Strategic Positioning and Industrial Development Vision For the Kingdom of Saudi Arabia ‗Vision 2020‘ is an expression for the national development strategies of the Kingdom of Saudi Arabia up to the year 2020. It was developed consensually at a Symposium held in October 2002, organized by the Saudi Ministry of Economy and Planning in collaboration with other Ministries and Public Authorities. Vision 2020 sees Saudi Arabia emerging as ―a diversified and prosperous economy that guarantees the existence of rewarding job opportunities and higher levels of economic welfare for the Saudi citizens, and provision of education and health care for the population to equip the labour force with adequate skills, in addition to preserving religious values and cultural heritage of the Kingdom.‖ The strategies of Vision 2020 were organized along five distinct themes: (i) Economic diversification; (ii) Development of human resources; (iii) Expansion of public services needed to support these objectives; (iv) Promoting the expansion of the private sector as a key partner in the implementation of Vision 2020 (v) Streamlining and modernizing the governance structures of the public sector to meet the challenges of implementation. The concrete implications of these distinct themes are spelled out below starting with the nature of the current international context and the fundamental challenge that underpins the formulation of Vision 2020. Saudi Arabia is alive to the historic challenges facing nations in this epoch of accelerating global change. Developing countries such as China, India and Brazil are emerging rapidly as major industrial powers, accumulating impressive capabilities in knowledge-intensive technologies such as ICT, biotechnology, pharmaceuticals and aerospace. The challenge for the KSA is to decisively shift the economic basis of prosperity from excessive reliance on natural resource endowments to mastery over knowledge-based technologies over the next 15 years or so. The ability of the country as a whole to deploy modern technologies is the only basis for long-term economic security, since inherited comparative advantage built on natural resource endowments, could vanish as the technologies that impart value to particular resources are displaced. The safest way to build on comparative advantage as it exists now is to use windfall resource rents to build long-term technological capability which is the only safeguard against the uncertain evolution of global technologies. Vision 2020 is best realized by diversifying the economy and building industrial competitiveness to international standards in a number of select sectors, since small-to-medium countries can only specialize in a limited range of industries. An underlying premise of Vision 2020 is that manufacturing is critical to Saudi Arabia‘s future progress. Manufacturing is the main engine for deploying new technologies and raising innovation, which are both essential for success in the emerging world economy. Manufacturing is crucial to enhancing exports and moving them from low-value-added products to higher value, skill and technology-intensive products that grow faster in world markets and can sustain faster income growth. Manufacturing is also vital to creating new skills and inducing growth and technological change in agriculture, finance, construction and modern services including the management of environmental quality. Manufacturing capability development and external linkages interact positively: skills and capabilities develop faster and better if they can draw upon the knowledge, technologies and quality standards provided by export markets and if they are exposed to global competition. Manufacturing brings about the above-described benefits by inducing faster accumulation of human capital – skill and capability – in individuals, firms and even society as a whole. In short, economic progress and human capital development are two sides of the same coin, as is indicated by the experience of most advanced countries. The accumulation of human capital means raising the technical, managerial and innovative capabilities of the working population through various learning processes, along the following lines. - raise standards of technical and scientific education in schools and colleges - enhance managerial competence and innovative capabilities of existing firms through industrial learning accelerated by producing for competitive markets. - encourage the expansion of technology-based small and medium enterprises - develop a national innovation system to support technological learning, innovation and the exchange of technological knowledge between R&D centres and private firms producing goods and services. - provide support and encouragement for all firms to upgrade production technology through alliances with international technology leaders, collaboration with domestic technology centres, especially science and technology schools of KSA universities, licensing arrangements and the use of domestic and foreign consulting services. The building of economically significant human resources along the above dimensions can only be realized by a sustained drive to position a select set of national industrial clusters at internationally competitive levels, similar to that of the petrochemicals industry today. The Kingdom needs to selectively support the most viable clusters, that given global market trends and emerging competition, promise the fastest growth of exports and offer the largest spillover benefits in technology and skill development. This effort would also reverse the secular declines in industrial productivity and per capita income observed in recent years. The creation of a number of world-class industries and the building of human capability through sustained learning are mutually reinforcing processes that are the defining feature of all advanced economies today ranging from Europe and the USA to South Korea, Taiwan, Norway and Finland. The consensus achieved in Vision 2020 is that this overarching goal is realizable by 2020. Clusters—not industries—should become the main unit of policy analysis and delivery. Clusters span several industries, so supporting them involves dealing with the whole value chain from suppliers through all factor markets and support institutions to final buyers. Analyzing the supply chain helps policymakers build on the strengths in the value chain and address bottlenecks to international competitiveness. Cluster-based strategies are particularly important for promoting competitiveness in small firms to overcome constraints in finance, credit, skills, inputs and export activity. Pooling resources and experience enables small firms to realize economies of scale, access funds, obtain market information, learn from each other, exchange ideas, explore new distribution channels and also collaborate on large contracts. International experience also shows that focusing on clusters is an effective and economic way to deliver support services to enterprises. Enterprise competitiveness will define the ability of Saudi industry to grow, create new jobs and increase exports. With entry into the WTO system competitiveness is necessary for all enterprises – not just exporters – because firms will face intensifying competition in domestic markets. The entire industrial value chain, from input and service suppliers to final producers, must become competitive for firms to survive. Becoming ‗sustainably competitive‘ does not mean taking the ‗low road,‘ i.e. cutting wages or environmental standards, avoiding taxation or subsidizing uncompetitive firms. It means implementing long-term strategies to improve efficiency and quality, raise skill and technology levels and moving into higher value products and services. Along with most other countries Saudi Arabia believes that the vehicle for building global industries is the private sector. The target is for all firms to produce goods and services competitively for domestic and international markets; some would latch onto global value chains of production. Research shows that participation in internationally competitive markets is the best way of building economically significant human capital because it leads to faster technological learning and innovation through cluster networks. Hence the establishment of international linkages through links with foreign firms and international R&D centres is essential for faster domestic innovation and technological learning. At the same time private firms will not be able to upgrade technology and build industrial competitiveness without the provision of critical public support. The government has to provide a sound and stable macroeconomic framework and clear rules for industrial firms to operate under. Framework issues cover macro management, tax policy, trade policy, competition policy and a stable environment for business (transaction costs, business regulations, labour laws and privatization). These determine the investment climate for private enterprise. Macro management is already very effective in the Kingdom. But it is widely felt that procedures are excessively bureaucratic, cumbersome and riddled with delays and inefficiencies in many governance structures relating to regulation of business. While significant progress has been made by organizations such as SAGIA, it is essential that such streamlining and modernization be extended to all government institutions. The government also has to build up the supply of skills, finance, technology support and infrastructure and other support institutions, so that firms have access to the high-quality factor inputs needed to reach world-class competitiveness. These are developed in greater detail below. The infrastructure for metrology, standards, testing and quality needs to become more effective to support improvements in industrial competitiveness. Providers of private technology service could also be encouraged to get involved in metrology, standards, testing and quality activities. The country needs to set up an effective ‗national innovation system‘ by strengthening and widening R&D activity in universities, other public research institutions and firms and developing strong linkages between all R&D and technology upgrading in firms. - For maximum effectiveness, funded R&D must conform to technologies targeted in the present industrial development plan as relevant to the selected set of clusters. - R&D promotion must be matched by effective and timely patent registration. - Enterprises must be made aware of the need for periodic technological upgrading and the need to link up with R&D centres; i.e. strong links must be set up between technology infrastructure and industry, possibly through ‗mixed formula funding‘ or collaborative research projects, technology incubators and so on. - Intermediaries could be set-up to forge linkages among firms, research institutions and universities. - Research parks could be set up for new, high-tech government supported ventures such as in biotechnology, desalination and nanotechnology. - The role and structure of public R&D institutions also needs to be re-examined, and material incentives introduced to encourage links with industry. Academic research leading to patents and commercial products needs to be rewarded with royalties shared with the host institution. Major steps have to be taken to strengthen the Kingdom‘s educational system and shift emphasis to science and technology at the secondary and tertiary levels. While the quality of graduates is high in some tertiary institutions, it is not adequate across the entire range. Furthermore, quality and relevance of education have not kept pace with the growth in numbers. In particular, industry finds a mismatch between the output of the education system and its skill needs. An urgent programme of reform is necessary to improve the quality and content of education, teacher training, facilities and the use of technology. Additionally, it is essential to further develop technical and vocational training and employee training within firms to periodically upgrade employee skills. Employee skill development programmes should be coordinated with overall industrial strategy, and training programmes need to be scaled up on a sectoral basis and made more responsive to industry needs, for example, through wider use of skills audits, relevant management courses, industrial sponsorship programmes and a graduate placement scheme. Incentives could also be provided for employee training, such as double tax-deductibility of training expenses, as in Malaysia, or treatment of training as an investment (in an investment allowance scheme). Skills and training provision must be specifically adapted to small and medium-size enterprises, which face constraints in skill-intensive activities. Small and medium-size enterprises need help upgrading their employees‘ existing skills and gaining new ones. The encouragement of small and medium enterprises (SME) is an essential component of the Vision 2020 programme. SME formation and success needs to be promoted by the provision of flexible credit facilities and subsidized consulting services to solve business and technical problems. Financing could be facilitated by means of credit bureaus and rating agencies to assess the credit viability of loan applicants. Guidelines to develop collateral security could be formulated in collaboration with industry associations. A system of financing based on collateralization of land and fixed structures could also be created, with a separate system for movable property, including a registry of security interests, procedures and regulations. SME promotion is already very active in the KSA. The decentralization of development is also an explicit target of Vision 2020. Cluster-based promotion of industry is generally believed to be more conducive to regional development and governance than sector-based strategies. Modalities for devolving the support activities on a regional basis need to be worked out along with strategies for building regional networks. The coordination and implementation of strategies outlined here requires new governance structures. Implementation is to be realized through a National Industrial Policy Office set up under the Minister of Commerce and Industries with assistance from UNIDO; this will be the executive body responsible for day-to-day governance. The formulation of strategy and policies will be carried out by a Steering Committee set up by the Minister, consisting of representatives of all major stakeholders from the public and private sectors. A subset of the Steering Committee to be called the Executive Board which will meet frequently will oversee the work of implementation by the National Industrial Policy Office.