How Saudi entrepreneurs can benefit from a 1950s Italian-US agreement model

In order to boost entrepreneurship, Saudi Arabia should consider following a 1950s plan used to improve the Italian economy, which was done in partnership with the US, a recent paper by Michela Giorcelli of the University of California suggested.

Saudi Arabia’s Vision 2030 seeks to modernize the economy, and the US is contributing to many of the associated projects, building upon its rich tradition of assisting its allies’ economic development, most famously in the postwar Marshall Plan.

But, before describing Giorcelli’s research, it is worth explaining why the Saudi private sector requires assistance to realize its potential. Three related factors have been impairing the private sector’s growth during the last 50 years.

First is the historical abundance of public sector jobs available to Saudi citizens. These jobs are characterized by low work intensity and above market wages for those with limited skills, making it very hard for the private sector to attract those particular Saudi citizens. Moreover, public sector jobs rarely require technical degrees, leading to a distorted distribution of educational credentials that does not satisfy the requirements of the private sector.

Very low levels of R&D

The second factor is the abundance of low-cost foreign labor. Contrary to popular belief, the problem that this creates is not that foreigners “steal” jobs from citizens. Instead, flexible, low-cost labor undermines private companies’ incentives to invest in new technology, or to allocate resources toward innovation. This is because it is easier to just hire low-cost migrant workers to compete, and so it becomes a key reason for the very low levels of research and development in all of the Gulf countries, including Saudi Arabia.

Lastly, the Saudi economy is centered around oil, with oil revenues accruing the government and then being recirculated through the economy via public sector hiring and government projects. In particular, winning a government tender in Gulf countries requires less commercial nous than it does to convince private investors to contribute to a project in an advanced economy, because the level of competition is much higher in the latter. In the Gulf, networking with civil servants rather than improving production efficiency can be a more effective strategy for commercial success.

Simple commercial model

Together, these three factors, and additional ones, make Saudi Arabia’s entrepreneurs focus on a simple commercial model, based on importing a final, foreign-made product, employing low-cost foreign labor, and reselling that product domestically. Developing a fundamentally new product or improving production efficiency by homegrown technological progress are uncommon. In fact, the traditional Saudi business community is better described as “merchant” community rather than “entrepreneurs” due to their focus on arbitrage as their primary business model. Vision 2030 acknowledges this, and aims to turn a higher proportion of Saudi business people into dynamic entrepreneurs, such as those more commonly found in the US.

Giorcelli’s research suggests a potential remedy. After years of fascist rule, and the devastation of the Second World War, Italian entrepreneurs in the late 1940s were inferior to their American counterparts. As part of the Marshall Plan in 1952, the US launched the United States Technical Assistance and Productivity Program. The program involved sponsoring European managers to learn modern management practices at US firms, and issuing subsidized loans to European companies to purchase technologically advanced US machinery.

Many Italian companies applied to the program, and just before its launch, its budget was cut significantly, meaning that only a fraction of the initially successful applicants were allowed to participate. Giorcelli reveals that the companies selected looked very similar to those that were excluded at the last second. She then compares the two groups over an extended period of 15 years after the program’s launch to estimate its long-term impact.

Giorcelli was able to demonstrate that the US-based managerial training led to a sustained improvement in sales, employment, and productivity. In particular, the companies benefiting from the training started regularly maintaining their machines and tracking their sales and orders, as well as professionalizing their approach to marketing and branding. Moreover, they invested significantly in improving worker safety.

Today, given the importance of realizing Vision 2030, Giorcelli’s research suggests that a pilot Saudi-US program recreating its Italian-US predecessor may be in order.

Peer-to-peer help

The King Abdullah Scholarship Program currently involves thousands of Saudis studying in the US every year. However, this is a weak substitute for direct managerial training of active entrepreneurs since the scholarships are invariably for academic study. It is also for people at the start of their careers, most of whom have no interest or intention in becoming entrepreneurs. A critical ingredient for the success of the United States Technical Assistance and Productivity Program was that it was peer-to-peer help for those who had already chosen entrepreneurship as their career path, and had started actual companies.

Another unsatisfactory substitute is American managers coming to Saudi Arabia to instruct Saudi entrepreneurs, because for the knowledge to be transferred successfully, the Saudis need to see it in action and in person, rather than hypothetically or narratively on a PowerPoint presentation.

The three hindering factors described above have also begun to subside: public sector jobs are far less abundant, foreign labor is becoming more expensive, and there is a greater emphasis on efficiency and innovation in government projects. As the private sector begins to grow organically, these types of targeted training programs can help significantly accelerate the rate of development.

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Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain.