Introduction: Role of Manufacturing in Economic Transformation and Growth

In many parts of the world, economic development has been achieved by shifting resources from agriculture to industry and, later, services: “industrial development is not the only possible route to a developed country standard of living, but it is a well proven one” (O’Connor 2007, 415).

Indeed, industrialization has been the major force for economic development and growth in successfully catching-up countries, such as Korea, Taiwan and Singapore in the 1960s and 1970s; or China, India and Malaysia in the more recent past.

Endowed with abundant hydrocarbon resources, the GCC member states developed a strong oil and gas industry and became global players in petrochemical production and markets. Concurrently, oil revenues functioned as a main driver for the expansion of the services sector. Thus, a great deal of the extended services activities that exist today may be interpreted as an indication of the shift of demand and production towards non-tradables typically associated with resource booms, rather than a transition to a post-industrial, services-based stage of development.

Given the finite nature of hydrocarbon resources, all GCC member states, though to varying degrees of urgency and time pressure, need to convert their surpluses from oil and gas extraction into other forms of productive assets and income. While the resource-rich, smaller GCC countries, namely Kuwait and Qatar – at least theoretically – may have the option to simply replace hydrocarbons by interest-bearing financial assets in order to sustain a high standard of living for their citizens, other GCC members are forced to build a competitive and diversified production base.

In light of the given resource endowments, hydrocarbon-based processing industries and value adding downstream projects, as well as the more dynamic services activities continue to be major thrusts of the ongoing diversification process. In addition to these already well-performing sectors, it is the non-oil manufacturing industry in particular that is expected, for a number of reasons, to make substantial contributions to further economic development and growth (Rodrik 2006; Richard 2002):

• • Manufacturing industries have turned out to be an essential ingredient of socio-economic development. The notion that manufacturing is a driver of productivity and growth is supported by the fact that countries with large manufacturing sectors grow faster. According to United Nations Industrial Development Organization (UNIDO) analyses, industrial performance explains one-third of the variations in per capita income across developing countries. Manufacturing, for example, supports growth by the mere fact that an economy with a broader manufacturing base is better able to take advantage of new opportunities as compared to an economy which is specialized in a narrow range of resource-based products.