The Arab world needs to look beyond industry for development

Egypt's ambitions

Nonetheless, ambition can be powerful. Industrial development can create jobs and support military capability. Post-colonial Egypt wanted to liberate Palestine and defeat Israel.

And so, iron and steel factories were established in Helwan, an aluminium industrial complex in Nag' Hammadi, and an oil complex in Suez. The textile industry, which was already up and running, expanded.

But these moves to transform industry – led by Aziz Sedki – did not always consider the economic and social constraints faced by the country and the broader forces at work reshaping the world.

The 20th century saw significant changes in manufacturing, leading to bankruptcies and declining productivity in industries in major capitalist countries, including the United States and the United Kingdom.

Industries now depended on efficiency, technological advances, cost-effective skilled labour, and the ability to market products locally and develop export capabilities.

Countries such as Japan, South Korea and, more recently, China were the beneficiaries, enhancing their manufacturing and export capabilities.  

The Algerian experience

When Algeria gained its independence after a seven-year war of liberation, its leaders were determined to develop national industries.

However, as in other third-world countries, the industrial development strategy was not based on objective economic concepts. No partnerships were formed with specialised industrial institutions in developed countries, and no foreign capital was involved.

Industrial organisation was instead based on the Soviet model of state domination and bureaucratic control. Private ownership of industries that could be subject to market criteria of profitability and sustainability were not permitted.

The country's economic philosophy — especially since the rule of the late Ahmed Ben Bella — was that the government should be in charge of industry and the private sector should operate in agriculture and services.

Of course, this philosophy was consistent with the nationalisation of natural resources, particularly oil and gas. The country's economy was based on centralised planning and political decision-making, irrespective of its compatibility with the economic realities and global flows that affected it.

Development was not defined by open exposure to supply and demand but by central government mandate, even after the end of Ben Bella's rule and the accession to power of Boumediene.

Despite claims of structural overhaul and openness to foreign investment, nothing changed. According to the World Bank, the contribution of the manufacturing industries remained at around 27% of the value of gross domestic product in 2021. This share remained above the contribution of the oil and gas sector, which was around 15% in 2021.

Services are not parasites

The emphasis on the industrial sector in developing nations – particularly in Egypt and Algeria among Arab countries – is consistent with an irrational resistance to other economic activities.

In these countries, the concept of parasitic capitalism prevailed. Anyone engaged in imports, financial services, tourism, or just outside the agricultural and industrial sectors was labelled unproductive.

That view is short-sighted. Every economic activity contributes to the national gross domestic product and creates jobs and growth. The idea that some parts of the economy are parasitic is still dominant in many Arab countries. This hinders reform.

Even with manufacturing revered as the priority of economic development, its management in Egypt, Algeria, and other Arab developing countries has been inefficient.

Many factories and economic institutions were run by military personnel with no understanding administrative systems or business management. They did not adhere to production and financial accounting systems.

Limits on development

This created a decline in production and rising costs, poor marketing, low sales, and deteriorating quality, which disrupted competitiveness at home and abroad.

Under such lax management, factories and institutions failed to achieve self-sufficiency. After nationalisation left them reliant on state financing, governments did not allow room for developing textile, aluminium, or iron and steel companies.

Technological advances and economic transformations made many manufacturing industries in Egypt, Algeria, and other developing countries outdated.

Government-created industrial facilities were set up based on political — not economic criterion — which left them ill-equipped to meet the economy's needs.

The Arab world needs a comprehensive review of its thinking in this regard. It requires less black-and-white — and more nuanced — economic policies.

This is not only limited to states controlled by socialist or military parties, but also some Gulf countries where the government is heavily involved in the economy and oil revenues have created clientelism or rentier systems.

The use of planning programmes from the socialist bloc and reliance on economists trained there has brought anti-free market ideas that have hindered the structural reform that would enhance the private sector.

Proper development has different elements relevant to the available economic potential of each country. Industrial development can be significant, but it should be appropriately defined.

It can relate to oil production in oil-producing and exporting countries, including the petrochemical and related industries. The food industry may also be crucial in a country with a productive and rich agricultural sector.

Industrial development should benefit from the experiences of countries such as Japan, South Korea, and China and enhance the ability to attract foreign investment and engage specialised companies with financial and marketing capabilities. The manufacturing industry should be a source of income for countries with outstanding export capabilities.

It is essential to adequately understand development in line with promoting growth, improving the quality of life, advancing education, supporting healthcare, and raising living standards.

Better choices

Proper economic development – which fulfils those outcomes – does not solely rely on establishing heavy or light industries. It also requires other vital sectors with the potential to grow to be identified and supported, including relevant service industries.

Demographic factors are important to its success, including sufficient population size, a population growth rate not exceeding 1% annually, and a fertility rate of not more than two children per woman of childbearing age (15-50 years old).

It is also essential to offer high-quality education adapted to technological and scientific advances. This should be accompanied by a healthcare system with universal coverage, one which guarantees everyone the right to prevention and treatment.

When these conditions are met, industrial development adapts to the requirements of sustainable development.