What Gulf economies can learn from Britain's Industrial Revolution

Boosting innovation is central to the economic transformation strategies of the Gulf countries. Maximising the effectiveness of innovation policies requires supporting sectors based on the degree of scientific interlinkages with other sectors. Britain’s outperformance of France during the initial part of the Industrial Revolution is illustrative of the role played by innovation networks in economic development. A central pillar of all of the Gulf countries’ economic visions – as they continue to transition from hydrocarbon centricity to diverse, knowledge-based economies – is improving the levels of innovation. This is based on the observed importance of technological advancement to economic growth in virtually all rich economies. This emphasis is reflected in the large volume of resources that the Gulf countries have allocated to endeavours such as reforming education systems, establishing branches of elite global universities, launching joint ventures with leading multinational manufacturing companies, and supporting the growth of small and medium-sized enterprises. The ultimate goal is for local entrepreneurs to consistently lead the commercialisation of homegrown, cutting-edge technologies that create jobs and raise living standards. During such transitions, one of the questions that policymakers ponder is: Which sectors should we support? The traditional criteria include selecting sectors in which the country has, scientifically speaking, a comparative advantage – meaning that they have a decent chance of being contributors to pioneering technological advancements. This is one reason why the Gulf countries are investing heavily in renewable energies: they are looking to build on extensive domestic knowhow in the energy domain, as their local universities already boast competitive engineering departments. Another important consideration is supply-chain interlinkages. Economists have long espoused investing in sectors where a growth leap “spills over” into other sectors because of vertical and horizontal dependencies. For example, when energy prices fall, the productivity of almost every other sector rises, especially energy-intensive ones such as heavy petrochemical manufacturing. This also partially accounts for the UAE’s enthusiasm for developing its homegrown capacity in the area of AI, as this general-purpose technology is likely to provide a boost in efficiency to many areas of economic activity. However, one area that has not fully been incorporated into the Gulf countries’ innovation strategies is the importance of innovation “spillovers”, whereby technological advancements in one sector spawn innovations in other sectors. This is to be contrasted with the aforementioned supply-chain interlinkages approach, which focuses on how innovation in one sector lowers the input costs – or raises output demand – in other sectors without necessarily having any impact on innovation in those neighbouring sectors. One reason for this omission is the nascence of economic research on the issue. This phenomenon has been explored in a new study conducted by Dr Lukas Rosenberger (at the Ludwig Maximilian University of Munich), and Carl Hallmann and Dr Walker Hanlon (both at the Northwestern University), titled “Innovation networks in the Industrial Revolution”. Their study’s starting point is the divergence in Franco-British economic growth witnessed during the first half of the Industrial Revolution in the 18th century. On the one hand, Britain led the world in the process of centralising and scaling manufacturing, thereby reaching historically unprecedented rates of economic expansion – of about 3.3 per cent annually – during the first half of the 19th century. France, on the other hand, industrialised more slowly, and lagged behind its northern neighbour, growing at about 2.3 per cent annually during the same period. The authors argue that differences in technological focus were a key cause of these differing trajectories. In particular, Dr Rosenberger and his colleagues noted that British inventors focused on new technologies such as steam engines, machine tools and metallurgy, which exhibited a high propensity to spawn technological innovations in other areas of scientific inquiry. In contrast, French inventors agglomerated in the more peripheral elements of the innovation network, such as apparel, glass and papermaking. These differences were exemplified by the patenting behaviour: British and French inventors alike patented heavily in their respective areas of focus, but British ones were much more likely to also patent in areas distinct from their primary focus. The study concludes that about half of the substantial difference in Franco-British economic growth can be accounted for by this innovation-network channel. In light of these findings, the Gulf countries may wish to ensure that their current technological investments are focused on domains that are close to the centre of the innovation network. AI – one of the favoured domains at present in several Gulf countries like the UAE – appears to satisfy this criterion. But some of the other areas of focus may lie closer to the periphery, thereby representing suboptimal investments. Beyond the nascence of this line of inquiry, there is another reason for why some innovation strategies sometimes yield outcomes that are less effective than hoped, which is the overemphasis on global innovation indices. These measures of a country’s capacity to innovate depend on crude factors such as spending on research and development and the rate at which commercial patents are registered. While these indices are useful for obtaining a rapid assessment of a country’s innovation capabilities, they are not designed to be the foundation for deep reforms seeking to transform an economy into an innovation powerhouse. That is because they do not take into account the sort of nuanced yet pivotal details that the study by Dr Rosenberger and his colleagues have identified. A number of civil servants in the region understandably gravitate towards these prestigious measures of progress. As a result, they inadvertently skew innovation policies towards short-term interventions that are marginally important, away from complex ones that have a much more profound effect. No matter what a management consultant might claim, determining optimal economic policy is a non-linear process that requires sound subjective judgment by civil servants and homegrown experts intimately familiar with local idiosyncrasies, rather than following a series of predictable steps. Further, the study by Dr Rosenberger and his colleagues affirms the benefits of having deep knowledge of historic episodes of economic growth, so as to avoid the cardinal sin in the world of business: reinventing the wheel.