As Arab states pursue knowledge-based development, national skills formation policies require rethinking

  • Arab economies risk failing to effectively contest knowledge-based industries by not factoring in the globalization of knowledge
  • If knowledge-based industries fail to take root and lead to employment, many of the reforms and money spent on education, R&D, and entrepreneurial growth could be wasted

Tahseen Consulting’s work with the Sheikh Saud bin Saqr Al Qasimi Foundation for Policy Research on Skills in the Arab World was featured in Gulf Business. You can read the article here

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Why The GCC Needs New Skills Formation Systems – Now

As Arab countries pursue knowledge-based economic development, national skills formation policies require significant rethinking says a new report from Tahseen Consulting.

In our recent study A Conceptual Model of National Skills Formation for Knowledge-based Economic Development in the Arab World we raise a red flag over whether regional economic development plans have sufficiently accommodated global trends that have eroded the high wage, high skill opportunity bargain throughout Europe and the United States as these regions have pursued knowledge-based development. 

Nearly all of the countries in the Arab World have adopted development of a knowledge-based economy as a policy objective to meet economic, political, and social objectives.

In the region, policies aimed at catalyzing knowledge-based economies are highly related to job creation, economic integration, economic diversification, environmental sustainability, and social development.

While the advantages of knowledge-based economic development have become clearer, so too have the challenges of implementing related policies.

The potential risk of Arab economies failing to effectively contest knowledge-based industries by not factoring in the globalization of knowledge is reminiscent of the story of Muhammad Ali’s attempt to industrialize Egypt through the establishment of a textile industry in the 1800s. In 1819, Muhammad Ali began an industrialization drive using imported foreign technicians which led to the establishment of 30 modern factories for textile manufacturing. By 1830, these factories employed 30,000 but within a decade all the factories had failed due to lack of technical skills, European competition, and increased production quality in Europe.

In today’s global economy, a key question is whether Arab economic development strategies based on the transition to knowledge economies have sufficiently taken into account the changing economic environment where knowledge is becoming cheaper and commoditized by emerging economies.

Decreasing pressure on wages due the globalization of knowledge industries and growth in high skill, low cost talent in emerging countries challenges the assumption that more education, higher levels of skills, and national labor markets can provide prosperity to Arab citizens and nations.

Because competition for dominance in knowledge-based industries is now global and emerging countries are moving up the value chain to perform increasingly more sophisticated activities, the Arab region’s plans to enter knowledge-based industries are susceptible to the globalization of low cost, high skill competition from beyond the region’s borders.

Nations which have pursued economic development strategies to capitalize on offshoring have generally employed either a strategy based on the export of low-cost and high-end knowledge-based services or alternatively low-cost export-oriented manufacturing strategies. Because knowledge and business process and manufacturing outsourcing is a cost minimization strategy pursued by companies, wages in outsourced sectors face persistent compression forces from many countries which are in line to offer the lowest wages possible to secure employment for their citizens and spur economic growth. The Gulf countries employ many of their citizens in high wage roles in parastatals operating in knowledge-based industries. 

Thus, GCC states may be particularly threatened by competition from low wage knowledge workers and be subject to significant margin compression.

This challenges the economics of their entry into knowledge-based industries.  A recent ranking of the attractiveness of the top 50 global service offshoring locations shows that competition is not only coming from the BRICS but from many countries in Southeast Asia, the Baltic States, Eastern Europe, and Central and South America. However, only five Arab countries, Egypt, Jordan, Morocco, Tunisia, and the UAE, appear on the ranking.

With increasing cost competition in knowledge-based industries from emerging countries, the less resource wealthy Arab countries could feasibly follow a development trajectory grounded in selective participation in knowledge-based and manufacturing industries in which they have a cost advantage and have or can develop quickly sufficient workforce skills to compete against emerging country rivals.  However, the high wage structure of Gulf labor markets is at odds with the emergence of high skill, low cost knowledge workers in other countries and attempts by global companies to minimize costs through outsourcing.

While leapfrogging into some of the more innovation-driven, high skills knowledge-based industries might be a long-term vision for Arab countries, such a development trajectory ignores the immediate need now to create jobs and provide economic opportunity for youth.

Across the region there is also the risk of competitive latency in which global industry possibility frontiers are driven by an increasing array of countries which may create additional competitive gaps compared to leading edge countries and companies that go unrecognized or cannot be reached due to market failures in skills formation by the Arab countries. Our research provides evidence of a lack of effectiveness of Arab skills formation systems that influences Arab firms to contest lower-skilled, non-knowledge intensive industries at the detriment to regional competitiveness and knowledge-based economic development.

The Arab opportunity bargain relies on a modernized interpretation of creative destruction which posits that emerging markets can also be sources of knowledge-based innovation. The low levels of regional R&D and innovation led to substantial expenditures in the Nineties on critical components necessary for innovation systems, research, market-oriented R&D, and entrepreneurship such as educational systems; institutions conducting basic, applied, and interdisciplinary research; business incubators; funding institutions; and professional societies.

An important question for the Arab World to answer in making such investments is how much of a risk creative destruction poses for high skill, high wage job creation.

This is important since continually innovating economies present both employment opportunities for workers in new industries who have the right skills as well as failed dreams for those who do not have the right skills, experience, or education. Contrary to what the region’s economic development strategies suggest, the future of the Arab Dream is very much reliant not only on what happens nationally and regionally but what happens globally in terms of increased economic integration, availability of cheap highly skilled labor, rival competition for knowledge-based industries, demand for commodity exports, and the economic health of other countries.

National Skills Formation for Knowledge-based Economic Development

Beginning in the 1990s, there was a shift in the Arab World away from viewing education and training systems as solely suppliers of skills toward an emphasis on the relationship between governments, educational systems, labor markets, and firms to generate demand for skills. By adopting demand-driven, ecosystem approaches to skills formation, Arab governments can align education and training systems with high-growth sectors of industry for knowledge-based economic development and achievement of accompanying economic, political, and social objectives.

While many international models of skills formation promote an exclusively market based approach, several Arab countries view investment in human capital as a political and economic goal in which significant government intervention is warranted. Yet, many previous attempts at skills formation policy have failed to address persistent skills development problems and do not present a comprehensive strategy to develop the skills of the national workforce as a whole. 

Despite the need for countries to adopt demand-driven approaches to skills formation, many of the countries in the region have pursued policies with no clear link between key stakeholders and specific economic outcomes.

The changing demands of knowledge-based economic development create a need for interdependence and collaborative networks for effective skills formation. The widespread regional pursuit of knowledge-based economic development is driven by policies that envision the emergence of high skill, high wage economies that will create jobs. However, the global availability and growth of low cost, high skill workers potentially threatens the viability and economic fundamentals of sophisticated, innovation-driven knowledge-based industries taking root in the region if skills formation challenges are not addressed.

The Need for a New Approach

The changing demands of knowledge-based economic development, global macroeconomic trends, and social development, create a need for interdependence and collaborative networks consisting of education and training providers, firms, government entities, and other key stakeholders for effective skills formation. Citing good practices of skills formation policy from across the Gulf Cooperation Council countries, our research presents a framework via which countries can analyze their skills development systems.

Arab skills formation system reforms must challenge the assumption that more education is always better.

Particularly in non-resource rich Arab countries, governments must reconsider the full employment promise which hampers global competitiveness, reduce wage inequality to ensure equal distribution of wealth, and determine the Arab world’s position in a global economy with emerging low cost, high-skill competitors that challenge knowledge based economic development both in the developed and developing world.

While some Arab countries are more suited to competing in a high-skill, low-wage global economy, other Arab countries which are unable to compete in high-skill, high-wage knowledge-based industries will need to adequately calibrate the expectations of their citizens regarding the types of jobs that will be available in the future. They will also have to account for the likely instability of salaries due to wage compression from competing low-wage, high-skill workers.

Efforts in the region to privatize education attainment so that labor market success or failure passes the burden on to individuals are prone to market failure without sufficient demand for skills from the labor market.

If knowledge-based industries fail to take root and lead to employment, many of the reforms and money spent on higher education expansion, education quality, R&D ecosystems, and entrepreneurial growth could be deemed inappropriately spent.

A copy of our recent study A Conceptual Model of National Skills Formation for Knowledge-based Economic Development in the Arab World can be downloaded here.