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Industrial policy is back with a vengeance. This much is clear. What is less clear, however, is how to do industrial policy well. Yet with the right approach—knowing where to intervene and when to hold back—state-led diversification has great potential for Gulf Cooperation Council (GCC) countries.
Successful and failed industrial policies have a number of factors in common across different country cases, eras, and industries. We have distilled these into seven lessons learned, providing crucial insights as well as actionable advice.
Seven essential lessons for state involvement via industrial policy:
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1. Establish early openness to competitionEarly openness to competition—especially on international markets—is a key, necessary device to ensure the efficiency and commercial viability of state-supported projects and sectors. In the GCC, this implies, among other things, setting clear and public targets for success in international markets and among non-government customers.
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2. Build the capacity to measure performanceGovernments need to build advanced capacity to measure performance, using commercially robust KPIs that reflect competitiveness rather than just the scale of a sector’s or project’s activity. GCC governments should deepen the data-gathering and analysis capability in central agencies and use profits, productivity, and export success as primary KPIs.
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3. Make support for new activities conditional on performanceGovernments need to make industrial policy support conditional on performance and cut their losses when needed. This is more easily done when ventures are scalable and when industrial policy involves wide-ranging experimentation rather than a few very large, high-stakes bets. GCC governments need to stage-gate their industrial policy projects and be willing to cut their losses when objectives are not reached. This requires off-ramp strategies for winding down underperforming projects and initiatives and the prioritization of scalable ventures.
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4. Set consistent and narrow priorities for industrializationGovernments need to be clear and consistent about their industrial policy priorities, and the list of priorities should be short. GCC economic planners should review target conflicts where they are at play—notably between profitability and national employment—and resolve these transparently and permanently.
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5. Use high-capacity “lead agencies”High-powered lead agencies can ensure the coordination, coherence, and credibility of industrial policy. GCC governments should create or boost economic lead agencies, using advanced recruitment tools and incentives to attract top potentials, and consolidate the institutional landscape around these agencies to minimize organizational overlaps and conflicts.
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6. Crowd in the private sector as soon as possiblePrivate investors need to be crowded in as soon as possible to leverage private capital, innovation capacity, and market discipline. When governments invest directly, special care needs to be taken that this investment does not tilt the playing field against private competitors. GCC economic planners should review their major initiatives with a view to facilitating private-sector participation through the same incentives and guarantees implicitly enjoyed by public entities. They should also adopt more explicit competitive neutrality policies to ensure fair competition between public and private firms.
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7. Move up value chains systematicallyCountries need to move up value chains systematically. They should try moonshots only if there is a plan to build all the ingredients necessary. GCC planners should review their current moonshot strategies to ensure that the required industrial clusters and suppliers exist or can be attracted and that the local skill basis is provided. Where possible, initiatives should be broken down into individual stages (of increasing technological complexity) that are each commercially viable on their own.
Executive summary
Only a handful of countries in the world are true cases of successful state-driven industrialization and diversification. Wise leadership—both in government and in the private sector—would do well to embrace historical lessons of failure and success to find the right path to state-led industrial diversification.
In the news
Industrial policy done right: Finding the balance to unlock value
The conventional wisdom around industrial policy since the 1980s has been that the best bet is for states to keep a hands-off approach and let the market regulate itself. This is changing, with important implications for GCC countries, many of which have industrial growth at the heart of their economic development agendas.
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