82736 v1 Full Report Transforming Arab Economies Transforming Arab Economies: Traveling the Knowledge and Innovation Road Full Report A note to the reader Transforming Arab Economies: Traveling the Knowledge and Innovation Road was prepared by the Center for Mediterranean Integration (CMI) with the World Bank, the European Investment Bank (EIB), and the Islamic Educational, Scientific, and Cultural Organization (ISESCO). This document is the full version of the report. Versions in French and Arabic will be available on the CMI website (www.cmimarseille.org/ke). A short version of this report was produced in Arabic, French, and English editions, all of which are available on the same website. © 2013 International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in the work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other informa- tion shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be repro- duced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street, NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. CMI production: Loraine Falconetti Editing and typesetting: Steven B. Kennedy, based on design by Emmanuelle Dezanet, Dynamic Creative, France ontents Foreword....................................................................................................................................................X Acknowledgments..................................................................................................................................... XI Acronyms and abbreviations.................................................................................................................... XIII Executive summary.................................................................................................................................. XIV Introduction.................................................................................................................................................................. 1 Part 1: Key issues: Why, what, and how?...................................................................................................11 Chapter 1: Deploying knowledge and innovation to transform Arab economies......................................................... 12 A host of daunting challenges.................................................................................................................................... 12 Wanted: A new economic model................................................................................................................................ 16 The knowledge economy, growth, and employment ................................................................................................ 18 Conclusion................................................................................................................................................................... 23 Chapter 2: Catching up with global knowledge economy trends................................................................................. 26 MENA compared with other regions.......................................................................................................................... 26 Country performance ................................................................................................................................................. 27 Why has advancement toward the knowledge economy been slow in MENA? ....................................................... 29 Understanding and benchmarking the four pillars .................................................................................................. 30 Conclusion................................................................................................................................................................... 36 Chapter 3: Shaping new development strategies for Arab countries.......................................................................... 38 Acting with ambition and realism............................................................................................................................... 38 Engineering change, with pragmatism, by building on easy wins............................................................................ 40 Building a new social contract through a new development model......................................................................... 43 Fostering regional integration and international cooperation ................................................................................. 46 Conclusion................................................................................................................................................................... 49 Part 2. Policy pillars..................................................................................................................................51 Chapter 4: Improving governance and the business environment.............................................................................. 52 Strengthening governance and the functioning of the state..................................................................................... 52 Opening up societies................................................................................................................................................... 55 Improving the business environment ........................................................................................................................ 58 Adjusting labor markets............................................................................................................................................. 61 Integrating into global trade....................................................................................................................................... 63 Conclusion................................................................................................................................................................... 65 Chapter 5: Educating people for better jobs in a new economy .................................................................................. 68 The current situation.................................................................................................................................................. 68 Improving the quality of education............................................................................................................................. 70 Investing in early childhood development.................................................................................................................. 71 Developing new skills and competencies.................................................................................................................. 72 Improving technical and vocational education and training ..................................................................................... 72 Accountability, incentives, and governance: The keys to stronger education systems ........................................... 75 Linking higher education with employment............................................................................................................... 76 Expanding regional cooperation................................................................................................................................. 77 Conclusion................................................................................................................................................................... 80 Transforming Arab Economies V Chapter 6: Fostering innovation and technological upgrading.................................................................................... 82 Innovation effort and performance in the Arab world .............................................................................................. 82 Broadening the concept of innovation policy............................................................................................................. 82 Supporting innovators ................................................................................................................................................ 86 Putting R&D structures in service of the economy and society ............................................................................... 87 Tapping into global knowledge and technology......................................................................................................... 89 Educating for innovation............................................................................................................................................. 90 Stimulating change through international reviews and joint projects...................................................................... 92 Conclusion................................................................................................................................................................... 93 Appendix 6.1: The different types of innovation and related ecology........................................................................ 94 Chapter 7: Moving toward an information society....................................................................................................... 95 Information infrastructure in the Arab world............................................................................................................ 96 Increasing the contribution of ICTs to growth........................................................................................................... 97 Improving broadband access..................................................................................................................................... 99 Strengthening competition in the ICT market .......................................................................................................... 101 Making more effective use of ICT applications......................................................................................................... 102 Developing IT skills for employment, entrepreneurship, and innovation................................................................ 104 Developing content in Arabic..................................................................................................................................... 105 Enhancing regional cooperation................................................................................................................................ 105 Conclusion.................................................................................................................................................................. 106 Part 3. Diversification initiatives..............................................................................................................109 Chapter 8: Promoting growth sectors........................................................................................................................ 110 Established sectors: Making the knowledge economy leap..................................................................................... 110 ICT-related activities: Exploiting opportunities, traditional and new....................................................................... 115 Tourism: In search of a niche and a long-term growth strategy............................................................................. 115 Creative industries: Leveraging unexploited opportunities..................................................................................... 118 Green growth: Building on comparative advantage................................................................................................. 119 Conclusion.................................................................................................................................................................. 123 Chapter 9: Managing local and regional development............................................................................................... 125 Building industrial and technology sites................................................................................................................... 125 Developing competitive and sustainable cities......................................................................................................... 128 Reducing regional disparities ................................................................................................................................... 130 Conclusion.................................................................................................................................................................. 132 Appendix 9.1: Technopoles in the Arab world........................................................................................................... 133 A last word............................................................................................................................................... 136 Annexes.................................................................................................................................................... 137 1 Econometric model and literature analysis: The knowledge economy, growth, and employment................... 138 2 Some inspiring country experiences................................................................................................................. 147 3 A country application of the knowledge economy model: A bird’s-eye view of the Arab world........................ 154 VI List of boxes I.1 What’s in a name? A comparison of the terms “knowledge-based economy,” “information society,” and “innovation-driven society” ...............................................................................................................................................3 I.2 Grouping the countries of the Arab world ............................................................................................................................3 I.3 How is a country’s preparedness for the knowledge economy measured?........................................................... 7 I.4 Diversification initiatives.......................................................................................................................................... 7 I.5 A road partly traveled .............................................................................................................................................. 9 1.1 Knowledge, growth, and employment: Theoretical and empirical underpinnings............................................... 20 3.1 The path followed by the knowledge economy success stories............................................................................ 39 3.2 How many jobs can be created by new and innovative sectors in the Arab world?.............................................. 42 3.3 The job-efficiency ratio: How many jobs will €1 million bring?............................................................................. 42 3.4 In search of a new social contract for the Arab world ........................................................................................... 45 3.5 The media as change agents................................................................................................................................... 46 3.6 The Center for Mediterranean Integration ............................................................................................................ 48 4.1 Catalyzing female employment in Jordan ............................................................................................................. 57 4.2 State-owned enterprises and the business elite.................................................................................................... 59 4.3 Global and regional integration: Key recommendations to Deauville partners ................................................... 65 5.1 The Skills toward Employment and Productivity (STEP) Approach....................................................................... 70 5.2 Jordan’s Education Reform for the Knowledge Economy (ERfKE) program........................................................ 71 5.3 Curricular reform in Malaysia and Singapore........................................................................................................ 74 5.4 Preparing future generations for the knowledge society...................................................................................... 74 5.5 Assessing university governance: A benchmarking tool ...................................................................................... 75 5.6 Connecting education and employment ................................................................................................................ 78 5.7 Entrepreneurship training and self-employment among university graduates: Evidence from Tunisia............................................................................................................................................. 79 6.1 What it takes to promote innovative firms ............................................................................................................. 85 6.2 Kafalat, a Lebanese institution providing venture finance..................................................................................... 87 6.3 Yomken (“It’s possible!”)......................................................................................................................................... 87 6.4 Promoting collaborative R&D projects between university and industry in Egypt ............................................... 89 6.5 Good practices for international cooperation in research..................................................................................... 90 6.6 The International University of Rabat .................................................................................................................... 91 6.7 iMENA: An innovation agenda for jobs and financing of innovation in the Arab world......................................... 92 7.1 The Networked Readiness Index (NRI): Rankings across the Arab world, 2012................................................... 98 7.2 The state of broadband in the countries of the Facility for Euro-Mediterranean Investment and Partnership (FEMIP)........................................................................................................................................ 100 7.3 YESSER and effective e-government in Saudi Arabia........................................................................................... 103 8.1 Egypt’s agribusiness value chain........................................................................................................................... 112 8.2 Offshoring opportunities in Tunisia ....................................................................................................................... 116 8.3 Water stress and desalination .............................................................................................................................. 120 9.1 Knowledge and innovation cities in Saudi Arabia.................................................................................................. 126 9.2 The Berytech technology park and fund................................................................................................................ 128 9.3 Exploiting argan oil in Morocco.............................................................................................................................. 131 Transforming Arab Economies VII List of figures I.1 Strong links between knowledge and growth......................................................................................................... 2 I.2 Robust growth in the Arab world, 1998–2011.......................................................................................................... 4 I.3 Unemployment in MENA by age group.................................................................................................................... 4 I.4 Youth unemployment by region............................................................................................................................... 5 I.5 MENA: A labor-rich region....................................................................................................................................... 6 1.1 Lagging growth in the Arab world........................................................................................................................... 13 1.2 Youth unemployment by region, 2011 estimates (%)............................................................................................. 13 1.3 MENA unemployment by age, various years.......................................................................................................... 13 1.4 Population growth in MENA by age group, 1980–2050.......................................................................................... 14 1.5 Private investment as a share of GDP in world regions, 1990s vs. 2000s ............................................................ 14 1.6 Female labor participation rates............................................................................................................................ 15 1.7 Average annual rates of TFP growth, 1990–2009................................................................................................... 17 1.8 Postsecondary enrollment in MENA, 2002–10....................................................................................................... 17 1.9 Share of working-age population in the MENA region holding a formal job (2010 estimates)............................ 18 1.10 Knowledge Economy Index scores and unemployment rates in Arab countries.................................................. 19 1.11 Estimating the employment effects of knowledge................................................................................................. 19 1.12 Elasticity of employment to economic growth in MENA countries, 1995–2008.................................................... 21 1.13 Elasticity of employment to the KEI in MENA countries, 1995–2008 .................................................................... 21 1.14 Government and other providers of good jobs in the MENA region...................................................................... 23 2.1 The region’s knowledge economy performance in comparative perspective, 2012............................................. 27 2.2 Regional scores on the KEI, 2012........................................................................................................................... 27 2.3 Country scores on the KEI, 2000 and 2012............................................................................................................. 28 2.4 The GCI: Select Arab country rankings, 2010–11 and 2012–13.............................................................................. 28 2.5 Country performance on the 2012 KEI plotted against the 2011–12 GCI.............................................................. 29 2.6 Performance on the KEI and EIR index: MENA and other regions and country groups, 2009............................. 30 2.7 Doing business in the Arab world........................................................................................................................... 31 2.8 Women’s participation in a comparative perspective, 2012................................................................................... 32 2.9 Grade 8 TIMSS scores, 2007.................................................................................................................................... 33 2.10 Results on 2009 PISA test....................................................................................................................................... 33 2.11 The innovation pillar in MENA countries, 2000 and 2012....................................................................................... 34 2.12 Rankings of MENA countries on the NRI, 2010–11 and 2012................................................................................. 35 3.1 The knowledge economy process contrasted with business-as-usual models of economic growth: Ambition, speed, and mobilization.......................................................................................................................... 39 3.2 Sources of job creation, by type of enterprise........................................................................................................ 41 3.3 A pragmatic agenda: From micro-reforms to major changes.............................................................................. 44 4.1 MENA governance rankings, 2010 compared with 2005........................................................................................ 52 4.2 Government effectiveness vs. the knowledge economy........................................................................................ 53 4.3 Voice and accountability rankings of selected countries of the region, 2010........................................................ 54 4.4 Women’s participation in the labor force, select countries, 2012......................................................................... 56 4.5 Advantages of hiring female employees over male employees: A survey of multinational companies............... 57 4.6 Leading constraints on MENA firms ...................................................................................................................... 59 4.7 Select country rankings on the Quality of Regulation Index, 2010........................................................................ 60 4.8 Bank dominance of the financial sector in the region............................................................................................ 61 4.9 Employment shares in the public sector (%) in MENA and comparator countries (averages in the 2000s) ........................................................................................................................................... 62 4.10 Regional scores of the proxies of meritocracy in hiring........................................................................................ 62 4.11 Male-female wage gap, select countries in MENA................................................................................................ 63 5.1 Learning deficit: The difference between being enrolled and learning the subject............................................. 68 VIII 5.2 Secondary and tertiary gross enrollment rates, by world region, 1990 and 2010................................................ 69 5.3 Share of firms identifying lack of skills as a business constraint......................................................................... 73 5.4 Rote learning of mathematics in MENA................................................................................................................. 73 5.5 Proportion of unemployed adults with a tertiary degree in select countries, 2000 and 2010.............................. 77 6.1 Innovation performance and GDP per capita: Select Arab countries compared with the world.......................... 83 6.2 Gross national R&D expenditures as a percentage of GDP in select countries, 2000–09.................................... 83 6.3 Gross national R&D expenditures in select countries, by source of funds........................................................... 84 6.4a Total exports by technology category, world excluding MENA, 2005–09.............................................................. 84 6.4b Total exports by technology category, MENA, 2005–09......................................................................................... 84 6.4c Share of high-tech exports among total manufacturing exports of selected Arab countries, 2005–10.............. 84 6.5 Innovation policy positioning .................................................................................................................................. 85 6.6 Innovation policy as gardening................................................................................................................................ 86 6.7 Availability of venture capital in select Arab countries.......................................................................................... 86 6.8 Publication of scientific and technical articles by authors residing in Arab countries, 2002 and 2009................ 88 6.9 Availability of scientists and engineers in the Arab world .................................................................................... 89 7.1 Effect of various ICTs on GDP growth in high- and low-income economies, 2000–06......................................... 95 7.2 Mobile and fixed-line telephone penetration in the Arab world, 2010................................................................... 96 7.3 Internet users in MENA countries, 2010................................................................................................................. 96 7.4 Mobile and internet penetration in MENA, 1999–2009 .......................................................................................... 99 7.5 Regional comparison of mobile andbroadband penetration (%).......................................................................... 100 7.6 Increase of mobile penetration vs. broadband in MENA, 2003–10....................................................................... 101 7.7 Mobile tariffs in select countries of the Middle East and Asia.............................................................................. 101 7.8 Youth and the degree of formality in ICT labor markets....................................................................................... 104 8.1 Arable land as percentage of total land area, select Arab countries, 2008 ........................................................ 111 8.2 Fertilizer consumption as a percentage of fertilizer production, select Arab countries, 2009........................... 111 8.3 Exports of textiles and clothing as a percentage of total manufacturing exports, select countries, 2010......... 113 8.4 Gas costs and the cash cost of producing urea in 2012 (estimated)..................................................................... 114 8.5 Annual arrivals in four MENA countries, 2001–11................................................................................................ 117 8.6 Cost of rhinoplasty in select countries ................................................................................................................. 117 8.7 Contribution of copyright industries to GDP.......................................................................................................... 119 8.8 Sketch of possible infrastructure for a sustainable supply of power from renewable sources to Europe, the Middle East, and North Africa ....................................................................................................... 121 8.9 Potential value of exports of CSP components, 2012–25...................................................................................... 122 9.1 El Gazala technopole, Tunisia................................................................................................................................ 127 List of tables I.1 ­The four pillars of the knowledge economy............................................................................................................ 6 1.1 ­Employment growth rates in Arab countries, 2000–09.......................................................................................... 22 3.1 Appropriate policy measures for countries at various stages of advancement toward the knowledge economy................................................................................................................................................ 43 6.1 Diaspora strategy: Combining top-down and bottom-up approaches.................................................................. 91 7.1 ICT actions to create employment opportunities at various skill levels............................................................... 104 8.1 Direct and indirect local economic impact of CSP plants, 2012–25..................................................................... 122 9.1 Special economic zones and free zones in the Arab World.................................................................................. 126 9.2 Knowledge and technology sites in Dubai............................................................................................................. 128 9.3 Regional disparities in select Arab countries........................................................................................................ 130 Transforming Arab Economies IX oreword Recent events in the Arab world have shown the vital importance for countries to engage in continuous, broad-based, and inclusive development. The main challenge in the Middle East and North Africa today is to create more and better jobs. Vast numbers of unemployed or underemployed youth, male and female, now expect concrete national and regional transformation through the rapid creation of decent jobs. If the aspirations and creative forces of Arab youth can be put to work, then the region’s potential for growth, stability, social justice, and human fulfillment will be enormous. The extent of change will depend in good part on how well the knowledge economy takes hold throughout the region. Creating jobs entails more investment in knowledge-related sectors and new emphasis on how to develop competitive, productive, and sustainable economies. Countries in the region must take advantage of the ongoing knowledge revolu- tion to develop economies that are agile, networked, and constantly learning. The private sector must be enlisted to help build an entrepreneurial culture and create needed jobs. Such an approach is essential to cope with unemployment and pave the way for sustain- able growth and economic development. Transforming Arab Economies: Traveling the Knowledge and Innovation Road places a knowl- edge- and innovation-driven model at the heart of new development strategies in the region. It highlights how the knowledge and innovation approach can help Arab countries diversify their economies and innovate, creating new enterprises and jobs. The study places these issues in a suggested integrative framework, a framework that includes developing more open and entrepreneurial economies, preparing a better-educated and highly skilled population, improving innovation and research capabilities, and expanding information and communication technologies and their applications. It exhorts policy makers to adopt new policy agendas and a new type of open mindset that can lead to the creation of more jobs of higher value in a rapidly connected and globalized world. Given the diversity of the Arab world, the study does not provide a cookie-cutter approach but rather offers examples from within the region, as well as from other countries from Finland to Korea that have put in place effective strategies to maximize the use of knowl- edge, innovation, and technology. Patience and determination will be required, because the fruits of investments in knowledge may not begin to appear for a few years. Putting this type of approach to work in any country requires a vision and strategy on the part of each country in the region. Fostering greater integration within the Arab world and around the Mediterranean would be a key booster for this approach. This is where the Center for Mediterranean Integration can add value. CMI is a place for dialogue, a place where all stakeholders—from governments, academia, the private sector, and civil society—can engage in open exchange on how to make an effective transition to the knowledge economy. Given the events of the Arab Spring, there is no time to lose and no reason for com- placency. Countries need to be pragmatic and to take advantage of opportunities as and when they arise. I hope that this report can be useful in providing insights into how countries in the Arab world can develop strategies that are adapted to the challenges and opportunities of our time. Mats Karlsson, Director, Center for Mediterranean Integration X cknowledgments Transforming Arab Economies: Traveling the Knowledge and Innovation Road was prepared by a multipartner team led by Anuja Utz (task team leader) and Jean-Eric Aubert (senior consultant), with assistance from Latifa Belarbi, Sophie Muller, and Tamer El Sayed Taha, and with guidance and supervision from Mats Karlsson, director of the Center for Mediterranean Integration (CMI). It was developed with the World Bank, the European Investment Bank (EIB), and the Islamic Educational, Scientific, and Cultural Organization (ISESCO). This document is the full version of the report. Versions in French and Arabic will be available on the CMI website (www.cmimarseille.org/ke). A condensed version of this report was produced in Arabic, French, and English editions, all of which are available on the same website. The team benefited from the valuable support of Simon Bell (sector manager, Financial and Private Sector Development, World Bank), Mourad Ezzine (sector manager, Human Development, World Bank), Jacques van der Meer (advisor, EIB), and Dr. Mukhtar Ahmed (former deputy director general, ISESCO). The following World Bank staff members authored first drafts of various chapters: Jean-Eric Aubert, Latifa Belarbi, Derek H. C. Chen, Ndiam. Diop, Marjo Koivisto, Yevgeny Kuznetsov, Samia Melhem, Sophie Muller, Kurt Larsen, Ismail Radwan, Pierre Strauss, Tamer Taha, Anuja Utz, and Zeine Ould Zeidane. Particular mention should be made to other contributors who prepared insightful background reports—namely, Carl Dahlman (Georgetown University); Benedict de Saint Laurent (ANIMA), Abdelkader Djeflat (University of Lille); Patrick Dubarle, Laila El Saedy, Guy Fleuret, Philippe Guinet, Jussi Hätönen, Kristian Uppenberg, and Jacques van der Meer (EIB); and Flavia Tsang, Ohid Yaqub, Desiree Van Welsum, Tony Thompson-Starkey, and Joanna Chataway (Rand Europe). The overall orientation of the work and the drafts were shaped by two regional workshops for participants from Algeria, Egypt, Jordan, Lebanon, Morocco, and Tunisia, held at CMI in November 2011 and at ISESCO headquarters in Rabat in June 2012, as well as through country consultations and participation in other events in the region. Maha Merezak (ISESCO) was particularly helpful in organizing these events and in consolidating related contributions. The team would like to thank the following individuals for providing useful inputs: Nabeel Al-Fayoumi (Royal Scientific Society, Jordan), Youcef Aklouf (National Agency for the Promotion and Development of Technology Parks, Algeria), Rigas Arvanitis (Institut de Recherche pour le D.veloppement), Ahmed Benghazi (Axis Capital, Inc., Tunisia), Rachid Benmokhtar (National Observatory of Human Development, Morocco), Shéhérazade Berrehouma (Union Tunisienne de l’industrie, du commerce et de l’artisanat, UTICA), Fadi Daou (MultiLane Inc., Lebanon), Pavel Dvorak and Constantinos Shiatis (European XI Acknowledgments Bank for Reconstruction and Development, EBRD), Ghaith Fariz (UNDP Arab Knowledge Report), Hamid El-Zoheiry (Ministry of Higher Education and Scientific Research, Egypt), Jean-Louis Reiffers (Forum Euroméditerran.en des Instituts de Sciences Economiques), Henry Roux-Alezais (Institut de la Méditerranée), Amir Wassef (Egypt-Japan University of Science and Technology), and Cheonsik Woo (Korea Development Institute). Carlos Braga (World Bank) and Carl Dahlman (Georgetown University) served as peer reviewers of the concept note, about which valuable comments were also received from Caroline Freund, Jonathan Walters, Janette Uhlmann, and Carlo M. Rossotto (all from the World Bank). The draft report was reviewed at the World Bank in October 2012. Peer reviewers included Jamal al-Kibbi and Robin S. Horn. Helpful comments were received from Caroline Freund, Bob Rijkers, Kevin Carey, Omer Karasapan, Randa Akeel, Peter McConaghy, Hnin Hnin Pyne, Kurt Larsen, Pinki Chaudhri, Carlo M. Rossotto, Cecilia M. Paradi-Guilford, Joulan Abdoul-Khalek, Isabelle Huynh, Murat Seker, Esperanza Lasagabaster (all from the World Bank), and Bruno Lanvin (INSEAD). Useful contributions were received throughout the drafting process from Adriana Jaramillo, Olivier Lavinal, Juan Manuel Moreno, Eavan O’Halloran, Gilles Pipien, Najet Tenoutit, Simon Thacker, and Jeffrey Waite (all from the World Bank), and Thomas Andersson (International Organisation for Knowledge Economy and Enterprise Development). Members of CMI’s Oversight Committee—Nawel Ben Romdhane Dhrif (Ministry of Investment and International Cooperation, Tunisia), Mohamed Chafiki (Ministry of Economy and Finance, Morocco), and Mahmoud El-Said (Centre for Project Evaluation and Macroeconomic Analysis, Egypt)—provided helpful guidance and substantive com- ments throughout the drafting process. This report was enhanced by work performed in connection with the Deauville Partnership report on trade and foreign direct investment, which was coordinated by CMI, and by information gathered at the “Transition to Transition” workshops organized by CMI and EBRD in Morocco and Tunisia. It was also discussed at high-level events held at CMI in October and December, 2012, as part of CMI’s “Rencontres Valmer” series. Finally, we would like to acknowledge the contribution of ISESCO to this work, especially for supporting the organization of country consultations in Morocco and Tunisia, as well as for hosting a high-level conference to disseminate the report’s main messages. We also thank ISESCO for their support for the production of three language versions (Arabic, English, and French) of the condensed report, and for the translation of the full report into French. Steven B. Kennedy and Fayre Makeig edited the report, and Michelle Lemaire provided vital administrative support. XII cronyms and abbreviations BPO business-process outsourcing ECA Europe and Central Asia EFE Education for Employment project ERfKE Education Reform for the Knowledge Economy (Jordan) EU European Union FDI foreign direct investment GCC Gulf Cooperation Council GCI Global Competitiveness Index GDP gross domestic product ICT information and communication technology ITES information technology–enabled services KAM Knowledge Assessment Methodology KEI Knowledge Economy Index LAC Latin America and the Caribbean MENA Middle East and North Africa MKE Ministry of Knowledge Economy (Republic of Korea) OECD Organisation for Economic Co-operation and Development R&D research and development SME small and medium-size enterprise TFP total factor productivity TVET technical and vocational education and training USAID U.S. Agency for International Development USPTO U.S. Patent and Trademark Office WEF World Economic Forum Transforming Arab Economies XIII xecutive summary Key messages The Arab Spring uprisings sounded a political alarm throughout the region, attesting to a thirst for change after decades of stagnation. But huge problems remain, chief among them the need for more and better jobs, particularly for the young, whose rates of job- lessness are the worst in the world: about 25 percent among individuals between the ages of 15 and 25. It is estimated that 40 million new jobs will have to be created in the Middle East and North Africa (MENA) in the next decade. This report explores development strategies that hold the potential to create more jobs in the Arab world. The knowledge economy approach seeks to foster employment by using knowledge and innovation to enhance productivity and competitiveness in order to take advantage of opportunities in the global economy. Development strategies based on the knowledge economy follow a model that has become increasingly common around the world.1 According to estimates presented in this study, such strategies could contribute significantly to increasing the rate of job creation in countries across the region. What types of policies can place a knowledge- and innovation-based, productivity-driven growth model at the center of development strategies for countries in the Arab world? This study highlights key elements of such policies, while recognizing that several Arab countries are already pointing the way, inspired by good practices in other countries around the world, notably the recent success stories of the Asian tigers (such as the Republic of Korea and Singapore) and the Nordic countries (particularly Finland and Denmark). The path starts with good governance and a business-friendly environment—that is, one favorable for growth and investment, including investment by foreign firms and inves- tors. Several Arab countries have already taken already steps in this direction, often by facilitating the development of new firms and clusters of new activities. The value of good governance and a business-friendly environment is key to any development strat- egy, especially if countries are to get the maximum benefit from their efforts in areas particularly important to the knowledge economy—namely, education, innovation, and information and communication technology (ICT). To the maximum extent possible, reforms in these four areas—governance and the busi- ness climate, education, innovation, and ICT—should be carried out across the economy. But it is also important to be opportunistic, to seize opportunities and take action in selected sectors, traditional and new, and in locales where it may be possible to capi- talize on comparative advantages and to reach a critical mass of entrepreneurial and innovative initiatives. Seizing localized opportunities can create clusters of growth that help to diversify the economy. Successfully exploiting such opportunities sets in motion and propels a virtuous cycle of growing confidence that demonstrates to the popula- 1. As observed by the Organisation for Economic Co-operation and Development in 1996, “OECD economies are increasingly based on knowledge and information. Knowledge is now recognized as the driver of productivity and economic growth, leading to a new focus on the role of information, technology and learning in economic performance. The term ‘knowledge-based economy’ stems from this fuller recognition of the place of knowl- edge and technology in modern OECD economies.” See also World Bank (2007). XIV Executive summary tion at large the concrete benefits of such reform actions and gradually improves the environment in which the government Toward economies that implements reform. The success of such development strategies depends on a are more productive participatory process that involves a wide range of actors in government, the business community, academia, research and competitive and organizations, and other key institutions. In managing that process, the government should display both leadership and that create more jobs the willingness to listen to key economic and social actors, particularly from the private sector, which should become a To date, most Arab countries have based their economic growth partner in the process and an engine for growth and employ- and competitiveness on the exploitation of natural resources, ment creation. By using such a participatory process to imple- on infrastructure development, and on financial markets. There ment knowledge and innovation policies, the government is now ample room in which to orient economies toward devel- can foster a new social contract with its citizenry, breaking opment systems that are richer in knowledge and innovation, with the centralized and authoritarian practices that have thereby further increasing total factor productivity, which in long prevailed in the region. It is the role of the government the past few years has already shown signs of improvement to formulate a compelling vision that is both ambitious and in the region. realistic. By accomplishing concrete projects, even if small in size and scope (starting small can be a good way to begin), Tomorrow’s more productive and competitive economies the vision gains credibility and becomes reality. will generate more jobs at higher skill levels that are also more likely to be sustainable. And they will do so in a big way: It goes without saying that the development strategies According to estimates measuring the contribution of the described above must be adapted to the cultural, institu- knowledge economy to employment in the region (through tional, and economic characteristics and circumstances of higher growth), a stronger knowledge economy effort may each country. Similarly, within each country, care must be increase the annual rate of job creation by 30–50 percent (the taken to adapt policies to the needs, wishes, and capacities of impact being larger in the oil-importing countries). To obtain the various segments of the population and in diverse areas. these results, which are not out of reach, countries will need to take steps to put in place a set of policies that underpin Cooperation within the Arab world in the domains of the knowledge-based development strategies. knowledge economy offers substantial benefits to all par- ticipants. It would accelerate the formation of the critical mass needed for sustainable success in innovation and other areas, while also advancing collective learning. Equally important is the advancement of integration between the Arab world and What to do Europe (through the interface of the Mediterranean Sea) in business, finance, and academia. Integration—centered on concrete projects and supported by regional and international institutions and bilateral programs—provides an important opportunity to score wins for all participants. Enact business-friendly and Such are the principles that inspire and guide the policies governance reforms proposed in this study for countries that seek to make better use of knowledge and innovation in their overall develop- Sound macroeconomic policies, good governance, and a busi- ment trajectories. The strategies already initiated by several ness-friendly climate provide the basis for knowledge-based countries of the region should now be amplified and brought strategies, as they do for virtually all development strategies. to scale to meet the challenges confronting the changing To make an effective transition to the knowledge economy, Arab world. it is necessary to continue to improve the business climate in order to stimulate business formation and attract foreign The value added of this work stems from the integrative nature investment, which together foster growth and competitiveness. of the knowledge economy approach, which can help countries Several Arab countries, including Morocco, Egypt, Jordan, and in the region reexamine their development strategies in a Saudi Arabia, have made substantial progress over the past coordinated manner, rather than through sectoral strategies 10 years in this area, heeding demands for change from the prepared and implemented in isolation. It summarizes the business community and making the best of assistance from “state of play” on the knowledge economy in the Arab world international institutions. In some cases, the events triggered at large, while also highlighting the efforts made by individual by the Arab Spring have slowed the pace of reforms, even in countries in different domains, providing examples of good countries not suffering from political disturbances or outright practice from countries around the world and policy recom- civil war. To be credible, necessary reforms should be resumed mendations to help guide efforts, which should be customized and deepened as soon as possible to build momentum for the to the specific circumstances of each country. transition to a knowledge economy. Transforming Arab Economies XV Executive summary In addition, it is important to facilitate the emergence of entre- by international experience, including a number of pilot pro- preneurial activity, to reduce bureaucracy in its various forms, to grams in countries such as Tunisia. New ways of connecting eliminate regulations that stifle initiative, to remove unearned education and employment must also be explored, such as privileges currently enjoyed by groups close to ruling powers, the multinational Education for Employment initiative that to ensure competition, and to expand sources of financing, is ongoing in Egypt, Jordan, Palestine, Morocco, Yemen, and including Islamic finance, which, in principle, should favor Tunisia, and which deserves to be expanded and introduced innovation by encouraging the sharing of profits and risks. in the rest of the region. To complement the changes evoked above, trade channels In higher education the vast majority of students choose pro- must be widened, customs barriers lowered, and exchanges of grams in the humanities and social sciences, and many gradu- technology facilitated. Logistical platforms must be improved ates of those programs have difficulty finding jobs. The most and expanded, as has been done, for example, by Morocco at effective way to ameliorate this situation is to improve the quality the port of Tangiers. The establishment of special industrial of scientific and technical education upstream—in secondary zones makes it possible to attract foreign firms and to promote and even primary school. The establishment of new universities exports through various incentives. Such zones make the in partnership with prestigious foreign institutions has already most sense if they also stimulate the local economy through begun to raise scientific and technological capacities in several the development of subcontracting links and new business countries, improving their international competitive position. spinoffs, and if they are not used as an excuse to delay reform Members of the Gulf Cooperation Council—such as Dubai, Saudi in the rest of the economy. Arabia, and Qatar—have shown the way in this area. At the heart of good governance is the struggle against cor- ruption in all its forms, large and small. Measures to curb  Create a climate of innovation corruption cannot fail to benefit society, if only through the positive signs that they send to the population about openness, Innovation energizes and renews the productive foundations of transparency, and accountability. Other essential elements economies and societies. But to reap the full benefits of innova- are freedom of expression and the flowering of democratic tion, certain fundamentals must be heeded. To begin with, it is practices. It is encouraging to see that in several countries the necessary to debunk the notion that innovation proceeds only political processes set in motion by the Arab Spring have led and directly from research. The fact is that innovation results to democratic advances that, while still tenuous, show signs from the actions of entrepreneurs who exploit technological of being here to stay. or scientific opportunities to satisfy needs or markets that they have identified.  P  rovide more and better Therefore innovation policy should begin with mechanisms to education support innovators: technical, commercial, legal, and financial support provided through structures such as incubators that Education is the key enabler of a knowledge- and innovation- operate as close as possible to innovators. Incubators have driven economy. Tremendous progress has been made across proliferated in the Arab countries, as they have elsewhere, the Arab region in widening access to education. But although but have had uneven results in the region, often because they the countries of the Arab world have invested a respectable lack appropriate management and professionalism, and con- share of their gross domestic product (GDP) in education, those nections to adequate technical or commercial networks and to efforts are not yielding the expected results: more schooling sources of venture capital. (Some countries, such as Lebanon, has not been synonymous with more learning in most parts have been able to devise ways of mobilizing capital using public of the Arab world. International achievement tests reveal that guarantees.) Innovators also need full access to technological students in the Arab countries still trail those of many other services to test their ideas and inventions, and the environment countries at comparable levels of development in the acquisi- in which they operate must offer efficient standards, measure- tion of basic knowledge. ment equipment, and related infrastructure. Greater investment in early child development could help give Public and academic research structures in the region would do Arab children a solid start. Moving on to the education system well to be systematically evaluated. A strict criterion of excel- as a whole, teaching methods that remain based on rote learn- lence should be applied when evaluating basic research efforts, ing could usefully be revised, the quality of teaching materials whereas economic, social, and environmental relevance are could be upgraded, and the qualifications of teachers could be the most appropriate considerations when evaluating applied raised. Some countries, notably Jordan, have already imple- research. Cooperation between universities and the business mented ambitious programs that have substantially improved world is essential to the process of innovation; regulations and educational levels. obstacles that prevent such collaboration should be removed. The availability of public subsidies—in the form of matching Mismatches between the skill needs of the economy and the funds that businesses contribute to specific projects—stimu- outputs of the education and training system are apparent. lates academic-corporate cooperation, a fact amply demon- Technical and professional education across the region needs strated by experiences around the world. Several countries, an overhaul. Cooperative education schemes delivered in part- such as Egypt, have implemented well-designed programs nership with employers seem to work well, as demonstrated in this area. XVI Executive summary And finally there is the issue of accessing, tapping, and using agribusiness, textiles, and chemicals—are typically labor the foreign technology that is abundantly available through intensive and account for most industrial jobs in the region. a variety of channels (for example, multinational companies In addition, industries with high technology content, such as operating within the country). Several initiatives in the region, automobiles and aeronautical components, may be attractive including those of Morocco in the automobile and aeronautics for certain countries. industries, and in Jordan in information technology, point the way in this area. Sector-specific development requires coordinated mea- sures on the various pillars of the knowledge economy: an attractive business climate; adequate training programs;  Promote an information society the capacity to catch up on technology and to innovate; and good infrastructure, both for ICTs and in conventional areas such as transportation. To yield maximum growth benefits, ICTs are the backbone of modern economies, as transportation sectors must be well positioned in international value chains and electricity were in the previous century. Arab countries and must fully exploit comparative advantages offered by have invested heavily in ICTs over the past 15 years. Mobile natural resource endowments and by created conditions phone networks have been considerably developed across the and competencies. Success stories such as those of tex- region, as in most of the world. Together with related services tiles in Tunisia and ICTs in Jordan show the way forward. and industries, ICTs can account for a significant share of GDP Morocco’s various sectoral plans constitute a framework in countries of the region (for example, up to 15 percent of for broad implementation of the knowledge-based economy GDP in Jordan). that can inspire other countries. Progress has been slow in expanding Internet access, however, which now reaches only a quarter of the popula- tion of the Arab region. A mere 5 percent enjoy broadband  Develop dynamic sites and locales access. Greater competition among providers would help to lower prices and improve services for users. Other areas Modern economies develop around dynamic sites in which for improvement include upgrading education and train- talented and skilled individuals rub elbows with one ing in ICTs, developing more Arabic-language Web content, another and with employers, entrepreneurs, and financiers. and, most important, expanding the range of ICT applica- Governments endeavor to create such sites in the form of tions used in business, government, education, services, and science and technology parks, often located within special elsewhere. Several countries, including Jordan and Saudi economic zones in which exceptional regulatory or fiscal Arabia, have launched ambitious pilot programs to develop policies are applied. Such government-sponsored sites have ICT applications for various industries, such as e-learning proliferated in the Arab world, which presently has some and e-government. 50 technology parks. The task now is to ensure that these sites are effective and efficient, that business-academic cooperation takes place actively, and that entrepreneurs are able to find the networks and other support they need—all How to move toward a of which are necessary if competitive clusters are to form. A rigorous evaluation of the efforts made to date in the Arab world would draw lessons from success stories and take knowledge economy steps to ensure that management and financial arrange- ments are effective. Knowledge and innovation can be useful in efforts to diver-  F  acilitate the development of sify economic activities in rural areas. Developing rural areas requires investments in infrastructure, the organization of promising sectors and clusters producers’ cooperatives, technical and management training, and, possibly, the formation of clusters (for example, in agrifood The report has outlined a broad set of economy-wide reforms industries) that bring together in one location facilities and to make an effective transition to the knowledge- and inno- infrastructure for research and development, manufacturing, vation-based economy. But it will also be important to devote commercialization, and logistics, all of which can help rural specific efforts to sectors that offer a high potential to gen- producers move up the value chain. erate growth and create jobs. Moving up the value chain by absorbing knowledge from the world’s best practices could transform existing comparative advantages in the Arab world  Implement participatory policies into competitive advantages. as the foundation for a new In addition to niches in ICT industries, opportunities are to be social contract found in several promising knowledge-based sectors, such as activities related to medical and health tourism, the cre- The ways in which knowledge-based development strat- ative industries, and green energy. Sectors that are already egies are implemented is crucial for their success. Well- well established also have a major role to play in enhanc- designed actions can build trust and self-confidence, which ing economic growth in the medium term. These sectors— together are often referred as the fifth pillar of the knowledge Transforming Arab Economies XVII Executive summary economy. The transition to a knowledge- and innovation- based economy depends on the participation of people at all Enhance cooperation levels and in every corner of society. This agenda cannot and in the Arab world and the should not be the government’s alone; instead, it requires Mediterranean basin consultation with and participation of stakeholders from the private sector and civil society, including academia, think A knowledge-based development strategy takes advantage of tanks, and, importantly, the media. In a sense, there is need the dramatic reduction in the cost of sharing and trading goods to work on the four pillars through a combination of top- and services, finance, and information. To fully exploit these down reforms and bottom-up initiatives, buttressed by a opportunities, however, Arab countries will have to do more in well-communicated vision. the areas of regional integration and international cooperation. Indeed, economic integration through increased trade and As people’s energy emerges it spawns new economic activi- foreign direct investment (FDI) may be the best way to put the ties that have the potential to create wealth and jobs, pushing countries of the region on a path to higher, more sustainable to the forefront groups of reformers, change agents, and economic growth and greater employment. other proponents of sustainable transformation. The impera- tive of nurturing this vital process of social renewal points The absence of a single market limits trade within the region, to the importance of effective policies of decentralization or which is three times lower than trade among the developing deconcentration of power, similar to those recently taken in countries of Asia. Thus even small steps toward trade integra- Morocco. Encouraging the flowering of productive energy tion would be beneficial. With respect to education, research, helps foment a dynamic for change throughout society, while and innovation, joint programs under a framework modeled also building a critical mass of new initiatives. Together these on the Lisbon Agenda of the European Union (EU) would make effects improve the climate for reform. The multiplication it easier for Arab countries to build and benefit from the nec- of dynamic sites and sectors that spin off new activities essary critical mass of resources, talent, and markets. In the and create jobs eventually shifts the economy into a new realm of infrastructure, large-scale cooperative projects in mode—a growth mode, triggering a virtuous cycle of change water, transportation, and other areas would allow for the and renewal. introduction of innovations, while also creating many jobs. Among the change agents who are capable of catalyzing Integration within the Mediterranean basin would bring con- these changes are members of the diaspora, especially siderable benefits to the countries of the southern and eastern those with advanced qualifications (scientific, entrepreneur- rims by enlarging possibilities for market growth and employ- ial, or other), who have a key role to play by lending their ment in the north. Several ambitious projects have already commercial, financial, and technical support. Nowhere are begun, such as the Desertec solar energy project; other worthy the positive effects of this support clearer than in Lebanon. initiatives should be scaled up. European and Arab govern- Diaspora members can also contribute to the national con- ments alike should give such initiatives a closer look. Much versation on improving governance, as one sees today in can be accomplished through the consolidation of existing Algeria. regional networks of academics, entrepreneurs, financiers, city managers, and others—networks that have engendered a The role of the media should not be overlooked. Television wide range of promising initiatives in the form of joint research networks that cover the Arab region have an important role and development (R&D), education, and other programs, as to play in stimulating pride and interest in innovative devel- well as in joint learning activities. opments in cities, firms, schools, and laboratories that are helping to create jobs, improve living conditions, and protect Euro-Mediterranean cooperation is particularly important to the environment. Social media are very powerful tools for support the modernization of higher education in the Arab propagating such information, notably among young people. world. Some countries such as Morocco, Tunisia, Algeria, Lebanon, and Egypt have adopted the LMD (licence [bachelor], It may be appropriate and effective to develop the connec- master, and doctorate) degree ladder around which European tion between the proposed new development model, based academic programs and degrees have been standardized. On on knowledge and innovation, and the deepest principles the research side of academia, multicountry R&D platforms of Islam, whose holy book contains many passages that serving common goals supported by EU funding have proven emphasize the importance of knowledge and the need to their utility, as have international programs that match funds apply knowledge for the good of society. provided by Arab countries. The latter have been particu- And finally there is the key question of the status and role of larly useful for the promotion of innovative projects involving women. Participation in the modern world and active engage- research, technology incubators, and venture capital. Regional ment in the knowledge economy require the talents of an efforts in ICT can also strengthen cooperation in the develop- entire country. In several countries of the region, women’s ment of telecommunication infrastructure. educational achievements outpace those of men. The full, unfettered entry of women into the labor force would do much to benefit every country’s economy, while also boost- ing women’s status in economic life and in society at large in the Arab world. XVIII Executive summary There is a role for regional and international organizations as well. Turning to the countries that are beset by political and military The EU, the European Investment Bank, the World Bank, and the conflict, it may be necessary to wait until peace returns before United Nations Development Programme, for example, have a attempting to implement major new economic policies, but it crucial role to play in accelerating the implementation of knowl- is important to acknowledge the opportunities presented by edge-based development strategies in Arab countries and in the pockets of academic, scientific, and business competence that integration process in the Mediterranean area. In a similar vein, have survived despite the surrounding troubles. Reconstruction regional organizations such as the Islamic Development Bank, projects and infrastructure investments may offer opportunities the Islamic Educational, Scientific, and Cultural Organization, for future growth, innovation, and jobs (including highly skilled and the African Development Bank can do much to facilitate the employment) that should not be overlooked. progress of knowledge-economy strategies in the region. A last word Moving forward: Diverse countries with a variety of strengths This study is a humble look at the situation of the Arab world from the perspective of the knowledge economy, a powerful concept that can lead to growth and to economic and social As this report makes abundantly clear, there is great diversity development. The opportunities for an efficient economic in the Arab world. The countries of the region possess different response by the countries of the region to the unfolding events strengths. They differ widely in their circumstances—some rich of the Arab Spring should be seized. But seizing the moment in oil and gas resources, some poor in such resources, and will require a well-considered, customized, and action-oriented some beset by political conflict or even civil war. They differ investigation of the unique circumstances of each country. widely, too, in the level and pace of their engagement with a Indeed, the current situation calls for the formation of a regional knowledge- and innovation-driven growth model. Many have coalition of reformers—individuals and groups capable of tran- adopted original solutions that may, along with the experiences scending the inherited divisions within and between countries of other countries around the world, serve as examples to of divergent and sometimes conflicting histories. The Arab their neighbors. It is incumbent upon each country to find the peoples already feel that they are members of a community, combination of measures that suits it best, drawing inspiration the Umma, which should favor efforts in mutual cooperation. from what others, both in the Arab world and elsewhere, have The knowledge economy also resonates with the historical been able to accomplish. prominence of knowledge and science in Arab culture and in Islam. If the Arab world can rise to the challenge of political The Arab countries of the Mediterranean that lack oil resources renewal that has been sounded throughout the region, it has will have to make the best possible use of the assets that they within its power the ability to rediscover the path of social do possess. And the best way to do that is to proceed steadily and cultural flowering that it walked 10 centuries ago during with well-conceived reforms of their institutions. Several of its golden age. these countries—Jordan, Morocco, and Tunisia—have sub- stantial capacities that have already enabled them to launch ³ ° ³ significant initiatives based in the knowledge economy, focused on sectors or regions. For these countries, the task is to push ahead, accelerate, or relaunch reforms that have already begun, taking care to ensure their efficacy in promoting innovation, diversification, and job creation, all of which are crucial for Organization of improving the overall climate for reform. the report Several of the oil-rich countries, such as Saudi Arabia, the United Arab Emirates (UAE), and Qatar, have made massive investments inspired by the knowledge economy model. These The report is made up of three parts and includes three investments—in new universities, cities, and services (media, annexes. finance, and so on)—contribute to what must be a key aim: economic diversification. Those contributions will have to be Part 1 deals with three fundamental questions surrounding the complemented by measures that create jobs, provide technical proposed development model based on knowledge and innova- training, and encourage the formation of new businesses. It is tion: Why make the move to a knowledge- and innovation-driven also critical that the oil-rich countries increase the administra- economy (chapter 1)? What would that move entail (chapter tive and managerial capacities of their citizens, so that they 2)? How should it be done (chapter 3) can gradually replace the many expatriates brought in to fill Part 2 delves into the policy orientations related to the overall key positions over the past decade. economic and governance regime (chapter 4), education (chapter 5), innovation (chapter 6), and ICTs (chapter 7), and the kinds of policy reforms and initiatives that may be needed in each area. Transforming Arab Economies XIX Executive summary Part 3 discusses the promotion of growth sectors (chapter 8) and the management of local and regional development References and bibliography (chapter 9) as key elements of economic diversification. OECD (Organisation for Economic Co-operation and Develop- Annex 1 provides a literature review of the relationships among ment). 1996. The Knowledge-Based Economy . the knowledge economy, growth, and employment and develops Paris: OECD. http://www.oecd.org/dataoecd/ a methodological approach to link the knowledge economy to 51/8/1913021.pdf. job creation in the MENA region. World Bank. 2007. Building Knowledge Economies: Advanced Annex 2 provides insights into experiences developing knowl- Strategies for Development. Washington, DC: World edge-based development strategies from around the world. Bank. Annex 3 surveys knowledge economy issues in different Arab countries and highlights policy initiatives that are adapted to their specific country circumstances. XX ntroduction We know that the source of wealth is something specifically human: knowledge. If we apply it to tasks we already know how to do, we call it “productivity.” If we apply it to tasks that are new and different, we call it “innovation.” Only knowledge allows us to achieve those two goals. –Peter Drucker, Managing for the Future, 1992 Why is knowledge ` The knowledge economy is not just about information and com- munication technology (ICT) or high-tech industries. It differs from important? the notions of the information society and the innovation-driven economy (box I.1). In contrast to these, the knowledge economy approach should be seen in a broad perspective, as the founda- tion of a development strategy. Knowledge is a powerful tool A knowledge-based economy is one that acquires, creates, dis- that makes it possible to increase productivity and innovation seminates, and uses knowledge to enhance its growth and develop- across all sectors of the economy and to develop competitive ment. Knowledge and innovation have always played a crucial and sustainable economic activities. As countries diversify their role in economic and social development. But not until now economies, new enterprises and jobs are created. Ultimately, has knowledge been the key driver of competitiveness, since economic development becomes a process of generating and globalization and new technology have profoundly reshaped tapping relevant knowledge—and putting that knowledge to the patterns of the world’s economic growth and activity over work to generate further growth. the past few decades. More and more countries are embracing knowledge- and innovation-related policies to spur growth This approach focuses on enhancing the drivers of growth, that and competitiveness. These countries are moving up the is, enhancing the quality of human and physical capital, and, in global value chain by broadening and deepening the product particular, on raising TFP. According to Yusuf (Nallari and others and service lines they offer and increasingly participating in 2011), the rich empirical literature on growth shows that for international trade. Investing in the knowledge economy means low- and middle-income countries, capital is the principal investing in strategies that will bring about significant changes determinant of growth, with labor and TFP trailing well behind.1 in the way a country can grow. The global economic and finan- But upper-middle- and high-income countries derive more cial crisis that has plagued the world economy since 2008 of their growth from gains in TFP, and the consensus among accentuates the need to draw upon knowledge and innovation researchers is that, over the longer term, growth is a func- to facilitate the needed response. tion of TFP. Successful development is predicated not only on a facilitating external environment and good policies but also Knowledge, productivity, and innovation strongly influence com- on domestic political dynamics that support development. petitiveness, economic growth, and development. Since the Even weak states can grow if policies are conducive and the emergence of classical economic theory in the 18th century, business sector is motivated. economists have sought to determine the sources of economic growth, from Adam Smith’s examination of the division of labor To remain competitive in the global economy of the 21st century, in The Wealth of Nations, to Joseph Schumpeter’s analysis of it will be increasingly important to invest in high-quality knowl- the importance of innovation in capitalism in the mid-20th edge (as distinct from traditional capital inputs), so as to make century. After the Second World War, Robert Solow (1956) each sector of the economy more efficient. Figure I.1 illustrates offered a unified analytical framework, according to which the strong links between knowledge and growth. Singapore economic growth is ultimately determined by extra-economic, and Finland—two small, relatively resource-poor countries— exogenous factors such as technological progress. The need achieved rapid growth between 1990 and 2007 thanks to a to assess the importance of technological progress for sus- long-term growth strategy based on human capital and tech- tainable growth, including related investments in areas such nology, a strategy that enjoyed broad political support. These as education, created the impetus for new growth theories in developments equipped the three countries to assemble an which technological progress is determined endogenously. effective, globally networked learning and innovation system The effects of knowledge-economy-related investments are that generated high-quality skills, and to build the institutions roughly measured through total factor productivity (TFP), which needed to coordinate the workings of such a system (Yusuf accounts for economic growth induced by factors other than and Nabeshima 2012). increases in labor and capital. 1. TFP has long been a catchall for other factors, the measurement and individual contributions of which have proved difficult to pin down (Nallari and others 2011). Among a long list, six factors are most amenable to policy action: human capital (measured in a variety of ways) and its quality; technological capability and innova- tion; managerial skills; organizational effectiveness; institutions affecting incentives, competition, allocative efficiency, and governance; and the characteristics of urbanization. Typically, all six affect the production and use of knowledge, resource allocation, and productive utilization. 1 Transforming Arab Economies 1 Introduction Figure I.1 Strong links between knowledge and growth 60,000 Singapore 50,000 United States PPP (current international $) R = 0.92097 40,000 GNI per capita, 2010 Germany United Kingdom Finland Ireland 30,000 Korea, Rep. Slovenia 20,000 Russian Federation Poland Lebanon 10,000 South Africa Brazil Algeria Tunisia Thailand Yemen, Rep. Egypt, Arab Rep. China Jordan Sudan Indonesia Ethiopia India 0 Ghana 0 1 2 3 4 5 6 7 8 9 10 Score on 2012 Knowledge Economy Index Source: Authors’ calculations; www.worldbank.org/kam. Note: The Knowledge Economy Index (KEI) measures the overall preparedness of a country or a region to compete in the knowledge economy. It is based on the average of all normalized scores on the four pillars of the knowledge economy: economic and institutional regime, education, innovation, and ICTs. GNI = gross national income; PPP = purchasing power parity. Fast, sustained growth is not a miracle—it is attainable for develop- economic growth that has taken hold throughout the world. ing countries with the right mix of ingredients. The Commission In at least one way, the paradigm is a natural fit for the Arab on Growth and Development (2008), a high-level panel chaired world, whose global precedence in science and technology by Nobel laureate Michael Spence, examined 13 of the world’s during the Middle Ages remains a source of pride. In echoing economies2 that had achieved average annual growth rates of those accomplishments, the new knowledge economy would at least 7 percent for 25 years or more in the post-WWII period. represent a renaissance for the region. These high-growth countries benefited from knowledge and innovation in two ways. One, they imported ideas, technology, Recent events, ignited by the Arab Spring, have shown the and know-how from the rest of the world. Two, they exploited vital importance for countries in the Arab world to engage global demand, which provided a deep, elastic market for their in continuous, broad-based, and inclusive development. goods. The inflow of knowledge dramatically increased the For too long, poor governance in the region has obstructed economy’s productive potential; the global market provided change. The private sector has been stymied by the constraints the demand necessary to fulfill it. Put simply, “they imported of privilege, limits on competition, intractable bureaucracies, what the rest of the world knew and exported what it wanted.” and corruption. Many countries in the region have achieved relatively high levels of educational attainment; the challenge now is to provide more and better jobs for this large cohort of educated women and men. Women expect a reprioritiza- Transforming Arab tion of gender issues in national agendas so that they will not remain an untapped human resource. If the aspirations economies: Traveling and creative forces of Arab youth can be put to work, then the region’s potential for growth, social justice, and cohesion will be enormous. the knowledge and Over the past decade, annual growth in the Arab world has innovation road exceeded 4 percent (figure I.2). The improved performance is largely the result of improved macroeconomic manage- ment and steadily rising commodity prices. Many countries This report is designed to assist Arab countries to adopt, in a have reduced the barriers to trade and removed some of the manner consistent with their preferences and circumstances bottlenecks to private sector investment. Although there is (box I.2), the paradigm of knowledge- and innovation-driven still some way to go in all these areas, the countries that have 2. Botswana; Brazil; China; Hong Kong SAR, China; Indonesia; Japan; the Republic of Korea; Malaysia; Malta; Oman; Singapore; Taiwan, China; and Thailand 2 Introduction BOX I.1 What’s in a name? A comparison of the terms “knowledge-based economy,” “information society,” and “innovation-driven society” Knowledge-based economy In 1996 the Organisation for Economic Co-operation and Development declared that “OECD economies are increasingly based on knowledge and information. Knowledge is now recognized as the driver of productivity and economic growth, leading to a new focus on the role of information, technology, and learning in economic performance. The term ‘knowledge-based economy’ stems from this fuller recognition of the place of knowledge and technology in modern OECD economies.” In 2005 the OECD highlighted that the “knowledge-based economy” described trends in advanced economies toward greater depen- dence on knowledge, information, and skill, and the increasing need for ready access to all of these by business and government. Information society Again according to the OECD (1996), the growing codification of knowledge and its transmission through communications and computer networks has given rise to the “information society.” As acknowledged at the 2005 World Summit on the Information Society organized by the International Telecommunications Union in Tunis, the digital revolution in information and communication technologies has created the platform for a free flow of information, ideas, and knowledge across the globe. The Internet has become an important global resource; a critical business and social tool in the developed world; and, in the developing world, a passport to equitable political participation and economic, social, and educational development. At the 2003 summit in Geneva, world leaders declared their “common desire and commitment to build a people-centered, inclusive, and development-oriented Information Society, where everyone can create, access, utilize, and share information and knowledge, enabling individuals, communities, and peoples to achieve their full potential in promoting their sustainable development and improving their quality of life.” Innovation-driven economy According to the OECD’s Innovation Strategy (2010), the search for new sources of growth comes at a time when many countries have stagnating or declining populations and face diminishing returns from investments in labor and physical capital. In the long term, the slowdown in population growth precludes or at least limits the promise of a growth strategy based on low-cost labor. Innovation—which involves the introduction of a new or significantly improved product, process, or method—will increasingly be needed to drive growth and employment and to improve living standards. This is true as well for emerging economies that look to innovation as a way to enhance competitiveness, diversify, and move toward economic activities with greater value added. The numerous determinants of competitiveness interact in a complex manner. The World Economic Forum’s (WEF’s) Global Competitiveness Index, the results of which are published annually, takes into account the fact that the different dimensions of competitiveness are not of equal importance to all countries. As a country advances in economic terms, its products and services must become increasingly sophisticated to sustain the productivity increases that enable rising wage levels. The index therefore applies different weighting schemes depending on a country’s level of development. Economies are grouped in three stages of development: the factor-driven stage, the efficiency-driven stage, and the innovation-driven stage, based on their GDP per capita and the importance of natural resources to their economy.a Source: OECD 1996, 2005, 2010; WEF and OECD 2011. The passage on the information society is based largely on reports from the 2003 and 2005 World Summit on the Information Society (http://www.itu.int/wsis/basic/faqs.asp). Note: a. Key variables for each stage of development are described in chapter 2, footnote 5. BOX I.2 Grouping the countries of the Arab world This study covers all Arab countries, with the exceptions of Comoros, Mauritania, Somalia, and Sudan. Reference is often made to the Middle East and North Africa (MENA) as a geographic region;a however, Iran, Israel, and Malta are not covered by this study, as they are not Arab countries. To be useful, any assessment of the economic challenges facing the Arab region must take into account the region’s great diversity. The region is so diverse, in fact, that it can be segmented in many different ways. Two defining characteristics of MENA countries are the distribution of oil resources and the size of native populations. Based on these two factors, the MENA countries can be classified into three main groups:  esource-rich, labor-abundant countries that are producers and exporters of oil and gas and have large native populations that make • R up the vast majority of residents. This group of countries includes Algeria, Iraq, Syria, and Yemen.   esource-rich, labor-importing countries that are producers and exporters of oil and gas and have large shares of foreign or • R expatriate residents who represent a significant percentage (or even the majority) of the total population. This group of coun- tries comprises the members of the Gulf Cooperation Council (GCC)—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)—plus Libya.   esource-poor countries that are net importers of oil and gas. These countries include Djibouti, Egypt, Jordan, Lebanon, Mauritania, • R Morocco, Tunisia, and West Bank and Gaza. Source: WEF and OECD 2011. Note: a. The MENA region within the World Bank is made up of Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Malta, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, the UAE, West Bank and Gaza, and Yemen. Transforming Arab Economies 3 Introduction overwhelmingly affects youth (figure I.3). Youth unemployment Figure I.2 rates vary substantially across countries in the region, ranging Robust growth in the Arab world, 1998–2011 from 18 percent to 43 percent. The average unemployment rate 8 for Arabs aged 18–25 is 25 percent, while the world average is about 11 percent (figure I.4). Young women face even higher 6 rates of unemployment (estimated at 40 percent in both Egypt Annual GDP growth rate (percent) and Jordan). The direct opportunity cost of youth unemploy- ment in the Arab world is estimated at up to $50 billion a year 4 (Zoellick 2011). 2 Job creation in the region has not kept pace with growth in the labor force. Nor is it meeting the needs and aspirations of the 0 young in MENA countries.3 It is estimated that more than 10 million young people enter the labor market annually, includ- 2011 1998 1999 2000 2001 2002 2003 2005 2006 2007 2008 2009 2010 2004 –2 ing an increasing number of women, yet only a tiny fraction of them can currently expect to find formal employment. To accommodate them, approximately 40 million jobs will have –4 Arab world Latin America and Caribbean to be created in the coming decade (figure I.5). Those jobs will East Asia & Pacific (all income levels) have to be not only more plentiful, but also of better quality— (all income levels) World often referred to as decent jobs, better-paid jobs, or jobs with higher value-added. This demographic phenomenon presents Source: World Bank 2011. an unprecedented challenge—indeed, few topics in the Middle Note: GDP = gross domestic product. East merit more attention than the pressing issue of youth employment. put their economic house in order have been rewarded with The region must launch its own employment miracle. MENA coun- robust growth. It must be noted, however, that the region’s tries that are on the hunt for employment miracles, defined overall pattern of growth remains tied to hydrocarbons and by the World Bank (2012) as large and sustained reductions other capital-intensive sectors. in unemployment, should invest in prudent macroeconomic management, sound business regulation and good governance, But the region’s robust economic growth has not made a significant and associated improvements in regulatory frameworks and dent in unemployment. Unemployment in MENA is high and their enforcement.4 In addition, the challenge of informal Figure I.3 Unemployment in MENA by age group Lebanon 2010 55–64% 35–54% Tunisia 2010 25–34% Morocco 2009 15–24% Egypt, Arab Rep. 2006 Jordan 2010 Egypt, Arab Rep. 1998 Iraq 2007 United Arab Emirates 2009 West Bank and Gaza 2008 0 5 10 15 20 25 30 35 40 Source: Gatti and others 2013. Note: MENA = Middle East and North Africa; UAE = United Arab Emirates; WBG = West Bank and Gaza. 3. The MENA region is overwhelmingly young. Currently, more than 100 million people between the ages of 15 and 29 live in the Middle East, making up 30 percent of the region’s population and almost 47 percent of the working age population (Wrigley 2010). 4. Although employment miracles have not been common in the MENA region, they occur fairly frequently elsewhere in the world. Algeria and Morocco are the only two MENA countries that have experienced employment miracles in the last three decades, where large reductions in unemployment were accompanied by accelerating growth and more flexible regulation. 4 Introduction Figure I.4 Youth unemployment by region 30 Middle East 25 North Africa Europe and Central Asia 20 South East Asia Percent 15 Latin America OECD 10 Sub-Saharan Africa World 5 South Asia 0 East Asia 2006 2007 2007 2008 2009 2010 2011 Source: Gatti and others 2013. Note: ECA = Europe and Central Asia; OECD = Organisation for Economic Co-operation and Development. employment needs to be tackled, as informal workers in most with the transition from an oil-based to a knowledge-based MENA countries are engaged in low-productivity jobs (Gatti economy that can create meaningful employment opportuni- and others 2011).5 ties for their youthful populations and sustain them when their fossil fuel endowments are depleted. Given the events of the recent past, the extent of change will depend in large part on how well the knowledge economy approach takes To make the transition to a new development strategy based on hold throughout the region. Now more than ever, creating jobs in knowledge and innovation, countries in the region need to act con- the Arab world entails more investment in knowledge-related sistently on four key pillars. Countries would do well to revisit sectors and new emphasis on how to develop competitive, their national development strategies and policies and adopt a productive, and sustainable economies. As economies grow more holistic approach, starting with the four-pillar framework and develop, their structure may well change, evolving from of the knowledge economy, as defined in table I.1. Transitioning agriculture and manufacturing to more sophisticated knowl- to a knowledge-based economy requires effective action— edge-intensive services, which account for a growing share of reform, investment, and coordination—in all four of these areas. world employment.6 Greater participation in trade is another Box I.3 highlights the Knowledge Assessment Methodology, a key to economic modernization, diversification, and employ- benchmarking tool to compare country preparedness for the ment, as it brings opportunities for growth, investment, and knowledge economy. innovation—within the region, with Europe, and with the rest of the world—and helps countries move up the global value Specific policies related to the four pillars will have to reflect the chain. As a region bordering Europe, MENA can also draw level of development of different countries in the MENA region. They valuable lessons from nearly two decades of economic growth will often need to be gradual, rather than taking a “big-bang” in Europe and Central Asia. approach. Given their economic diversity, the countries of the region will need to exploit the potential of various sectors— This dynamic process of knowledge and wealth creation offers great traditional and new—as sources of productivity enhancement, possibilities to enhance growth and competitiveness for the region’s growth, and job creation. diverse set of countries in the medium to long term. Most oil- importing (resource-poor) countries in the region are middle- It will be important to promote sources of economic diversifica- income countries that have achieved universal basic education tion through focused actions. While pursuing reforms nation- and are poised to realize faster growth; they can build on this wide, governments may also find it appropriate to promote, asset and exploit opportunities for economic diversification. using the four-pillar knowledge economy approach, new or The oil exporters (resource-rich countries) are now grappling established sectors that offer high growth potential, as well as 5. Some MENA economies are among the most informal in the world. It will be necessary to develop a host of policies—relating to labor regulations to promote labor mobility, support for workers in periods of transition, and greater productivity through training and skills upgrading—to remove existing barriers and to lead to the creation of high-quality jobs in the formal sector. 6. The services sector provided the largest share of world jobs in 2006 (accounting for 40 percent of global GDP), with agriculture at 38.7 percent and industry at 21.3 percent. Services overtook agriculture for the first time in history in 2006. Roughly 22 million manufacturing jobs disappeared globally between 1995 and 2002, with even China losing around 15 million such jobs. The need to think of innovation in terms of services has therefore never been more important (World Bank 2010). Transforming Arab Economies 5 Introduction Figure I.5 MENA: A labor-rich region Projected deficit or surplus of working population in 2020 (millions) Source: U.S. Bureau of the Census International Database. Note: In calculating potential surplus, the ratio of working population (age group 15–59) to total population is held constant. sites devoted to the nurturing of innovative capabilities, such unleash the untapped potential of the private sector, formal as technoparks, industrial clusters, new cities, and dynamic and informal, to develop an entrepreneurial culture rooted in spots in depleted areas (box I.4). Such sectors and sites can trade and integration. A more vibrant private sector in MENA become a key source of economic diversification, productivity countries will also contribute to increased economic integration enhancement, and job creation. within the region. With a conducive business environment, new entrepreneurs will emerge to reap the benefits of greater trade The private sector needs to become a key engine for stronger and investment within the region—driven more by business growth and employment creation. While significant economic considerations than by political concerns (World Bank 2009). reforms have been launched in the region, private sector Innovation and entrepreneurship are at the core of the change dynamism remains relatively muted. The process of creative process (Andersson and Djeflat 2013). destruction, which led to technological upgrading in fast- growing East Asian and Eastern European economies, has so Putting in place the new type of development strategy and its various far been limited in the private sector of the region’s econo- policy pillars requires a process that builds broad confidence and mies (Gatti and others 2013). It is therefore important now to trust in the new model. This trust-building process—sometimes The four pillars of the knowledge economy  TABLE I.1   ­ Economic and Information and Education and skills Innovation system institutional regime communication infrastructure The country’s economic and The country’s people need educa- The country’s information system— A dynamic information infra- institutional regime must provide tion and skills that enable them to firms, research centers, universi- structure is needed to facilitate incentives for the efficient use of create and share knowledge and ties, think tanks, consultants, and the effective communication, existing knowledge, the acquisi- to use it well. other organizations—must be dissemination, and processing of tion of new knowledge, and the capable of tapping the growing information. application of both to economic stock of global knowledge, assimi- activity—to improve productivity, lating and adapting it to local needs, to raise quality, to innovate, and and creating new technology that to launch new enterprises. underpins the development of new products and processes that can compete in export markets and meet needs at home. 6 Introduction Box I.3 How is a country’s preparedness for the knowledge economy measured? The four-pillar framework highlighted above can also be used to measure countries’ efforts in the global knowledge economy and to shed light on their relative progress over time. The World Bank’s Knowledge Assessment Methodology (KAM, www.worldbank.org/ kam) is a global Web-based tool that provides a basic assessment of countries’ and regions’ readiness for the knowledge economy. Countries’ efforts and investments in the knowledge economy are continuous—like a river’s flow—and all countries make these efforts. But the efforts in some countries flow more quickly than in others. The KAM tries to capture these differences in speed and monitor countries from a global perspective, charting their progress on the four pillars and on combined indexes. The KAM compares 146 countries on the basis of 148 structural and qualitative variables that serve as proxies for the four knowledge economy pillars. The basic scorecard consists of three key variables that serve as proxies for each of the pillars described in table 1. The Knowledge Economy index (KEI) measures the overall preparedness of a country or a region for the knowledge economy. It is based on the average of all normalized scores on the four pillars of the knowledge economy. The figure below provides a snapshot of MENA’s most recent performance on the four knowledge economy pillars in comparison with two other world regions: Europe and Central Asia, and Latin America and the Caribbean (LAC). The figure reveals that the MENA region as a whole could to do more to harness the benefits of knowledge for growth and economic diversification. The region’s knowledge economy performance in comparative perspective, 2012 Regulatory quality Internet users per 10 1,000 people Rule of law Royalty payments Middle East and North Africa Computers per 5 and receipts Europe and Central Asia 1,000 people (US$/pop.) Latin America 0 Total telephones per S&E journal articles per 1,000 people million people Gross tertiary Patents granted enrollment rate by USPTO per million people Gross secondary Average years enrollment rate of schooling Source: World Bank Knowledge Assessment Methodology, www.worldbank.org/kam. Note: Owing to a lack of data for the MENA region as a whole, the variables on tariff and nontariff barriers (parts of the basic KAM scorecard) have not been included in the figure above. Box I.4 Diversification initiatives Growth sectors Innovation sites Develop new sectors such as information technology services, Develop technoparks, industrial clusters, and dynamic creative industries, health tourism, and green technologies economic zones. by exploiting specific niches and the country’s comparative Build new cities and global innovation spots. advantages. Reduce territorial disparities within the country by Improve established sectors such as agrifood industries and building knowledge infrastructure, improving the business petrochemicals by strengthening value chains. environment, and stimulating innovation in depleted areas. 7 Transforming Arab Economies 7 Introduction referred to in this report as the fifth pillar of the knowledge The success of the new development strategies will be enhanced economy—requires bold and broad social approaches. The new by active processes of integration within the Arab world, as well as economic model should be accompanied by a new social con- in the Mediterranean area. Regional integration within the Euro- tract between ruling powers and citizens, a contract in which Mediterranean space should take concrete form through new key reforms are accepted in return for the promise of significant agreements to facilitate trade, foreign direct investment (FDI), growth and employment. Leaders in the Arab world can use and outsourcing, as well as new projects to transfer innovation the impetus toward greater openness, democracy, and justice and technology, and new networks in research and education. to begin the transition to a knowledge-based economy. In the The clear engagement of the international community will be establishment of the new economic model, leaders should take essential if opportunities for synergy and mutual reinforcement the opportunity to engage change agents—young people, entre- of growth potential are to be fully realized. preneurs, and the new class of workers known as “knowledge workers,”7 who form the foundations of the knowledge economy Getting started. Given the immense challenges and opportuni- and society. The process of engagement should include (i) the ties, what should policy makers in the region do? How should participation of those change agents in the design of plans and governments reform their overall business and regulatory envi- reforms, (ii) the involvement of local leaders in the context of ronments? How can entire educational systems be reformed thoughtful decentralization initiatives, and (iii) the develop- to produce people with the skills the market needs? How can ment of financial incentives to raise competences, encourage they support innovation in all its forms—from the creation of entrepreneurship, and reward entrepreneurial success. To gain new technology that is embedded in new products and pro- acceptance, a bold approach must also be pragmatic—that is, cesses to the diffusion and use of existing technology? How can it should generate visible results by capitalizing on immediate governments promote cheaper and more reliable connectivity opportunities to create jobs and stimulate new economic activ- and develop an entrepreneurial and competitive workforce? ity. These opportunities lie precisely in the growth sectors and What sectors are likely to be the best new sources of growth sites that are the sources of economic diversification. The “how and employment? What are the best ways to stimulate new to” of the new development strategies is key for their success. sites—such as secondary cities and other clusters outside the capital or dominant region of the country—to serve as sources In light of the region’s recent and continuing reforms and its ambi- of innovation and growth, to reduce territorial disparities, and tions to realize faster growth, it is important for each country’s to prevent excessive urban concentration? And, above all, how leaders and interested stakeholders to evaluate where they stand can the entrepreneurial and innovative dynamism that is bur- along their journey and how they can take maximum advantage of geoning in many corners of the Arab world (The Economist other countries’ experiences in using knowledge and innovation 2012) be harnessed? for growth and employment. Singapore, Finland, South Korea, and other success stories of our time advanced by forging This report highlights some policy areas that will need attention if a consensus on economic direction, by constantly learning countries are to fully embrace the knowledge economy. The value from global developments (and their by-product, innovation), added of this work stems from the integrative nature of the and by harnessing the power of urban networks and creative knowledge economy approach, which can help MENA coun- cities (which are the main loci of change and transformation tries reexamine their development strategies in a coordinated in the global economy). It is important to remain open to such manner, rather than through national and sectoral strategies experiences and to learn from them, in view of the dynamism of that are prepared and then implemented in isolation. This study these economies on the global stage as sources of knowledge, builds on the wealth of work done on the region—analytical and technology, investment, and markets. flagship reports, as well as capacity-building efforts—by the World Bank and other international organizations, and by the Several countries in the Arab world are already taking strides in this countries themselves. It is also focused on the practicalities direction and paving the way for their transition from factor-driven of how to move forward by adapting the knowledge framework to more knowledge- and innovation-driven economies (box I.5). to country specificities in the region. 7. At the center of the knowledge economy are what Peter Drucker refers to as “knowledge workers”—people with considerable theoretical knowledge and learning, such as doctors, lawyers, teachers, accountants, and engineers. But the most striking growth will be in so-called knowledge technologists. This class of workers includes computer technicians, software designers, analysts in clinical labs, manufacturing technologists, and paralegals, who spend far more time working with their hands than with their brains, but whose manual work is based on a substantial amount of theoretical knowledge that can be acquired only through formal education, not apprenticeship. Just as unskilled manual workers in manufacturing were the dominant social and political force in the 20th century, knowledge technologists are likely to become the dominant social and perhaps political force in the next decades (Drucker 2001). 8 Introduction BOX I.5 A road partly traveled In Algeria the Conseil national économique et social (CNES) has organized national conferences on the knowledge economy to raise awareness of key issues. Government authorities have undertaken reforms in the information and communication technology (ICT) sector and initiated the development of technology parks. Jordan has embarked on a major effort to transform the education system at the early childhood, basic, and secondary levels to produce graduates with the skills needed for the knowledge economy. It has taken steps to become a regional center of ICT develop- ment, including partnerships with Microsoft and Cisco, to provide more attractive job opportunities for highly skilled young graduates. In the past few years, it has acted to improve the innovation climate through the creation of a National Council for Competitiveness and Innovation. It has also embarked on the formulation of its 2012–16 science, technology and industry strategy. The Kingdom of Saudi Arabia has embarked on a strategy to move to a knowledge economy by 2022 and has put in place a host of education reforms. It is also investing in the development of new universities, especially to boost science and technology, and has embarked on a major plan to transform the holy city of al-Madina into a knowledge city. This concept is designed to position the country in knowledge-based industries and to attract and develop talent from around the world. Lebanon is moving on the innovation front. In 2011 the government requested World Bank support for a project to support innovative activities within the private sector. The proposed work could include a pilot investment fund to provide a combination of cash and equity financing to foster innovative ideas and support start-ups and other firms in the early stages of growth. Morocco pioneered regulatory reforms in ICT and GSM systems in the late 1990s, making it one of the countries with the highest teledensity in the region. It also initiated the building of a number of technoparks and technological industrial zones that attracted FDI and advanced manufacturing operations. It has developed a series of national plans in several domains—agriculture, fisheries, industry, ICT, tourism, and education—directly inspired by a will to follow a knowledge-based development path. In Oman, a combination of pro-employment policies, access to land ownership, facilitation of affordable consumer products, and freely available all-encompassing health and education services has supported improved living conditions. A research council has been instituted as part of a policy to give high priority to research and innovation, including the initiation of open research grants. Qatar has endeavored to enlarge its development model from one based solely on oil and natural gas to a model oriented toward the knowledge-based economy. An education reform law passed in 2001 attempted to break the mold of the rote memorization system, and the development of Education City by the Qatar Foundation for Education, Science, and Community Development is aimed at making Doha the center of educational excellence in the Middle East. Doha has already hosted international meetings on politics and economics and is becoming a world-renowned center for Islamic art and culture. Tunisia, following the preparation and publication of knowledge-economy annual reports, developed a comprehensive knowledge- economy strategy as part of its five-year plans to cope with high unemployment, especially among youth. It has established a series of technopoles throughout the country to renew and expand its economic base. Tunisia’s development plan for 2011–14 goes further in articulating a growth path driven by knowledge and innovation. In the United Arab Emirates (UAE), Dubai has based its development over two decades on a clear knowledge and innovation strategy. Its strategy of building a transport and logistics hub (centered on a world-class port) has spawned a successful tourism industry. In addition, the UAE has developed core competencies in technology, media, and telecommunications. These examples were shared at the 2009 Knowledge Economy Conference, held under the auspices of ISESCO and the Government of Tunisia, with World Bank support. The conference produced the Tunis Declaration: http://info.worldbank.org/etools/docs/library/252535/ TunisKEDeclaration.pdf. Source: Authors. Transforming Arab Economies 9 Introduction References and bibliography Radwan, Ismail, and Pierre Strauss. 2011. Knowledge Economy for Growth and Employment in MENA. Unpublished Background Report, World Bank, Washington, DC. Andersson, Thomas, and Abdelkader Djeflat, eds. 2013. The Real Issues of the Middle East and the Arab Sayre, Edward. 2010. “Qatar’s Bid for the World Cup: Spring: Addressing Research, Innovation and Shifting to a Knowledge Based Economy.” Entrepreneurship. Berlin: Springer. December 2. http://www.brookings.edu/up-front/ posts/2010/12/02-qatar-world-cup-sayre. Commission on Growth and Development. 2008. The Growth Report: Strategies for Sustained Growth Solow, Robert. 1956. “A Contribution to the Theory of Economic and Inclusive Development. Washington, DC: Growth.” Quarterly Journal of Economics 70: World Bank. http://cgd.s3.amazonaws.com/ 65–94. GrowthReportComplete.pdf. WEF (World Economic Forum) and OECD (Organisation for Drucker. Peter F. 1992. Managing for the Future. New York: Economic Co-operation and Development. 2011. Arab Penguin. 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Wrigley, Patrick. 2010. “Youth ‘Bulges’ in the Middle East and ———. 2005. The Measurement of Scientific and Technological North Africa: Risk or Asset?” MNA Knowledge and Activities: Guidelines for Collecting and Learning Fast Brief 74, World Bank, Washington, Interpreting Innovation Data (The Oslo Manual), DC. Third Edition. Prepared by the Working Party of National Experts on Scientific and Technology Yusuf, Shahid, and Kaoru Nabeshima. 2012. Some Small Indicators, OECD (paragraph 71), Paris. http://stats. Countries Do It Better. Washington, DC: World oecd.org/glossary/detail.asp?ID=6864. Bank. ———. 2010. The OECD Innovation Strategy: Getting a Head Zoellick, Robert B. 2011. “The Middle East and North Africa: Start on Tomorrow. Paris: OECD. May. http://www A New Social Contract for Development.” Speech .oecd.org/sti/theoecdinnovationstrategygetting at Peterson Institute for International Economics, aheadstartontomorrow.htm#summary April 6, Washington, DC. Radwan, Ismail and Giulia Pellegrini. 2010. Knowledge, Productivity, and Innovation in Nigeria: Creating a New Economy. Washington, DC: World Bank. 10 Key issues: Why, what, and how? In this part °± C hapter 1. Deploying knowledge and innovation to transform Arab economies Chapter 2. Catching up with global knowledge-economy trends °±  °± Chapter 3. Shaping new development strategies for Arab countries 11 hapter 1 Deploying knowledge and innovation to transform Arab economies This chapter highlights the main challenges facing the Arab (FEMISE 2011) but still lagged behind the developing-country world as it enters a new phase in its history, a phase that mil- average of 7.2 percent. The economies of the region still have lions hope will be characterized by broad-based, inclusive not converged with neighboring European economies (figure development. The events triggered by the Arab Spring have 1.1). Resource-rich countries remain in dire need of greater shown the vital importance of rethinking national development economic diversification, while the ability of non-oil-producing strategies and building a new economic model that will foster countries to provide equal access to economic opportunities new jobs and free, just, and dynamic societies. An approach to to their citizens is limited. The Arab Spring highlighted the development founded on knowledge offers clear opportuni- weaknesses of the region’s development pattern, which has ties to achieve that vision. Because job creation is undeniably failed to absorb the growing numbers of young people entering the main challenge facing most Arab countries, the last part the labor force. In general, the region has lacked an inclu- of this chapter examines the links between investments in sive growth strategy and generated inefficient social policies. knowledge, long-term economic growth, and employment.1 Widespread corruption and weak institutions have prevented an equal distribution of economic gains. Indeed, the alliance between the state and a privileged rent-seeking business elite was seen as an important driver of the Arab Spring. A host of daunting Unemployment, in particular among young people, is incontest- challenges ably the main challenge facing Arab countries. The MENA region has the highest rate of youth unemployment in the world—25 percent—twice the world average (figure 1.2; see also figure The Arab world comprises a diverse set of countries with very dif- 1.3). Already a pressing issue before the revolutions of 2011, ferent characteristics. In the countries of the Gulf Cooperation creating jobs is now the top priority as countries confront an Council (GCC)—Saudi Arabia, the United Arab Emirates, economic downturn (owing to both global and local factors) Bahrain, Kuwait, Qatar, and Oman—a large share of house- and try to respond to acute societal demands. Educated Arab holds enjoy a high level of disposable income. Elsewhere in youth are clamoring for opportunities—if jobs are not created, the Middle East and North Africa (MENA), countries have yet to further instability is likely. Unfortunately, high rates of demo- develop a sizable middle class capable of exercising significant graphic growth (averaging around 1.5 percent) and the associ- consumer-spending power. Even so, by international standards, ated swelling of the labor force already weigh heavily on the poverty is low in Arab countries. The percentage of the poor job market (figure 1.4). in MENA, measured at the $1.25-a-day poverty line, was as Arab countries have been unsuccessful in developing a strong and low as 2.7 percent in 2008. In the same year, about 14 percent of the region’s population lived below the $2-a-day poverty competitive private sector that generates productive employment. line (World Bank 2012a). But there is substantial variation in Although the formal private sector plays a larger role in the living standards within the region. In Djibouti and Yemen, for region’s economies than it once did, it still falls short of being example, a third or more of the population lives on less than the engine of strong growth. Poor productivity and low rates $2 a day (World Bank 2012a).2 of innovation have restrained firm competitiveness and the diversification of exports. Private investment has stagnated at Although growth had accelerated in Arab countries before the less than 15 percent of GDP, insufficient to create the neces- political upheavals of 2011, the region still exhibited structural sary jobs (figure 1.5). Foreign investment had picked up signifi- deficiencies that caused widespread feelings of exclusion and cantly before the current downturn, but it was concentrated in the perception that opportunities were unequal. Between 2000 energy, infrastructure, and real estate, with little investment and 2009, economic growth averaged more than 4 percent in technology-intensive ventures. A large part of the problem 1. This chapter builds on background contributions by Chen, Diop, and Muller (2012) and Zeidane (2012). 2. This study covers all members of the Arab League, with the exception of Comoros, Mauritania, Somalia, and Sudan. Reference is often made to the Middle East and North Africa (MENA) as a geographic region. According to the World Bank’s definition, the MENA region encompasses Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Malta, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, United Arab Emirates, West Bank and Gaza, and Yemen. Iran, Israel, and Malta are not covered by this study, as they are not Arab countries. 12 Chapter 1: Deploying knowledge and innovation to transform Arab economies Figure 1.1 Lagging growth in the Arab world GDP capita in world and selected regions, 1975–2011 (constant 2000 US$) 25,000 Arab world East Asia and Paci c European Union 20,000 World 15,000 10,000 5,000 0 11 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 20 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 Source: World Bank data. Figure 1.2 Youth unemployment by region, 2011 estimates (%) East Asia South Asia World у25 years Sub-Saharan Africa 15–24 years Latin America and the Caribbean Southeast Asia and the Pacific Central and Southeastern Europe (non-EU) Developed economies and European Union Middle East North Africa 0 5 10 15 20 25 30 Source: ILO 2012. Note: CIS = Commonwealth of Independent States; EU = European Union. Figure 1.3 MENA unemployment by age, various years Lebanon 2010 Tunisia 2010 55–64 Morocco 2009 35–54 Egypt, Arab Rep. 2006 25–34 Jordan 2010 15–24 Egypt, Arab Rep. 1998 Iraq 2007 UAE 2009 West Bank and Gaza 2008 0 5 10 15 20 25 30 35 40 Source: Gatti and others 2013. Note: MENA = Middle East and North Africa; UAE = United Arab Emirates; WBG = West Bank and Gaza. Transforming Arab Economies 13 Chapter 1: Deploying knowledge and innovation to transform Arab economies Figure 1.4 Population growth in MENA by age group, 1980–2050 800 700 600 500 65+ Millions 400 25–64 15–25 300 <15 200 100 0 1980 1990 2000 2010 2020 2030 2040 2050 Source: World Bank 2011a. with private sector development seems to lie with public-private and private sectors leave most of the business community out relations, which have historically been characterized by mutual of the policy process. In the absence of strong parliaments mistrust. When asked about obstacles to business expansion, and a truly independent judiciary, checks and balances are investors in Arab countries—especially managers of small- and a rarity in most Arab countries, muting citizens’ voices and medium-sized firms—consistently point to policy uncertainty leaving ruling elites unaccountable. In Tunisia and elsewhere, and an uneven playing field that favors incumbent firms at the popular perceptions of powerlessness and unaccountability led expense of new entrants and competitors. At the same time, to demands for the dignity of full civic rights and renegotiation many public officials are skeptical about the ability of the private of the social contract based on modern governance principles sector to deliver growth and critical of its rent-seeking behavior and inclusion (CMI, World Bank, and IsDB 2012). (World Bank 2009). Weaknesses in governance structures also affect social protection. The cause of both corruption and policy uncertainty is the same: In most MENA countries, two out of three people in the poorest quin- weak governance structures characterized by a lack of voice, par- tile do not receive income support. Social protection systems have ticipation, and accountability (see chapter 4). In many Arab coun- frayed under the strain of poor resource management. Subsidies tries, decision-making power is concentrated at a very high represent a significant proportion of GDP3 and consist mainly of level. Irregular and exclusive consultations between the public energy subsidies. But the rich tend to receive a larger share of Figure 1.5 Private investment as a share of GDP in world regions, 1990s vs. 2000s 25 20 15 Percent 10 1990s 5 2000s 0 South Asia East Asia Europe and OECD Latin America Middle East Sub-Saharan and Pacific Central Asia and the and Africa Caribbean North Africa Source: World Bank 2011a. 3. Estimates suggest consumer subsidies are more than 5 percent of GDP in Egypt, Yemen, Kuwait, and Algeria (World Bank internal document). 14 Chapter 1: Deploying knowledge and innovation to transform Arab economies consumption subsidies in absolute terms than the poor. Gaps world’s traded wheat, a figure that is expected to rise to 55 in coverage also leave informal and rural workers without percent by 2030. Rapidly growing populations and the limited protection (FEMISE 2011). availability of water and arable land mean that MENA countries are more dependent than most world regions on international Social inequity is further exacerbated by acute regional disparities. food commodity markets and particularly vulnerable to rising Lagging regions are particularly vulnerable to poverty. The food prices, which fall hardest on the region’s poor, who spend highest poverty in Egypt is concentrated in Upper Egypt, where 35–65 percent of their income on food (Akhtar 2011). 44 percent of the rural population was living in poverty in 2009 and where 95 percent of Egypt’s poorest villages are located. Urbanization and climate change will pose additional social chal- In Tunisia, urban-rural disparities are stark. Coastal cities lenges. Already, 58 percent of the MENA region’s population generate 85 percent of the country’s gross domestic product resides in urban areas (World Bank 2012b), and that figure (GDP); maternal mortality rates are three times higher in rural is expected to reach over 65 percent by 2030 (United Nations areas (70 versus 20 deaths per 100,000 live births, respectively); 2007). The issue is no longer how to stop urbanization but less than 60 percent of the rural population has access to safe how to manage it to exploit the growth-enhancing benefits of drinking water and 40 percent has access to modern sanitation agglomeration while minimizing environmental damage and (compared to near universal access in urban areas). threats to public health from pollution, poor sanitation, and other causes. Over many years, unplanned urban growth and Marked gender inequalities remain a critical concern. Significant the expansion of informal settlements have produced metro- improvements have been made in female school enrollment politan areas that cannot provide basic services—including rates and in women’s life expectancy, but gender equality public transportation, safe water, and adequate sanitation—to remains elusive. Perhaps the most important aspect of gender their residents. MENA is already the world’s driest region; with inequality is the very low rate at which the region’s women population growth, per capita water availability is predicted to participate in the labor force (figure 1.6). In fact that rate is shrink by half by 2050, even before accounting for the effects the lowest in the world: only one in four working-age women of climate change, which is likely to aggravate water scar- are in the labor market, and an average of 20 percent of them city (World Bank 2010b). Because agriculture accounts for 85 are unemployed (European Commission 2010). percent of the region’s water use, increased water scarcity Food security was an important issue during the Arab Spring and resulting from climate change will pose a grave threat to food remains an important concern for the poorest households of the security. Fluctuations in agricultural yields are expected to region. Cereal productivity in the MENA region is approximately increase, ultimately falling to a significantly lower long-term half that of the rest of the world (1.5 versus 3 metric tons per average (World Bank 2010b). Climate change also is expected hectare). Yet, 40–60 percent of irrigated land is dedicated to to amplify the burden of water-related, cardio-respiratory, and growing cereals. MENA countries underinvest in agricultural vector-borne diseases through a variety of pathways. Finally, productivity, with only 0.66 percent of aggregate GDP in agri- Arab countries are significantly vulnerable to any rise in sea cultural research and development compared to 2.36 percent level, which could quickly expose millions of people to coastal in developed countries. The region imports 30 percent of the flooding. Figure 1.6 Female labor participation rates 80 70 60 50 Percent 40 30 20 10 0 a a fic an ld EU pe ia a st i ric ric As As Ea or ci ro be d Af Af W Pa Eu an st h rib e ut dl an th Ea d Ca CD st So id or an r a ha M N OE he e ia th Sa As ut d b- So an st Su ea nd a ic h la ut er ra So Am nt Ce tin La Source: Gatti and others 2013. Note: LAC = Latin America and the Caribbean; OECD = Organisation for Economic Co-operation and Development; EU = European Union. Transforming Arab Economies 15 Chapter 1: Deploying knowledge and innovation to transform Arab economies Wanted: A new ingful employment opportunities for their youthful popula- tions and prepare for a day when their fossil fuel endowments economic model are depleted. All these countries need to formulate a robust national knowledge economy strategy and reform the appro- priate sectors in order to achieve this growth. Before the Arab Spring, several Arab countries had revisited their Arab countries face a challenging international context character- growth and development strategies (see the introduction to this ized by a major economic downturn and growing pressure to raise volume), but the need for a new economic model is now broadly productivity and competitiveness. The current economic crisis perceived. It is now widely recognized that the challenges affecting the euro zone, the major trade partner of the MENA described above are closely interconnected and require an countries, represents a serious constraint for the region’s integrated approach. The enhanced attention to job issues growth prospects. Countries such as China and India have offers an opportunity to develop innovative, inclusive, and coor- become the main drivers of global trade, putting pressure on dinated strategies. The ineffectiveness of youth employment firms in other developing countries to improve productivity and policies to date makes it clear that only integrated strategies cut costs, as well as making it more difficult to attract foreign will allow Arab countries not only to respond to the job chal- direct investment (FDI). Global value chains have become lenge but also to improve social cohesion, which is the founda- more elaborate over the past 10 to 15 years, and entering tion of continued economic and social development (FEMISE them now requires considerable competence on the part of 2011). As highlighted during the Arab Spring, the pace and suppliers. MENA countries, however, continue to depend on the nature of job creation can affect social cohesion in many a small number of exports—mainly natural resources and ways, notably by raising or lowering levels of equity, citizens’ products requiring very little transformation (CMI, World Bank, trust in institutions, and their willingness to participate in civil and IsDB 2012). In this context, it will be difficult for the MENA society (World Bank forthcoming 2013). Recognizing and acting countries to base their growth strategy solely on exports, as on the vital nexus between the environment and the economy the East Asian economies did; it will therefore be necessary is also key to meeting the challenges facing Arab countries. to develop domestic markets alongside export markets. Yet, By mainstreaming the environment in economic policies and Arab countries also must achieve greater diversification of their promoting green growth at the national and regional levels, economies and improve their international competitiveness, countries can foster economic growth, create jobs, and manage particularly as rapidly growing trade in services could well natural resources sustainably (CMI, World Bank, and IsDB result in a massive international migration of white-collar jobs, 2012). But moving toward such an integrated strategy requires amplifying the risk of a global competition for jobs, especially a comprehensive set of policies and close partnerships between good ones (World Bank 2013). public and private stakeholders. Raising productivity will require further investment in knowledge The Arab Spring has opened up opportunities to build new coali- and innovation, one of the most important determinants of change tions for change. Although Arab countries differ widely in their in total factor productivity (TFP). As discussed in the introduc- political systems and practices, many governments now feel tion, TFP is a residual variable that expresses the effects on the need to adjust and redefine the rules of the game. The busi- output of factors other than the traditional production inputs ness community, historically not inclined to support reforms, (labor and capital). It is considered a measure of an economy’s may now be easing its claim to privileged access to markets long-term technological change (through technological growth and investments. A stronger role will also be played by civil or changes in efficiency). Many studies have shown that, over society, in expressing the newly empowered voice of citizens. the past few decades, TFP in the Arab world has grown very These new agents of change will be called upon to support slowly. Using empirical analyses based on endogenous growth significant governance reforms that will allow the planning, models,4 Isaksson (2007) found that between 1960 and 2000 implementation, and evaluation of an integrated strategy aimed MENA had the second-lowest level of TFP growth after Sub- at creating more and better jobs. Saharan Africa. The region’s annual rate of TFP growth was 0.08 percent, compared with 0.6 percent for the East Asian A new economic model, based on knowledge and innovation, could “Tigers.” These empirical findings echo the results of a study respond directly and simultaneously to the aforementioned chal- by Makdisi, Fattah, and Limam (2007) that showed that the lenges. The dynamic process of knowledge and wealth cre- main sources of growth in MENA were not related to knowledge ation raises tremendous possibilities for enhancing growth (technological growth and increase in technical efficiency) but and competitiveness. But there is also a risk that countries rather to growth in capital and labor in the economy, notably or firms and organizations that are not able to keep pace with in most of the GCC countries (figure 1.7). rapid change will fall behind. Most oil-importing countries in MENA are middle-income countries that have achieved uni- Mismatches between productive structures and the supply of skills versal basic education and are poised to realize faster growth. will need to be reduced. The productive structure of Arab coun- The oil exporters are now grappling with the transition from tries, however, shows low demand for highly skilled labor, while an oil-based to a knowledge-based economy to create mean- the education system produces growing numbers of university 4. The model used in these works is a Cobb-Douglas production function: Y = AKaH1–a, where A represents TFP, K physical capital, H human capital determined by a relation of the type H = f(L, educ), and a the relative share of physical capital in production. Once this share is determined, the annual variation in TFP appears as a residual. 16 Chapter 1: Deploying knowledge and innovation to transform Arab economies Figure 1.7 Average annual rates of TFP growth, 1990–2009 Qatar Tunisia Sudan Egypt, Arab Rep. Syrian Arab Rep. Oman Morocco Jordan Bahrain Kuwait Algeria Iraq Saudi Arabia Yemen, Rep. United Arab Emirates –1.50 –1.00 –0.50 0 0.50 1.00 1.50 2.00 2.50 Source: CMI calculations based on Total Economy Database (2012). Source: TFP = total factor productivity. Although Qatar and the United Arab Emirates (UAE) have similar scores on the World Bank’s Knowledge Economy Index, Qatar had much higher average rates of TFP growth. The difference can be explained by the greater sensitivity of UAE’s TFP growth to the global financial crises of 1997 and 2007. graduates. Indeed, education levels in the region have increased Reducing unemployment will therefore require that Arab coun- significantly since 2002 (figure 1.8). The aspirations of young tries move toward productive activities with higher value-added people are rising with their level of education. Beyond foment- and improve their education and training systems. The high rate ing social discontent, this situation is harmful for at least two of unemployment among young graduates can be traced to reasons: (i) a substantial share of the region’s human capital the mismatch between the skills with which they leave the is not being used for productive purposes; and (ii) persistent educational system and those needed by the economy. One unemployment among graduates may discourage future gen- solution, desirable for more than one reason, would be to nudge erations from investing in education. the economy to increase its demand for skills. To do that, the Figure 1.8 Postsecondary enrollment in MENA, 2002–10 40 Maghreb average Mashreq average 35 GCC average Enrollment ratio (percent) 30 Arab average 25 20 15 10 5 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 Year Source: CMI calculations based on UNESCO data. Note: MENA = Middle East and North Africa; GCC = Gulf Cooperation Council. Transforming Arab Economies 17 Chapter 1: Deploying knowledge and innovation to transform Arab economies productive system must raise its technology content, the quality realm of regulation. Supporting their transition to formal of its production, and its place in the value chain—that is, it employment will mean that those outsiders (including the must concentrate on generating products with greater value- unemployed, youth, women, and informal workers) will be added (FEMISE 2011). Another source of the skills mismatch better represented in the social dialogue (World Bank 2011b). that afflicts the labor market in most Arab countries is the generalist orientation of postsecondary training at the expense Knowledge and innovation must be part of any strategy aimed at of technical and scientific training. Overall, the quality of edu- easing the pressure on physical resources and the challenges of cation in the region is quite low, and firms complain regularly climate change. Water scarcity and environmental degrada- about the lack of skills presented by job seekers (World Bank tion threaten key economic sectors such as tourism and dis- 2010a). A knowledge-based development strategy will therefore proportionately affect the poorest households of the region’s require structural policies that address both the labor-demand population. To address those threats and raise the productiv- side, through the development of a formal private sector that ity of natural assets (especially water), technology diffusion favors the emergence of high-value-added activities, and the and innovation efforts will be required (CMI, World Bank, and labor-supply side, through better-targeted education policies. IsDB 2012). That requirement is both an imperative and an opportunity for the region, where green energy remains under- Higher productivity and better training will also help address developed, despite its huge growth potential. Opportunities widespread informal employment and its associated social costs. include energy efficiency in the construction, transport, and In the MENA and GCC countries, 81 percent of the working- waste management sectors, as well as renewable energy. The age population work in the informal economy (figure 1.9). region’s vast solar energy potential also offers opportunities This means that more than two-thirds of all workers in the for growth, employment, and net exports. Taking advantage of region may not have access to health insurance and are this sector will require massive investments in skills, research not contributing to a pension system that will provide them and development (R&D), and clustering (CMI, World Bank, and with income security after retirement. A typical country in IsDB 2012). Investing in green growth strategies could also the MENA region produces about one-third of its GDP in the contribute significantly to job creation in the region (CMI 2012). informal economy. From a fiscal perspective, about one-third of total economic output in the region remains undeclared and therefore untaxed, with considerable implications for government revenue. The low productivity of informal work is especially notable in MENA’s poorer countries and rural The knowledge areas, where workers with limited literacy and education are engaged in micro-entrepreneurship and low-yield agricul- economy, growth, tural work. For that reason, programs aimed at increasing productivity in the informal sector through training and skills and employment upgrading will be essential components of any knowledge economy approach that hopes to promote inclusive growth in Heavy investment in the knowledge economy is associated with the long term. The high prevalence of informality also implies reduced unemployment. Because economic growth and job cre- that a vast majority of economic agents operate outside the ation is the main challenge to be addressed by any development strategy built around the cultivation of a knowledge economy, it is important to examine to what extent efforts to stimulate Figure 1.9 the knowledge economy can contribute to economic growth Share of working-age population in the MENA and employment. From an examination of the recent evolution region holding a formal job (2010 estimates) of the MENA region, it does appear that high investment in components of the knowledge economy, as measured by the Knowledge Economy Index (KEI), are associated with reduced Formal 19% unemployment (figure 1.10). The mechanisms by which the knowledge economy boosts eco- nomic growth are theoretically and empirically well founded. In the long run there is no question about the effects of the knowledge economy on economic growth through productivity growth (box 1.1). It also tends to boost employment of skilled labor. Whether that boost is enough to reduce unemployment depends on a host of factors, chief among them the skill profile of job seekers. Informal A model built on the scheme illustrated in figure 1.11 uses the KEI 81% to measure countries’ knowledge effort. The model, described in detail in annex 1, has made it possible to estimate with some precision the contribution of knowledge economy efforts Source: MNSHD (UN population data and Key Indicators of the Labour to growth and to employment in the MENA countries in the Market, International Labour Organization). period between 1995 and 2008, with two subperiods: 1995–99 18 Chapter 1: Deploying knowledge and innovation to transform Arab economies Figure 1.10 Knowledge Economy Index scores and unemployment rates in Arab countries 40 35 Gulf Cooperation Council Mashreq and Maghreb Unemployment rate, 2006–08 (percent) 30 Other Arab countries y = –4.1716x Ѥ 29.905 R2 = 0.64675 Linear (Arab world) 25 20 15 10 5 0 0 1 2 3 4 5 6 7 8 KEI score (KAM 2012 database) Source: Authors. Note: The Knowledge Economy Index is compiled from the KAM 2012 database. Unemployment rates cover the period 2006–08 and are drawn from the Arab Labour Organization Statistical Book (2010). and 2000–08.5 In the model, the elasticity of employment to Figure 1.11 increases in knowledge investments in a given country is medi- Estimating the employment effects of ated by the elasticity of employment to growth in that country. knowledge The employment effects of knowledge economy efforts in the past decades are perceptible. The following conclusions have been Economic Employment Knowledge drawn from the model: growth growth  s in other regions of the world, a higher score on the KEI • A in the MENA countries is associated with higher growth rates. In fact, this association was even more significant in Employment e ects the MENA region than in other regions during the period due to knowledge 2000–05, while it was rather limited during 1995–99. In the (via economic growth) MENA region, a unit increase in the KEI for 1995 tended to increase the average growth rate of real GDP per worker Source: Authors. for the period between 1996 and 2000 by 0.28 percentage point, while a unit increase in the KEI for 2000 increased the average growth rate of real GDP per worker for 2001–05 by annual increase of 1.3 percentage points in employment 0.89 percentage point. in Qatar over the period 2000–08. The average elasticity of employment to knowledge investment for MENA as a  he elasticity of employment to growth in the MENA region, • T whole was close to 0.7 for the period 2000–08, compared on average, hovered around 0.80 over the period 1991–2009, with just 0.23 for the period 1995–99. In other words, a unit meaning that an increase of 1 percentage point in GDP increase in the KEI for the year 2000 produced an average was associated with an average increase of 0.8 percentage annual increase of 0.7 percentage points in employment point in employment for the next three years (figure 1.12). in MENA as a whole over the period 2000–08 (figure 1.13).  he elasticity of employment to knowledge investment (as • T measured by the KEI) resulting from the combination of The picture of the knowledge economy’s impact on employment these coefficients, calculated at the level of each country, is therefore positive and encouraging. The aforementioned ranged from 0.2 in Kuwait to 1.3 in Qatar for the period estimates have also to be viewed against the observed rate 2000–09. The coefficient value of 1.3 implies that a unit of employment growth for the countries of the region over increase in the KEI for the year 2000 produced an average the period 2000–09 (table 1.1). Those countries—the small 5. The impacts of a knowledge economy effort in the first year of each period are assumed to spread over the rest of the period. The effects of knowledge on growth are measured for the periods 1995–2000 and 2001–05, whereas the elasticity of employment to growth is measured for the periods 1991–99 and 2000–09. The effects of knowledge on employment are the product of these two coefficients. See annex 1 for the full analysis. Transforming Arab Economies 19 Chapter 1: Deploying knowledge and innovation to transform Arab economies BOX 1.1 Knowledge, growth, and employment: Theoretical and empirical underpinnings Investment in knowledge indisputably encourages long-term growth. According to the so-called new growth models (Romer 1993), invest- ment in knowledge helps generate new ideas and processes that make possible new products and production processes. Since the pioneering work of Schumpeter, this has been called innovation.a Even if the immediate results of innovation are patented, copyrighted, or otherwise appropriated by the innovators, new ideas always entail positive externalities that can be captured by individuals, firms, and industries capable of absorbing them,b with the result that innovation’s benefits for society are greater than the private benefit captured by innovators. In other words, when entrepreneurs innovate, countries can grow permanently, despite diminishing returns to capital and labor.c In today’s global market, innovation is a condition for increasing market shares for many products. Around 60 percent of export growth now takes place through the introduction of new product varieties, rather than by exporting higher volumes of the same goods (see empirical analysis by Hummels and Klenow 2005). There is empirical evidence of a strong positive relationship between the knowledge economy and economic growth in both developed and developing countries (Chen and Dahlman 2004; Poorfaraj, Samimi, and Keshvarz 2011). Their assessment of 92 countries for the period between 1960 and 2000 shows that knowledge is a significant determinant of long-term economic growth through its effects on the growth rate of total factor productivity (TFP). In particular, they find that the stock of human capital, the level of domestic innovation and technological adaptation, and the level of information and communications infrastructure all exert statistically significant posi- tive effects on long-term economic growth. Openness to trade is a major mediator of the relationship between knowledge and growth. Innovation is a near impossibility in a closed economy. By contrast, trade integration is a powerful way of tapping into global knowledge through foreign direct investment and access to technology, whether licensed or purchased. There is abundant empirical evidence that cheap access to equipment and machinery has a positive impact on TFP and thus growth. For instance, Coe and Helpman (1995) and Coe, Helpman, and Hoffmaister (1997) find that foreign knowledge conveyed through trade in goods has a statistically significant positive impact on aggregate TFP in importing countries. Schiff and Wang (2007) show that the impact grows with increased trade with industrial countries, reflecting the fact that about 80 percent of the world’s research and devopment occurs in the developed world. The impact of knowledge-based growth on employment depends mainly on the skill profiles of job seekers. The positive impact of higher growth on demand for labor is undisputed. Generally, moving to a knowledge-based economy leads to an increase in demand for highly skilled workers and, under most circumstances, higher wages for such workers. But higher demand for labor will reduce unemployment only if the unemployed are qualified for the new jobs. Much depends on the sectoral basis of growth, the propensity of sectors to hire labor as they grow, and the profile of job seekers in the economy. The empirical literature corroborates these theo- retical intuitions. Studies show a strong positive relationship between the introduction of knowledge-intensive means of production, such as those based on information technologies, and demand for highly skilled workers (see OECD 2004 for a summary). But if most unemployed workers are unskilled, overall unemployment may not decline. A tendency for the labor market to polarize and for the wage gap to widen has also been noted in studies conducted on developed countries (OECD 2004). In the United States, relative wages for less-skilled workers have declined, even as the overall unemployment rate remained low. The United Kingdom was marked by a similar growing wage gap between skilled and unskilled workers. The other major European countries have seen no polarization in terms of wages, but the rate of unemployment for unskilled workers has risen. Knowledge and technological change are not the only drivers of these outcomes, however. Globalization affects the wage differential, regardless of changes in technologies. Source: Chen, Diop, and Muller 2012. a. Schumpeter defines innovation as consisting of (i) new products and services, (ii) new processes, (iii) new ways to penetrate new markets, (iv) new supply sources or distribution methods, and (v) new industries (Schumpeter 1912/1961). b. Economic theory emphasizes education and human capital as preconditions for absorbing new ideas and building a knowledge economy. Indeed, the availability of high-quality and abundant human capital allows the economy to absorb new ideas and avoids the problem of diminishing returns to capital and labor (Lucas 1988). c. The traditional models postulate that the growth rate of technology (or technological development) was exogenous. resource-rich economies, principally—for which the employ- But the knowledge contribution has not been sufficient to signifi- ment growth rates are relatively high are also those that have cantly reduce unemployment, except in the small economies of experienced the most significant progress in terms of their KEI the Gulf. There are three reasons for this: score over the past decade or so, as shown in the next chapter.  he knowledge economy effort, although of proven value, • T In a similar vein, those countries that exhibit a small employ- has been insufficient. In general the MENA countries have ment growth rate are generally those that have experienced performed below the world average in terms of the effort little progress or a regression in terms of the KEI. This confirms they have devoted to developing the knowledge economy, the positive contribution of knowledge economy efforts to the as discussed in the next chapter. job creation process. 20 Chapter 1: Deploying knowledge and innovation to transform Arab economies Figure 1.12 Elasticity of employment to economic growth in MENA countries, 1995–2008 1.8 1.6 1995–99 1.6 2000–08 1.4 1.4 1.4 1.3 1.2 1.2 1.1 1.1 1* 1 0.9* 0.9 0.9 0.82 0.8 0.78 0.8 0.70.7 0.7 0.7 0.7 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.5 0.5 0.4 0.4 0.4 0.4 0.3 0.2 0 0 0 p. n n co a e r ia Em an Ba s n t ria . p. p. ta ep ai ta te si ag a no ai b Re Re Re al oc rd Om w ge ni Qa ra hr ria n, R ira er ba M Ku or Jo Tu ab ab ic iA Al av Le M m e Ar Ar ud m A la EN ab Sa Ye t, n Is yp Ar M n, Eg Sy Ira d ite Un Oil exporting developed Oil exporting developing Oil importing developing * coefficient is not statistically significant Source: Authors. Note: MENA = Middle East and North Africa. Figure 1.13 Elasticity of employment to the KEI in MENA countries, 1995–2008 1.4 1.3 1995–99 1.2 2000–08 1.1 1 0.9 0.9 0.8 0.8 0.8 0.8 0.69 0.6 0.6 0.6 0.6 0.5 0.5 0.5 0.4 0.4 0.4 0.4 0.3 0.3 0.3 0.23 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0 0 0 Jo . Le an n co a ge r a Em an Ba s n t ria n, rab . p. p. ab a p p ai ta te bi t si no ai Re Re Re Re al oc ra rd Om w ge ni Qa ra hr ira ba M Ku e or Tu ria n, ic A Al av M m i Sy me Ar ud A A la EN ab Sa Ye n t, Is yp Ar M Eg Ira d ite Un Oil exporting developed Oil exporting developing Oil importing developing Source: Authors. Note: KEI = Knowledge Economy Index; MENA = Middle East and North Africa. Transforming Arab Economies 21 Chapter 1: Deploying knowledge and innovation to transform Arab economies  TABLE 1.1   ­Employment growth rates in Arab countries, 2000–09 Employed population Compounded annual Country name 2000 2009 rate of growth (%) Algeria 7,772,217 13,195,310 6.06 Egypt, Arab Rep. 19,254,668 23,980,516 2.47 Libya 1,624,133 2,103,832 2.92 Morocco 8,819,170 10,758,452 2.23 Tunisia 2,711,153 3,271,820 2.11 Bahrain 200,000 400,000 8.01 Kuwait 1,200,000 2,100,000 6.42 Oman 700,000 1,100,000 5.15 Saudi Arabia 6,000,000 8,100,000 3.39 United Arab Emirates 1,700,000 3,500,000 8.35 Gulf Cooperation Council 9,800,000 15,200,000 5.00 Non-GCC 53,202,748 69,935,998 3.09 Total 63,002,748 85,135,998 3.40 Source: Authors. Note: GCC = Gulf Cooperation Council.  n most countries there is a wide mismatch between the • I even by one unit is a tall order. It is equivalent to gaining skills demanded by employers and those presented by job about 15 ranks in the KEI. But this degree of progress is seekers (see chapter 5). That mismatch attenuates the possible with a sustained effort. Several years are typically positive adjustment of employment to increases in the KEI. required, as variables related to education and innovation Where the labor force has the requisite skills, as in Qatar do not move up quickly (unlike those related to the busi- (thanks to the easy attraction of skilled expatriates), invest- ness environment and information and communication ments in the knowledge economy have a huge impact on technology, where progress can be rapid). jobs. Most MENA countries have an abundance of highly  educing the skills mismatch. Major adjustments are needed • R educated workers, but their skills are not adapted to the in the education and training systems of the region to demands of the economy. ensure a better fit between graduates’ skills and the  conomic structures mediate the effect of higher growth • E demands of employers. In the meantime, short-term on jobs, particularly skilled jobs. In most MENA countries, measures to retrain workers or provide them additional owing to a lack of competitiveness, growth has a limited education in response to clearly identified labor demands effect on employment (that is, the elasticity of employment can have an important impact on reducing the gap in skills- to economic growth is limited) in most sectors exposed related supply and demand. to foreign competition. The main provider of skilled jobs  teering economies toward more competitive sectors in which • S in the region has been government, as illustrated by the growth is more likely to create jobs (that is, where the elas- case of Tunisia in figure 1.14. ticity of skilled employment to economic growth is higher). This, too, is a difficult task in a world where manufacturing Future efforts to spur development of the knowledge economy can is dominated by Asian countries and where demand has contribute to economic growth and employment creation through been stifled by recession. But opportunities exist in non- three channels: traded goods and services, in sectors in which the MENA • M  ore and better knowledge economy efforts. To have a serious countries possess unique comparative advantages owing impact, knowledge economy efforts should be significant, to geography or other factors, and in environment- and as shown by the results given above. Raising a country’s KEI infrastructure-related activities. 22 Chapter 1: Deploying knowledge and innovation to transform Arab economies Figure 1.14 Government and other providers of good jobs in the MENA region Change in Tunisian market structure, 1994–2008, percent –0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 5 Skilled/total labor 4.5 Transport and communications 4 3.5 Output growth ratio Financial institutions Mechanical and electrical 3 2.5 Government Trade Other services Construction 2 Agrifood Misc. industries Building materials Hotel and restaurant Agriculture 1.5 Chemical Textile 1 Mining and energy 0.5 0 Skilled jobs created (in percentage points) Source: Taja 2010. Note: MENA = Middle East and North Africa. Conclusion Tunisia would lead to some 300,000 new jobs, in Egypt to about 1.5 million new jobs, and in Saudi Arabia to some 700,000 new jobs (in addition to the jobs generated by pursuing current trends). Success in that endeavor would make a major con- tribution to shrinking the job problem, even if it would not With sustained efforts, it should be possible within a reasonable eliminate it altogether.8 As will be seen in the next chapter, period to increase significantly the current contribution of the most Arab countries have some room to maneuver, because knowledge economy to the growth of employment in the MENA to date they have generally underinvested in the pillars of the region.6 Based on the estimates and figures provided above, one knowledge economy by comparison with other countries at a may reasonably expect a significant increase in the KEI effort similar level of development. Building a knowledge economy across the region that could boost the annual rate of employ- requires a sustained commitment, but it is the best choice for ment growth by 1 percentage point over the rate recorded sustained economic growth with an appropriately high level in the decade 2000–09.7 Over a decade, such an increase in of job creation. 6. This period would vary from one country to the other. Five to ten years are generally necessary to see the benefits of efforts, reforms and initiatives in the differ- ent knowledge economy policy pillars. 7. The estimates offered here derive from the data presented above on the elasticity of employment to the KEI. For the period 2000–09, the region as a whole showed an elasticity of 0.7 percent for 15 positions in the KEI. That gain seems reasonable in view of the relative underinvestment of the region in the various knowledge economy pillars. In addition, one may presume a significant reduction in skill mismatches and an improve elasticity of employment to economic growth induced by improved competitiveness. Taking those factors into account, an increase of 1 percentage point in the annual growth rate of employment induced by more and better knowledge economy efforts is plausible. 8. It is generally estimated that a 7 percent economic growth rate is necessary for maintaining the level of employment in the region. An increased knowledge economy contribution would lower this requirement in a significant proportion. But at the same time, the overall growth rate is being negatively impacted by the global economic downturn, an effect that is likely to continue in the medium term. Transforming Arab Economies 23 Chapter 1: Deploying knowledge and innovation to transform Arab economies References and bibliography Gatti, Roberta, Matteo Morgandi, Rebekka Grun, Stefanie Brodmann, Diego Angel-Urdinola, Juan Manuel Moreno, Daniela Marotta, Marc Schiffbauer, and Akhtar, Shamshad. 2011. “Middle East and North Africa: Elizabeth Mata Lorenzo. 2013. Jobs for Shared Emerging Developments and Challenges.” Prosperity: Time for Action in the Middle East and North Speech delivered in Brussels, February 23. http:// Africa. Washington, DC: World Bank. go.worldbank.org/B3WOTWHJZ0. Hummels, David, and Peter J. Klenow. 2005. “The Variety and Quality Chen, Derek H. C., and Carl J. Dahlman. 2004. “Knowledge and of a Nation’s Exports.” American Economic Review 95 Development: A Cross-Section Approach.” Policy (3): 704–23. Research Working Paper Series No. 3366, World Bank, Washington, DC. ILO (International Labour Office). 2012. 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Willig. 2011. “Inclusive OECD (Organisation for Economic Co-operation and Growth from Competition and Innovation.” Paper Development). 2004. Innovation in the Knowledge presented at OECD-World Bank Conference on Economy. Implications for Education and Learning. Challenges and Policies for Promoting Inclusive Paris: OECD. Growth, March 24–25, Paris. Poorfaraj, A., A. J. Samimi, and H. Kesavarz. 2011. “Knowledge European Commission. 2010. Labour Markets Performance and Economic Growth: Evidence from Some and Migration Flows in Arab Mediterranean Countries: Developing Countries.” Journal of Education and Determinants and Effects. Volume 1, Final Report and Vocational Research 1 (1): 21–25. Thematic Background Papers, Occasional Papers 60, April. Romer, P. M. 1993. “Implementing a National Technology Strategy with Self-Organizing Industry Investment FEMISE 2011. Towards a New Med Region: Achieving Fundamental Boards.” Brookings Papers on Economic Activity: Transitions. FEMISE Report on the Euro- Microeconomics 2: 345. Mediterranean Partnership. Marseille. Schiff, M., and Y. Wang. 2007. North-South Technology Fioravante, D. G., and W. F. L. Maldonado. 2009. “Impacts Diffusion, Regional Integration, and the Dynamics of Technological Innovation on Employment: The of the “Natural Trading Partners” Hypothesis. Revue Brazilian Manufacturing Case.” http://www.merit d’économie du développement (De Boeck University) .unu.edu/MEIDE/papers/2009/1236670812_GF 21 (5): 69–84. .pdf. Schumpeter, Joseph. 1912/1961. The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. (Translated from the German by Redvers Opie.) New York: OUP. 24 Chapter 1: Deploying knowledge and innovation to transform Arab economies Stone, A., and L. T. Badawy. 2011. “SME Innovators and Gazelles ———. 2010a. Investment Climate Surveys 2006–10. Washington, in MENA—Educate, Train, Certify, Compete!” MENA DC: World Bank. 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Transforming Arab Economies 25 hapter 2 Catching up with global knowledge economy trends To create and sustain an effective knowledge economy in the medium  esource-rich, labor-abundant countries—such as Algeria, • R to long run, the countries of the Arab world must understand their Syria, and Yemen—have low scores (and low rankings) on the strengths and weaknesses in relation to the four pillars of the KEI (Algeria is ranked 96, Syria 112, and Yemen 122). These knowledge economy—the economic and institutional regime, countries have not yet been able to convert resource wealth education, innovation, and information and communication into strong pillars of the knowledge economy. technologies (ICTs). They must then develop appropriate policies  esource-rich, labor-importing countries have relatively • R and investments as part of their national development plans, high scores (and rankings) on the KEI: the UAE is ranked 42, to enable an effective transition to the knowledge economy.1 Bahrain 43, Oman 47, Saudi Arabia 50, Qatar 54, and Kuwait 64. These countries, many of which are small and have This chapter examines how the Arab region compares with other high per capita oil wealth, have started to use their natural regions of the world in its readiness for the knowledge economy. To resource wealth to begin a transformation to the knowl- be useful, any assessment of the economic challenges facing edge economy. the Middle East and North Africa (MENA) region must take into account the region’s great diversity.  esource-poor countries exhibit moderate performance • R on the KEI: Jordan is ranked 75, Tunisia 80, Lebanon 81, The World Bank’s Knowledge Assessment Methodology (KAM) Egypt 97, and Morocco 102. They represent the typical spec- is a global benchmarking tool that makes it possible to examine trum of developing countries, where progress toward the the state of advancement of knowledge economies in countries knowledge economy depends on a wide range of factors. and across regions. The 2012 KAM2 treats MENA as a geo- graphic region that includes 18 countries: Algeria, Bahrain, Djibouti, the Arab Republic of Egypt, the Islamic Republic of Iran, Israel, Jordan, Kuwait, Lebanon, Malta, Morocco, Oman, Qatar, Saudi Arabia, the Syrian Arab Republic, Tunisia, the MENA compared United Arab Emirates (UAE), and the Republic of Yemen. Iran, Israel, and Malta are not dealt with in this report because they with other regions are not Arab countries. The Knowledge Economy Index (KEI) generated by the KAM mea- sures the overall preparedness of a country or a region for the The KAM helps shed light on how MENA fares on the global knowl- knowledge economy. It is based on the average of all normal- edge economy stage.3 Figure 2.1 provides a snapshot of MENA’s ized scores on the four pillars of the knowledge economy (as most recent performance on the four knowledge economy discussed in box I.2 of the introduction). The higher the KEI pillars as compared with two other world regions in the KAM: score, the better prepared the country is to make an effective Europe and Central Asia (ECA) and Latin America and the transition to the knowledge economy. Interestingly, country Caribbean (LAC). It shows that the MENA region could to do scores on the KEI can be mapped against the three-tier clas- much more to harness the benefits of knowledge and innova- sification presented in the introduction. tion for growth and economic diversification, and in so doing, catch up with other regions of the world. 1. This chapter draws on several references, including a background contribution by Koivisto (2012). 2. The 2012 KAM (http://www.worldbank.org/kam) includes 148 structural and qualitative variables for 146 countries. It helps a country compare its readiness for the knowledge economy with its neighbors, competitors, or other countries that it wishes to emulate on the four pillars of the knowledge economy: the economic and institutional regime, education, innovation, and information and communication technologies (ICTs). The strength of the KAM is its cross-sectoral approach, which allows users to take a holistic view of a wide range of relevant factors, rather than focusing on just one pillar. 3. It should be noted that the KAM focuses on variables linked to knowledge and innovation performance but does not provide a broad picture of countries’ overall economic and social development. In contrast, the Economic and Social Development Indicator (ESDI), which was developed in 2010 through an initiative of the government of the Republic of Korea (NRCS 2010), aims to combine economic and social indicators to provide a better picture of balanced development. The motive underlying the ESDI initiative was a recognition that Korea’s development efforts had overemphasized growth, an imbalance that should be rectified through greater emphasis on social and environmental factors. The task was to create a new index to better reflect and measure Korea’s new policy goal of pursuing development that balances growth, social cohesion, and respect for the environment. The new indicator supports evidence-based policy making while also contributing to academic efforts to develop alternatives to gross domestic product (GDP) as measures of growth and development, a goal sought by several national governments and inter- national organizations. The index consists of three main categories (growth engine, social cohesion, and the environment), each of which is further broken down and represented by standard measures. Reflecting Korea’s status as a member of the Organisation for Economic Co-operation and Development and a G20 country, the ESDI prototype included panel data from 38 countries over 20 years (1990–2009). 26 Chapter 2: Catching up with global knowledge economy trends Figure 2.1 The region’s knowledge economy performance in comparative perspective, 2012 Regulatory quality Internet users per 10 1,000 people Rule of law Royalty payments Middle East and North Africa Computers per 5 and receipts Europe and Central Asia 1,000 people (US$/pop.) Latin America 0 Total telephones per S&E journal articles per 1,000 people million people Gross tertiary Patents granted enrollment rate by USPTO per million people Gross secondary Average years enrollment rate of schooling Source: Knowledge Assessment Methodology (www.worldbank.org/kam, World Bank 2012a).  Note: S&E = science and engineering; USPTO = U.S. Patent and Trademark Office. Figure 2.2 reveals that in 2012, the MENA region did better on the KEI than two other regions in the KAM: South Asia and Africa. Country performance MENA is almost at the level of LAC on the KEI, thanks to the progress made over the past 10 years in expanding access to education, acquiring and using ICTs, and gradually improving the institutional environment for private sector–led growth. But it still needs to do more to catch up with its ECA neighbors Delving into the performance of countries across the region, the (to the north) and countries in East Asia and the Pacific (EAP), 2012 KAM shows that the KEI scores of most MENA countries home to some of the world’s most dynamic economies. have slipped since 2000, indicating a lack of progress in build- ing knowledge economies (figure 2.3). Over the past decade, Algeria, Bahrain, Oman, Saudi Arabia, Tunisia, and the UAE—all resource-rich countries, except Tunisia—improved on the KEI, while Djibouti, Egypt, Jordan, Kuwait, Lebanon, Morocco, Qatar, Figure 2.2 Syria, and Yemen scored lower in 2012 than in 2000. Regional scores on the KEI, 2012 Like the KAM, the World Economic Forum’s (WEF’s) annual Global Competitiveness Index (GCI) helps to shed light on the performance 8 of MENA countries. The GCI for 142 countries—including 14 from the MENA region—is presented in the 2011–12 Global 6 Competitiveness Report (WEF 2011). Figure 2.4 compares the 4 GCI rankings for countries in the Arab world in 2010 and 2011. 2 The rankings of MENA countries are just as varied on the GCI as they are on the KEI. On the latest GCI, the Gulf Cooperation Council 0 (GCC) countries in general did well.4 Occupying position 14 in the Europe East Asia Latin Middle East South Africa global rankings, Qatar leads the region, followed by Saudi Arabia and and the America and Asia Central Asia Pacific North Africa (17), the UAE (27), Oman (32), Kuwait (34), and Bahrain (37). Tunisia is in position 40 globally, the best of the non-resource-rich coun- Source: Knowledge Assessment Methodology (www.worldbank.org/kam, tries, thanks to its decision in the 1990s to pursue policies toward World Bank 2012a).  the development of a knowledge economy. Morocco is in position 73; Lebanon, 89; and Egypt, 94. 4 The Gulf Cooperation Council includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE. It should be noted that a good ranking on the KEI reflects strong investment in variables related to the knowledge economy, not necessarily good knowledge economy performance. Moreover, the KEI does not take into account social indicators, such as those related to gender, that may affect the long-term progress of societies. Transforming Arab Economies 27 Chapter 2: Catching up with global knowledge economy trends Figure 2.3 Country scores on the KEI, 2000 and 2012 8 2012 7 2000 6 5 4 3 2 1 0 co . p. ep i p. ria a n an t r a an n s t ta ai te si bi oc no ai ou Re Re ,R rd Om ge w ni Qa ira hr ra or ba ib Ku ab en Tu Jo b iA Al Ba Em M Dj ra Le Ar m ud t, A Ye ab n Sa ria yp Ar Sy Eg d ite Un Source: Knowledge Assessment Methodology (www.worldbank.org/kam, World Bank 2012a). Figure 2.4 The GCI: Select Arab country rankings, 2010–11 and 2012–13 120 GCI ranking 2010–11 GCI ranking 2012–13 100 80 60 40 20 0 ia r s * an t n an co p. ia n a ai ta ia te by ai no ab er Re oc Om rd w s Qa hr ira Li ba g ni Ar Ku or Jo b Al Ba Em Tu Le ra M i ud A ab Sa t, yp Ar Eg d ite Un Source: WEF 2010, 2011, 2012. Note: GCI = Global Competitiveness Index. Rankings for Tunisia are for 2010–11 and 2011–12. On the GCI, as on the KEI, it is the resource-rich countries that efficient goods markets, and increasingly sophisticated busi- lead the pack. Most Gulf economies have benefited from vast nesses. Others—among them Algeria, Egypt, Jordan, Lebanon, natural resources and rising energy prices, and have used the Morocco, Syria, and Tunisia, Morocco, Jordan, Lebanon, and resulting revenues to improve their competitiveness in recent Syria—have made some efforts but also face varying levels of years by building solid foundations made up of a high-quality political and economic transition. institutional framework, a stable macroeconomic environment, 28 Chapter 2: Catching up with global knowledge economy trends Why has advancement investment (FDI) to build competitiveness, remains low. The region seems to have reached a plateau over the past decade toward the knowledge in its advancement toward the knowledge economy. economy been slow in There are several reasons for this lackluster performance. The bulk of economies in the Arab world are factor-driven economies, MENA? which need to change into efficiency- and innovation-driven economies. Political and economic volatility, especially in the recent past, have also exerted a downward pull on the KEI by weakening the overall economic and institutional regime (EIR). The relation between the 2012 KEI and the 2011–12 GCI is weaker Current events, however, provide a good window of opportunity for MENA countries than for the rest of the world (figure 2.5).5 The to develop more transparent and effective economic governance disparity is particularly notable for the GCC countries, which and unleash the region’s potential. score highest on the KEI. In other words, knowledge economy factors play a smaller role in the Arab countries than one would The economic performance of the countries of the region has been expect given their level of competitiveness. held back by their relatively weak EIR (except in the GCC coun- tries). Indeed, the index for the EIR pillar is strongly correlated MENA countries appear to exhibit what may be termed “knowl- with the overall KEI (figure 2.6) because the EIR has substantial edge-weak competitiveness,” which means their competitiveness is influence on performance across other knowledge economy derived from factors other than those related to knowledge (Taha pillars. Mediocre governance, resulting in a poor business 2010; Koivisto 2012). Across the region, the national capacity climate, is one of the greatest hindrances to economic and for knowledge absorption, which relies largely on investments social development in the region, and to knowledge-based in human capital and on openness to trade and foreign direct development in particular. Figure 2.5 Country performance on the 2012 KEI plotted against the 2011–12 GCI 6 World (excluding Arab countries) Arab countries 5.5 y = 0.3395x + 2.6999 Linear (world excluding Arab countries) Qat R2 = 0.78851 Ksa Linear (Arab countries) 5 UAE Kwt y = 0.2159x + 3.0784 Omn Tun Bah R2 = 0.71913 4.5 GCI Mor Jor 4 Syr Alg Leb Egy 3.5 Mau Yem 3 2.5 0 1 2 3 4 5 6 7 8 9 10 KEI Source: WEF 2011; World Bank 2012a. Note: KEI = Knowledge Economy Index; GCI = Global Competitiveness Index. 5. The GCI has been the key methodology used by the WEF in its assessments of competitiveness. The model rests on the belief that the determinants of com- petitiveness are numerous and interact with one another in a complex manner. The GCI captures these interactions through a weighted average of 12 pillars of competitiveness: (i) basic requirements that are key for factor-driven economies, including institutions, infrastructure, the macroeconomic environment, and health and primary education; (ii) efficiency enhancers that are key for efficiency-driven economies, including higher education and training, goods market efficiency, labor market efficiency, financial market development, technological readiness, and market size; and (iii) innovation and sophistication factors that are key for innovation- driven economies, including business sophistication and innovation (WEF and OECD 2011). Transforming Arab Economies 29 Chapter 2: Catching up with global knowledge economy trends Figure 2.6 Performance on the KEI and EIR index: Understanding and MENA and other regions and country groups, 2009 benchmarking the Western Europe four pillars G7 Europe and Central Asia East Asia and Pacific World  The economic and institutional GCC regime, including governance MENA Latin America The EIR is a key pillar of the knowledge economy. Its major ele- Mashreq ments are macroeconomic stability, competition, efficient Arab World regulatory policies, the rule of law, and legal rules and pro- Maghreb cedures that are conducive to entrepreneurship and risk taking. Africa A particularly important component of the EIR is the quality of KEI government, because the integrity and effectiveness of gov- South Asia EIR Others ernment determine the basic rules of a society. An effective 0 2 4 6 8 10 EIR also includes a competitive environment that stimulates improved economic performance, a financial system that mobi- Source: Knowledge Assessment Methodology, KAM (www.worldbank. lizes and allocates capital to its most productive uses, flexible org/kam, World Bank 2009).  labor markets (including support for improving the skills of the Note: Weighted average derived from the KAM and author’s computa- labor force), and effective safety nets to facilitate adjustment tions, except where data are unavailable (Iraq, Libya, and Palestine). to constant restructuring. EIR = economic and institutional regime; GCC = Gulf Cooperation Council; KEI = Knowledge Economy Index; MENA = Middle East and An important measure of how well the economic regime is func- North Africa. tioning is the extent to which countries are open to tapping various sources of knowledge that can help them perform successfully in the global economy. With a few exceptions, MENA countries have by and large remained isolated from the global economy. A recent World Bank report reviewed the economic performance of The KOF Index of Globalization (KOF ETH 2010) measures the more than 100 countries over the past 30 years and found empiri- economic, social, and political dimensions of globalization. cal evidence supporting the idea that economic freedom and These dimensions are captured by economic flows (trade, FDI, civil and political liberties are at the root of why some countries portfolio investment, and income payments to foreign nationals achieve and sustain better economic outcomes while others as shares of gross domestic product, GDP), social globaliza- do not (Chauffour 2011). The study showed, for instance, that tion (personal contacts, information flows, and cultural prox- a one-unit change in the initial level of economic freedom imity), and political globalization (embassies, memberships between two countries on a scale of 1 to 10 is associated with an in international organizations, and international treaties).6 almost 1 percentage point differential in their average long-run The 2012 index includes 208 countries. Five Arab countries economic growth rates. In the case of civil and political liber- are ranked in the top 50, 4 of them resource-rich countries ties, the long-term effect is also positive and significant, with a from the Gulf: the UAE (with a score of 75.69), Kuwait (71.42), differential of 0.3 percentage point. The expansion over time of Bahrain (68.83), and Qatar (66.53). The fifth is Jordan, which the conditions of freedom—economic, civil, and political—also comes behind Kuwait with an overall score of 70.48. At the positively influences long-run economic growth. These findings bottom of the rankings are Syria (42.78), Iran (40.69), and the provide potentially important policy lessons. In middle-income West Bank and Gaza (33.13). countries, such as those in the midst of the Arab Spring, there is now a quest for civil and political rights and also economic One way to tap into the growing stock of global knowledge is by freedom. If successful, this, combined with the reduction of attracting FDI, which can facilitate the transfer and cross-bor- existing privileges and entitlements, should lead to greater der adoption of new knowledge and technology. The 2012 A.T. economic growth. Kearney FDI Confidence Index examines future prospects for FDI flows to 27 top investment destinations at a time when the world economy is trying to recover from the global recession.7 6. The KOF Index of Globalization defines globalization as the process of creating networks of connections among actors at multicontinental distances, mediated through a variety of flows including people, information and ideas, capital, and goods. Globalization is conceptualized as a process that erodes national boundaries; integrates national economies, cultures, technologies, and governance; and produces complex relations of mutual interdependence. 7. The 2012 A.T. Kearney FDI Confidence Index assesses the impact of political, economic, and regulatory changes on the FDI intentions and preferences of the leaders of top companies around the world. The 2012 index is based primarily on a proprietary survey of more than 200 executives from 27 countries and 17 indus- try sectors (http://www.atkearney.com/index.php/Publications/cautious-investors-feed-a-tentative-recovery.html). 30 Chapter 2: Catching up with global knowledge economy trends The only Arab country on the list is the UAE, which ranks 15th. Improving the overall business climate is essential to create oppor- As an investment gateway to the Middle East, it could benefit tunities for domestic entrepreneurs to grow and create employ- somewhat from the current political upheavals elsewhere in the ment. The Arab World Competitiveness Report, 2011–12 (WEF region if foreign investors decide to opt for its relative stability. and OECD 2011) highlights the challenges for doing business in the Arab world (figure 2.7). According to business leaders, It is also instructive to look at the overall trade environment through- restrictive labor regulations, inefficient bureaucracy, and a out the world. The WEF’s (2012) Global Enabling Trade Report—a lack of access to finance are the top three hindrances to doing comprehensive compendium of the trade environments of 132 business in the region. countries—ranks the UAE as number 1 in the Arab world, and number 19 globally in terms of its trade-enabling environ- The 2012 Doing Business Index for 183 countries tracks changes ment. Second in line in the Arab world is Oman (25), followed in the regulations that apply primarily to small and medium-sized by Saudi Arabia (27), Bahrain (30), Qatar (32), Jordan (42), and domestic companies in 11 areas of their life cycle. The 2012 index Tunisia (44). Kuwait ranks lowest among the GCC states at 66. ranks 4 GCC countries in the top 50 (World Bank 2012b). Saudi Egypt (90), Lebanon (93), Syria (108), and Yemen (119) round Arabia ranks number 1 in the Arab world (and number 12 out the list. It is revealing that the Arab world’s top five trade- globally), followed distantly by the UAE (33), Qatar (36), and enabling states are all in the GCC region. While each country Bahrain (38). Tunisia comes in at 46, followed by Oman at 49. is different, the domination of the GCC reflects poorly on some Among Arab economies, 13 implemented reforms in 2011 to of the more populous, oil-importing Arab states that require make it easier to do business—20 such reforms in all. Half of the vital catalyst of a trade- and business-boosting regulatory these reforms focused on making it easier to start a business environment to meet the needs of their populations. or on improving credit information systems, but opportuni- ties for regulatory reform and greater transparency remain. The Heritage Foundation’s Index of Economic Freedom ranks 184 Entrepreneurs across the Arab world continue to face often countries on 10 measures of economic freedom related to the complex and costly regulatory processes to start and run a rule of law, the intrusiveness of government, regulatory effi- business, and contend with weaker investor and property ciency, and openness of markets.8 Not surprisingly, the 2012 rights protections than their counterparts in other regions. index shows that economic freedom around the world declined The regulatory environment varies across the region. Morocco over the past year. Among the top 25 freest economies in the was the most active in implementing regulatory reforms in 2012 index, 2 are in the Arab region: Bahrain (position 12) 2010−11. The new report indicates that over the past 6 years, and Qatar (25). Jordan occupies position 33, followed distantly 94 percent of the 18 Arab economies in the sample made their by Morocco (87), Lebanon (90), Tunisia (95), and Egypt (100). regulatory environment more business friendly. Egypt made These results suggest that gloomy economic prospects, income the greatest progress in this area, between 2005 and 2011, inequality, and corrupt regimes could have been important followed by Saudi Arabia. motivators in the Arab uprising that began in late 2010. Figure 2.7 Doing business in the Arab world Crime and theft Poor public health Foreign currency regulations Tax regulations Tax rates Inflation Government instability/coups Policy instability Inadequate supply of infrastructure Poor work ethic in national labor force Corruption Inadequately educated workforce Inefficient government bureaucracy Restrictive labor regulations Access to financing 0 2 4 6 8 10 12 14 16 18 20 Percentage of respondents citing item as constraint to doing business Source: WEF and OECD 2011. 8. The Heritage Foundation’s Index of Economic Freedom analyzes economic policy developments in 184 countries since the second half of 2010. It is based on 10 components: business freedom, trade freedom, fiscal freedom, government spending, monetary freedom, investment freedom, financial freedom, property rights, freedom from corruption, and labor freedom (http://www.heritage.org/index). Transforming Arab Economies 31 Chapter 2: Catching up with global knowledge economy trends These indexes are useful barometers of where each nation more recently, ICT competencies, today’s knowledge economy stands. Over the past two decades, most GCC states have demands “soft” skills such as communication ability, problem worked on their overall governance and engaged in global- solving, creativity, and teamwork. The development of a knowl- ization in a more sophisticated manner. But most still need to edge economy requires a flexible education system to deliver diversify their economies and build more sustainable knowl- the right amounts of both types of skill. That system begins edge and private-sector-driven economies. Some weaknesses with basic education, which lays the foundation for learning, across the GCC states are public education, poor work-culture and continues with secondary and tertiary education to develop practices, and underdeveloped entrepreneurial support net- core skills (including technical skills) and to encourage the works (Molavi 2012). creative and critical thinking that are key to problem solving and innovation. The education system must also include provi- Encouraging women’s participation in all spheres of economic, sions for lifelong learning. social, and political life is key for MENA to tap its wealth of human resources. How the region’s societies will enhance women’s Results on international educational tests indicate that outcomes for inclusion remains an open question. Using a comparative per- the region remain significantly below those of the Organisation for spective, the KAM reveals that unemployment and inactiv- Economic Co-operation and Development (OECD) countries. None ity among women are more prevalent in MENA than in other of the 12 MENA countries that took part in the international middle-income regions such as ECA and LAC (figure 2.8). 2007 Trends in International Mathematics and Science Study Arguably, greater economic empowerment can stimulate a (TIMSS) test of eighth-grade math and science capabilities virtuous circle that includes women’s empowerment. Targeted achieved above-average scores (figure 2.9). One of the weak- and coordinated efforts, specific to the country context, are nesses of the region’s education system is that most MENA needed on multiple fronts to increase women’s participation countries lack national standards for achievement in learning, in the public sphere. These include policies to secure women’s and those that have such standards do not use the tests to equality under the law, address the remaining human develop- promote accountability in the system (Ezzine 2009). ment challenges, redress the skills mismatch, and promote women’s civic and political participation (Viswanath 2012). The results of the 2009 Programme for International Student Assessment (PISA) are also instructive for the few countries in the region that participated. Compared with the OECD average,  Education and human resources Jordan, Qatar, and Tunisia trail their peers in science, math, and reading (figure 2.10).9 The results also show that high-order Education is the fundamental enabler of the knowledge economy, cognitive skills are quite low in the region. This is critical, as because well-educated and skilled people know how to create, a large proportion of secondary school graduates who enter share, disseminate, and use knowledge effectively. In addition higher education institutions do so with already low levels of to traditional “hard” skills such as literacy, “numeracy,” and, cognitive skills. Figure 2.8 Women’s participation in a comparative perspective, 2012 School enrollment, secondary, female (% gross) 10 Females in labor force School enrollment, (% of total labor force) tertiary, female (% gross) Middle East and North Africa 5 Europe and Central Asia Latin America Labor force 0 participation rate, Unemployment rate, female, age 15–64 female (% of female labor force) Employment to Employment to population ratio, population ratio, female, age 15–24 (%) female, age 15+ (%) Source: Knowledge Assessment Methodology (www.worldbank.org/kam, World Bank 2012a).  9. The PISA, an international study that began in the year 2000, evaluates education systems worldwide by testing the skills and knowledge of 15-year-old stu- dents in participating countries/economies. Since the year 2000 over 70 countries and economies have participated in the PISA. 32 Chapter 2: Catching up with global knowledge economy trends Figure 2.9 Grade 8 TIMSS scores, 2007 Top country 598 567 TIMSS scale average 500 500 Lebanon 449 414 Jordan 427 482 Tunisia 420 445 Bahrain 398 467 Syrian Arab Rep. 395 452 Egypt, Arab Rep. 391 408 Algeria 387 408 Oman 372 423 Palestinian Nat'l Auth. 367 303 Kuwait 354 318 Morocco 341 Science 297 Saudi Arabia 329 Math 403 Qatar 307 319 0 100 200 300 400 500 600 700 Source: Gonzales 2009. Note: Data for Morocco are for grade 4, as Morocco failed to meet the required school participation rates in grade 8. TIMSS = Trends in International Mathematics and Science Study. The education report card for the Arab world paints a picture that 14 Arab countries. To illustrate just two areas for improve- is far from rosy. A recent report (Faour 2012) includes indexes ment: data show that substantial percentages of teachers (for that combine data from three international studies (2007 example, math teachers) entered their profession with deficient TIMSS, 2006 PIRLS, and 2009 PISA) that measure schools’ academic preparation and preservice training. Many teachers safety, teaching, learning, and institutional environments in do not receive adequate in-service professional development to help them improve their teaching skills. Figure 2.10 There is a persistent gap between the skills acquired at university Results on 2009 PISA test and the requirements of employers. Enterprises often cite a lack of suitable skills as an important constraint to hiring: according 379 to the World Bank’s Enterprise Surveys, firms identify labor Qatar 368 379 skill levels as a major constraint in Lebanon (38 percent of surveyed firms), Syria (36 percent), Jordan (33 percent), and 404 Reading 372 Egypt (31 percent). The WEF has also identified an inadequately Tunisia 401 educated labor force as one of the challenges to doing business Mathematics 398 in the Arab World (WEF and OECD 2011). Argentina 388 401 Science  Indonesia 371 402 Innovation 383 421 A nation’s innovation system consists of the network of institu- Thailand 419 tions, rules, and procedures that affect how the country acquires, 425 creates, disseminates, and uses knowledge and technology. It 405 387 includes firms, research centers, universities, consultants, Jordan 415 and other organizations that keep up with new knowledge and 449 technology, tap into the growing stock of global knowledge, Chile 421 and assimilate and adapt that stock to local needs. Linkages 447 between national and global knowledge systems can take the 496 form of joint research, personnel exchanges, cross-patenting, OECD 499 501 licensing of technology, purchase of equipment, and a variety of other channels. The innovative performance of a country 300 350 400 450 500 550 depends to a large extent on how various national actors relate Source: Jaramillo and Melonio 2011. to one another as members of a broader system. Note: OECD = Organisation for Economic Co-operation and Development; PISA = Programme for International Student Assessment. Transforming Arab Economies 33 Chapter 2: Catching up with global knowledge economy trends On the innovation pillar, the 2012 KAM measures advances in royalty those countries that surmount weaknesses to achieve more and license fees (payments and receipts), patents granted by the innovation outputs than their innovation resources (inputs) U.S. Patent and Trademark Office, and articles in scientific and would suggest—from those that do not fulfill their theoreti- technical journals (figure 2.11). The latest results reveal that cal potential for innovation.10 The overall GII scores provide Algeria, Lebanon, Oman, Qatar, Tunisia, the UAE, and Yemen a composite picture of a country’s innovation performance.11 have improved their score since 2000, while Egypt, Jordan, and The GII includes 16 countries from the Arab world, with Qatar ranked Morocco have regressed. One of the reasons behind the region’s among the top 30, in position 26. The other high-income econo- mediocre performance is the shallowness of the scientific mies in the region occupy lower positions: UAE (34), Bahrain base, which the Arab world needs to improve if it is to build (46), Kuwait (52), Saudi Arabia (54), and Oman (57). Middle- cutting-edge industries. In a region that is home to some of the income countries such as Lebanon (49) present weaknesses world’s oldest universities, which have contributed to global in both input and output indicators of innovation. The other knowledge for thousands of years, scholars in the countries lower-middle-income countries—Tunisia (66), Egypt (87), and of the Arab League produce little more than 0.5 percent of the Morocco (94)—are all in the lower half of the GII rankings, with world’s scientific journal articles. Arab countries also spent Syria (115), Yemen (123), and Algeria (125) among the bottom 25. less than 1 percent of GDP on research and development as compared to 2.3 percent of GDP in the OECD countries in 2009. Jordan is a notable exception in the GII—it ranks 4th among the For many MENA countries that are still far behind the global MENA countries covered by the index and 41st overall. Its posi- frontier in many sectors, tapping into and making effective use tion is notable because it is more than 25 positions ahead of of existing global knowledge through channels such as trade its closest competitor in the same region and income group, and FDI could have a greater economic impact than developing Tunisia (66). Although Jordan is only eighth in the region on frontier knowledge. innovation inputs, it is third in output. Jordan’s leverage comes from creative outputs, with a strong dynamism at the level of The 2011 Global Innovation Index (GII) ranks 125 countries and econ- residents’ trademark registrations at the national level (where omies in terms of their innovation capacity and results (INSEAD it is placed first in the region) and a relatively high level of 2011). The report distinguishes between efficient innovators— exports of creative goods. Figure 2.11 The innovation pillar in MENA countries, 2000 and 2012 7 2012 6 2000 5 4 3 2 1 0 s r an t a n n ia p. an co ria p. . ti ep ai ta te si no ai ou ab Re Re oc Om rd w ge ni Qa hr ,R ira ba ib Ku r or Jo Tu ab ab iA Al Ba Dj en Em Le M Ar Ar ud m ab Sa Ye t, n ria yp Ar Eg Sy d ite Un Source: Knowledge Assessment Methodology (www.worldbank.org/kam, World Bank 2012a).  Note: MENA = Middle East and North Africa. 10. A key challenge is to find metrics that capture innovation as it actually occurs. Compounding this challenge is the fact that the definition of innovation has broadened in recent years, and with it the challenge of devising indicators and collecting data. Innovations are not only restricted to research and development laboratories and published scientific papers; today, knowledge production is centered mainly on the firm, where research is increasingly context driven, problem focused, application oriented, and interdisciplinary. Innovation encompasses not just new or significantly improved products, processes, and methods in the provi- sion of services, but also business and organizational models as well as creative imitation and technological catch-up. Innovations occur not only within high-tech labs and firms, but also in low-tech industries and at the public or social level (as in the innovative provision of government services). 11. The Global Innovation Index (GII) is calculated as the simple average of two subindices, while the Innovation Efficiency Index is the ratio of the two. The Innovation Input Subindex gauges elements of the national economy that enable innovative activities, grouped in five categories: (i) institutions, (ii) human capital and research, (iii) infrastructure, (iv) market sophistication, and (v) business sophistication. The Innovation Output Subindex captures actual evidence of innovation outputs, divided into two categories: (i) scientific outputs and (ii) creative outputs (composed of creative intangibles that include statistics on trademark registra- tions by residents at the national office and under the Madrid System, as well as two survey questions regarding the use of ICT in business and organizational models, new areas that are increasingly linked to innovation; and creative goods and services, which include the share of household expenditure on recreation and culture as a proxy for creative activities in a given country).These categories are divided into 20 subcategories, yielding a total of 80 indicators (http://www.globalin- novationindex.org/gii/main/fullreport/index.html). 34 Chapter 2: Catching up with global knowledge economy trends Information and communication to use ICT as well as the actual use of ICT in their day-to-day activities; and the broad economic and social impacts accru- technology ing from ICT and the transformation of a country toward an ICT- and technology-savvy economy and society. Rapid technological advances are dramatically affecting the acquisi- tion, creation, dissemination, and use of knowledge. As knowledge The GCC countries again feature prominently in the rankings in becomes an increasingly important element of competitiveness, both the 2010–11 and 2012 NRI (figure 2.12) with 3 in the top the use of ICTs is reducing transaction costs and demolishing 30—Bahrain, Qatar, and the UAE. Algeria, Egypt, Morocco, Syria, barriers of time and space, allowing the mass production of cus- and Tunisia improved their ranking in 2012, while Lebanon tomized goods and services and substituting for limited factors maintained its position. of production. A country’s information infrastructure consists of: telecommunications networks; strategic information systems; The MENA region is emerging as a promising offshore location for policy and legal frameworks affecting the deployment of those European firms taking advantage of the region’s proximity and pool networks and systems; the skilled human resources needed to of skilled talent for providing outsourcing activities (including IT develop, operate, and use them; and a population that is able and services and support, contact centers, and back-office support). can afford to use ICTs. To develop a strong information infrastruc- Indeed, the countries in North Africa have eclipsed several ture, it is necessary to mobilize the many stakeholders involved Eastern European locations, as demonstrated in A.T. Kearney’s in its deployment and use—chief among them government, 2011 Global Services Location Index of the top 50 countries for business, consumers, and providers of telecommunications and outsourcing activities, which places Egypt 4th in the world and information services. Applications of ICTs are also improving the the leader in the Middle East.13 Although the rankings were efficiency of existing services and creating new opportunities, as compiled before the recent political unrest began, Egypt has in trade, governance, education, business connectivity, health- scored well over time because of its relatively low-cost skilled care delivery, and environmental development. labor. The Egyptian government has also actively promoted the sector abroad, while pushing firms to bring their standards up The WEF’s Global Information Technology Report 2012 covers 142 to international levels. But the recent political turmoil in the economies and includes the Networked Readiness Index (NRI), country could have long-term consequences for Egypt as a which has been measuring the degree to which economies sourcing location. The UAE occupies position 15 in the global across the world leverage ICTs for enhanced competitiveness.12 rankings and serves as a regional services hub that supports The 2012 NRI framework gauges the degree to which a coun- many multinational corporations throughout the region, thanks try’s market and regulatory frameworks support high levels of to competitive labor costs, a rise in the quality of its manage- ICT uptake; the degree of a society’s readiness to make good ment schools, and an improvement in literacy scores. Other use of an affordable ICT infrastructure; the efforts of individu- countries from the region in the top 25 are Jordan (22) and als, businesses, and government to increase their capacity Tunisia (23); Morocco is in position 37. Figure 2.12 Rankings of MENA countries on the NRI, 2010–11 and 2012 129 NRI 2010–11 NRI 2012 124 117 118 95 95 91 83 79 75 74 62 50 47 50 41 40 33 34 35 30 27 30 25 28 24 Bahrain Qatar UAE Saudi Oman Jordan Tunisia Kuwait Egypt, Morocco Lebanon Algeria Syrian Arabia Arab Rep. Arab Rep. Source: WEF 2011. Note: MENA = Middle East and North Africa; UAE = United Arab Emirates; NRI = Networked Readiness Index. 12. The Global Information Technology Report 2010–11 covered 138 economies and is available at: http://www3.weforum.org/docs/WEF_GITR_Report_2011.pdf; the Global Information Technology Report 2012 is available at: http://www3.weforum.org/docs/Global_IT_Report_2012.pdf. 13. Each country’s score is composed of a weighted combination of relative scores on 43 measurements, grouped into 3 categories: financial attractiveness, people skills and availability, and business environment (A.T. Kearney 2011). Transforming Arab Economies 35 Chapter 2: Catching up with global knowledge economy trends Conclusion being able to afford investments in technology and other costly resources. But they still face the challenge of cultivating the talent needed to build and sustain a diversified, knowledge- based economy. The pressure is on for resource-poor countries with abundant labor This chapter’s benchmarking analysis, based on an examination of to undertake reforms through the development of high-value-added a variety of indicators and indexes, yields several striking points. It industrial and service sectors. Resource-poor countries would shows that the MENA region’s progress toward the knowledge do well to undertake the kinds of regulatory reforms that are economy over the past decade has been slower than that of needed to enhance education, innovation, and competition—key its close competitors at the global level (that is, the ECA and ingredients for lifting economic growth. LAC regions). Moreover, that progress seems to have reached a sort of a plateau. More generally the competitiveness appears The Arab region as a whole could advance more quickly toward to be increasingly factor driven rather than knowledge and the creation of the high-quality jobs that are so sorely needed innovation driven. by putting in place policies to move ahead on all four knowledge economy pillars, with particular emphasis on strengthening One of the main conditions limiting the knowledge economy per- the economic and institutional regime, including governance, formance of the region is the mediocre state of the EIR, particularly and improving the quality of education systems at all levels. the governance climate, in numerous countries. Improvements in this area are important, as they can stimulate significant overall progress toward the knowledge economy and thus References and bibliography toward sustainable long-term growth and competitiveness. Greater economic empowerment of women is also needed to A. T. Kearney. 2011. “Offshoring Opportunities Amid Economic fully tap the region’s valuable human resources (see chapter 4). Turbulence: The A.T. Kearney Global Services Despite impressive achievements in widening access to primary Location Index, 2011.” http://www.atkearney.com/ and secondary education, a principal barrier to the development index.php/Publications/global-services-location- of the knowledge economy in the region is the poor quality of edu- index-gsli.html. cation and mismatches between the skills with which graduates ———. 2012. “Cautious Investors Feed a Tentative Recovery: leave school and those required by employers. The region’s major 2012 A.T. Kearney FDI Confidence Index.” http:// investments in education (as detailed in chapter 5) could be www.atkearney.com/images/global/pdf/Cautious_ made more effective through additional efforts to improve the Investors_Feed_a_Tentative_Recovery-FDICI_2012. quality of education at all levels. pdf. Innovation indicators confirm that the innovation-related efforts and Chauffour, Jean-Pierre. 2011. “On the Relevance of Freedom performance of Arab countries, compared with those of the rest of and Entitlement in Development: New Empirical the world, have been modest (chapter 6). For most Arab countries, Evidence (1975–2007).” Policy Research Working it will be important to tap knowledge and technology through Paper 5560, World Bank, Washington, DC. channels such as FDI, imports of equipment and other goods, and licensing agreements. The diffusion of existing technolo- Ezzine, Mourad. 2009. “Education in the Arab World: Shift to gies should also receive attention in most MENA countries. Quality in Math, Science and Technology Faltering.” MENA Quick Notes 2, World Bank, Washington, DC. The region as a whole has made significant progress on the ICT pillar, which must be sustained to take advantage of the potential Faour, Muhammad. 2012. The Arab World’s Education Report of ICTs to improve a range of economic and social activities (see Card: School Climate and Citizenship Skills. Carnegie chapter 7). All MENA countries would do well to harness the full Endowment for International Peace, Washington, potential of ICTs for various sectors of the economy: education, DC. innovation, and learning; public sector management; private sector competitiveness; and capacity building. In so doing, they Gonzales, Patrick. 2009. Highlights from TIMSS 2007. National may be able to take advantage of emerging opportunities to Center for Education Statistics, U.S. Department leapfrog over early adapters (by adopting the latest technol- of Education, Washington, DC. http://nces.ed.gov/ ogy without having invested in earlier generations of related pubs2009/2009001.pdf. technologies) and participate in the development of new ICT- based knowledge industries. Heritage Foundation. 2012. 2012 Index of Economic Freedom. Washington, DC: Heritage Foundation. http://www The 2012 KAM results also reflect divergent prospects, opportu- .heritage.org/index. nities, and challenges for different sets of MENA economies. The resource-rich countries with scarce labor (especially in the INSEAD. 2011. The Global Innovation Index 2011: Accelerating GCC) show significantly higher performance on the overall KEI Growth and Development. Fontainebleau, France: and on its components (EIR, education, innovation, and ICTs). INSEAD. http://www.globalinnovationindex.org/ These resource-rich countries perhaps face less pressure gii/main/fullreport/index.html. than other countries in the region, having had the advantage of 36 Chapter 2: Catching up with global knowledge economy trends Jaramillo, Adriana, and Thomas Melonio. 2011. Breaking Even ———. 2012a. “Knowledge Assessment Methodology 2012.” or Breaking Through. Washington, DC: World Bank, World Bank, Washington, DC. www.worldbank CMI, and AFD. .org/kam. KOF ETH. 2010. KOF Index of Globalization. Zurich: Swiss Federal ———. 2012b. “Doing Business in the Arab World 2012.” World Institute of Technology. http://globalization.kof Bank, Washington, DC. http://www.doingbusi .ethz.ch/. ness.org/~/media/FPDKM/Doing%20Business/ Documents/Special-Reports/DB12-ArabWorld.pdf. Koivisto, Marjo. 2012. Knowledge-Weak Competition and Growth in the MENA Region. Unpublished background report, World Bank and IFC (International Finance Corporation). 2010. 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Transforming Arab Economies 37 hapter 3 Shaping new development strategies for Arab countries This chapter presents principles to guide Arab policy makers  ursuing regional integration and international coopera- • P wishing to design and implement knowledge-based development tion to speed up and consolidate the overall process of strategies.1 Succeeding chapters will focus on precise measures transformation to be taken on each of the knowledge economy pillars (Part 2) and on sector and spatial diversification initiatives (Part 3). This With respect to the knowledge economy, the region does not start chapter sets out a strategic approach for policy makers, provid- from scratch. Knowledge economy strategies can build on ing insight into the “how” of knowledge economy strategies, what has already been accomplished in several countries, as plotting the implementation of the so-called fifth pillar against described in the introduction (box I.5). But the countries of the the others, and building the nation’s trust and self-confidence region differ in their stage of development and in the degree of in the process of developing the knowledge economy. their engagement with the knowledge economy. In the course of the chapter, these differences will be taken into account. The proposed strategic orientations are informed by global expe- rience but adapted to the specificities of the Arab world and the challenges it faces. Of particular interest are: (i) countries such as Finland, Ireland, the Republic of Korea, and Singapore that have achieved notable success with knowledge-economy-based Acting with ambition development strategies in the past one or two decades; (ii) low- and medium-income countries that have experienced high and and realism sustainable rates of growth over a long period, including China and India; (iii) the transition countries of Central and Eastern The first piece of policy advice is to act with speed and ambition— Europe; and (iv) Turkey, which has much in common with Arab speed, because there is no time to lose and because it is the countries. Lessons drawn from the experience of a dozen of best way to overcome resistance to reforms; ambition, because those countries are summarized in annex 2. These countries the challenges are colossal and action plans of commensurate share eight features: a vision and long-term strategy, account- scale are needed to cope with them. Inspiration can be taken ability mechanisms, government capability, a preference for from countries that have embarked resolutely on a knowledge market solutions or at least a tilt toward markets, integration economy model, forswearing business as usual. Their approach in the world economy and diversification of exports, exploitation is presented in figure 3.1 and box 3.1. They have acted simul- of global knowledge, investment in education, and investment taneously on the four pillars, while ensuring a sustainable and in and use of information and communication technology (ICT). reliable process by adopting a multi-stakeholder approach. All of these features relate to the knowledge economy pillars and are discussed throughout this chapter, though not neces- While fully embracing the principle of speed and ambition, Arab sarily in the order mentioned above. policy makers must focus on what is feasible and adapted to the needs and capabilities of their country. A number of Arab coun- The strategy suggested here is one of transformative change, tries are either in problematic governance conditions or at framed within a political economy perspective. Four comple- mentary thrusts shape the strategy: a relatively low level of economic and knowledge economy development. In such contexts, as illustrated by low- and • A  cting with ambition and realism, while adapting policy medium-income countries that have successfully embarked actions to countries’ development levels, needs, and on sustainable high-growth regimes (see annex 2), a gradual capabilities approach is appropriate. Reforms of the business environ-  ngineering change with pragmatism, beginning by gath- • E ment, for example, generally cannot be implemented across ering low-hanging fruit to produce quick economic and the board in all their aspects. Indeed, they may even have to be employment gains and proceeding gradually but steadily limited to specific areas (such as special economic zones). On from demonstration projects to changes of wider scope the education front, in countries at an early stage of develop- • B  uilding a new social contract in parallel with the new ment or presenting serious weaknesses in the fundamentals economic model of education, it will be important to give priority to basic lit- 1. The chapter builds on background contributions by Dahlman (2012); Kuznetsov, Dahlman, and Djeflat (2012); and Zeidane (2012). It also draws on Rischard (2009). 38 Chapter 3: Shaping new development strategies for Arab countries Figure 3.1 The knowledge economy process contrasted with business-as-usual models of economic growth: Ambition, speed, and mobilization Process tilted toward nationwide mobilization KBE route Process tilted toward higher, world class–inspired ambitions BAU route t (now) t +10 yrs t +25 yrs Process tilted toward higher speed KBE = knowledge-based economy BAU = business as usual Source: Rischard 2009. Note: This figure provides two stylized growth trends; the gaps between the two are not as precisely defined as in the figure. BOX 3.1 The path followed by the knowledge economy success stories A sustainable, reliable process of policy advancement and implementation is key to building a knowledge economy. That is the lesson gleaned from studies of several countries that have pursued knowledge-based growth—among them Finland, the Republic of Korea, Malaysia, and Singapore, to which could be added Dubai and Ireland, despite recent crises induced by speculative excess (World Bank 2010). The same studies suggest that a multistakeholder process leading to a clearly defined, national commitment yields higher levels of growth than a business-as-usual growth model. Content: The knowledge economy pillars The governments of these successful countries focused their efforts on four knowledge economy pillars, implementing ambitious reforms on all or most fronts:  hey raised the quality of their educational systems—from early childhood education through lifelong learning systems—often • T setting the standard for the rest of the world in the process (Finland, Korea, Singapore).  hey took bold steps to develop a lively “innovation ecology,” using various routes to get there—a research and development • T (R&D) boost for Finland, high-tech foreign direct investment (FDI) for Ireland; attracting a creative class for Dubai.  hey improved their business environment by reducing transaction costs, promoting entrepreneurship, and sometimes even • T turning their cities into magnets for talent by ensuring attractive living and working conditions. In effect, they transformed their economy into a vibrant home base for firms from all over the world, from multinationals to start-ups (Dubai, Ireland, Luxembourg, Singapore).  hey made major investments in information and communication technology infrastructure and in catalytic applications such • T as advanced e-government (Estonia, Korea, Malaysia, the Nordic states). Process: Ambition, speed, and mobilization  mbition. The government itself provided a bold vision, became the top change agent, and mobilized the entire nation around • A an ambitious national effort, starting with a few key policy measures. Finland quadrupled public spending on R&D when fiscal austerity would normally have been advised. Ireland lowered the corporate tax rate and attracted knowledge-economy-boosting FDI. Dubai launched nearly two dozen special zones in rapid-fire sequence, attracting thousands of sophisticated businesses in a short time. Korea rapidly boosted its broadband density and usage to the point where it is now a world leader on these indicators.  peed. In each case, the process adopted by the governments of these successful countries emphasized immediate action, by • S contrast with the more traditional approach of writing voluminous reports or master plans and trusting that this would somehow lead to needed changes on the ground.  obilization. Many successful countries established a mechanism to mobilize relevant stakeholders and agents of change. • M Several, such as Finland and Ireland, set up a high-level council chaired by the prime minister to preside over the knowledge economy effort and to ensure full commitment by the top leadership. Some countries set up special support institutions, such as SITRA and TEKES in Finland, and a “committee on the future” within parliament. Some countries ran multiyear knowledge economy campaigns aimed at mobilizing the entire nation, often with a systematic and sustained communications effort, as in Korea and Malaysia. Source: Rischard 2009. Transforming Arab Economies 39 Chapter 3: Shaping new development strategies for Arab countries eracy and technical training, along with focused and selected Reforms to the business environment can have rapid employment efforts on higher education. On the innovation dimension, it effects. To be sure, nonnegligible employment effects may will be necessary to focus on tapping into global knowledge emerge from reforms that improve the business environment and technology and adapting it to local needs rather than on in its various dimensions, among them conditions surrounding building advanced structures for R&D. On the ICT pillar, it will the creation of enterprises, the manner in which the economy is be necessary to universalize Internet access and promote its financed, and the regulatory framework. Those effects should use through cheap and user-friendly applications and services be factored into the overall strategy. The expansion of trade for citizens, small businesses, and others, while developing and FDI generally are an important source of new activities information technology literacy. But no matter how circum- that typically emerge within a relatively short period of time. scribed the focus of the knowledge economy effort, it remains To provide early results that generate support for the new essential to demonstrate strong national determination to model, therefore, it is important that reforms to the business succeed with the new development model. environment be undertaken early. Resource-rich countries obviously are in a better position to engage Small business is a key source of jobs. Governments starting in bold projects developed at a quick pace—as some of the Gulf down the path to a knowledge economy are well advised to emirates have done with a degree of success. The critical get a good idea of where the potential for job creation lies in point, however, is to adjust ambitions and engagements to their economy. This is especially important when that economy what the country is able to deliver. From this viewpoint, most includes very different types of enterprises and a large informal Arab countries, even those that are resource rich, have limita- sector. Estimates made for southern Mediterranean countries tions and constraints. Except for the small Gulf states, Tunisia, (ANIMA 2011)8 provide the following figures, which reveal a and Morocco, which have good track records in designing and trade-off between equity and jobs (figure 3.2). Against an esti- implementing knowledge economy strategies, substantial mated need of 3–5 million jobs per year (FEMISE 2011), mul- efforts are needed to build administrative and management tinationals appear to be a source of relatively few jobs (about capabilities as part of their overall knowledge economy plans. 100,000), but they bring useful technologies, management skills, and other inputs. The informal sector is an important Shortcomings in the state apparatus and the institutional and busi- source of job creation (1 million jobs or more), but its innova- ness environment mean that a fine-tuned sequencing of reforms tive capabilities are limited. The main sources of economic is required, as demonstrated by the experience of the transi- growth and job creation are small and medium-sized enter- tion economies of Central and Eastern Europe (Dvorak 2011). prises (SMEs) and start-ups, including the so-called “gazelles” A “big-bang” approach does not apply, particularly when it (fast-growing companies operating in rapidly moving markets, comes to the knowledge economy. Although reforms must be which, so far, are not numerous in Arab countries). The job- carefully sequenced, this does not mean that halfway reforms creation potential of SMEs points to the importance of develop- (for example, partial liberalization) are appropriate, because ing policies to support this type of enterprise. they tend to create vested interests bent on rent seeking and provoke resistance to further reforms—something that Arab New growth sectors can be an important source of employment countries have also experienced. Appropriate sequencing of and should not be neglected. In fact, the knowledge economy whole-hearted reforms, by contrast, can avoid reform fatigue, success stories, as well as other good performers, all have especially as constituencies for reform are consolidated put in place active industrial policies to help new sectors take through early but decisive wins. The next section elaborates off—in manufacturing, services, or agriculture—based on rec- on the sequenced approach. ognized comparative advantages. This was true, of course, of the East Asian “Tigers,” in which the economy was actively managed by so-called “development states.” But it was also true in the West, where governments provided incentives to Engineering change, induce particularly competitive sectors to take advantage of “horizontal” industrial policies. This is why, when forging with pragmatism, by knowledge-based development strategies for the Arab world, the four knowledge economy pillars need to be complemented building on easy wins by actions to promote high-growth sectors.  romoting sectors that are P Carrying out reforms and sources of jobs creating jobs An aggressive strategy of economic diversification is needed. To One must pursue reforms and create jobs simultaneously. The date in the Arab world, exploiting comparative advantage has reforms needed to build a knowledge-based economy, notably been largely confined to the oil and gas industry, where impres- changes to educational and innovation systems, will not bear sive success stories can be found. Exploitation of the region’s economic fruit immediately. On the other hand, jobs must be considerable historic and cultural heritage and its geographic created as soon as possible—and in significant number. Early and climatic situation—that is, tourism—has also been well results matter if the new development model is to be credible. developed and has even extended into specialty areas such 2. The countries surveyed by the ANIMA study include all Arab countries, except those of the Gulf Cooperation Council, plus Israel and Turkey. 40 Chapter 3: Shaping new development strategies for Arab countries Figure 3.2 Sources of job creation, by type of enterprise FDI (multinationals): 100,000 direct jobs/year plus 300,000 indirect jobs (suppliers, related FDI services) t, en job tm ew inves s ve pital Major public Large-scale public projects (PPP): possibly projects 200,000 to 500,000 jobs/year ly f rel re ca Mo ati Existing SMEs Possibly 1 million jobs/year climbing the ladder tle Startups and micro en ly lit 0.5 to 1 million jobs/year enterprises stm ve t ve ati l in rel ita bs, cap re jo Mo Informal sector > 1 million jobs/year Source: ANIMA 2011. Note: SME = small and medium-sized enterprises; FDI = foreign direct investment; PPP = public-private partnership. as health tourism in Jordan. Lebanon, with its history as a renewable energy (solar), environmental stewardship, water finance and trading center, has established a sophisticated and use and conservation, and the mitigation of climate change. competitive banking system. In the countries of the Maghreb, How many jobs can the most dynamic activities and sectors some traditional manufacturing niches have been exploited, create in the Arab world in the medium and long term? Some such as textiles in Tunisia. But only in Morocco has a more rough indications are given in box 3.2. or less systematic policy of sector promotion been launched through a series of plans that cover the actions needed in Several promising niches can be expanded. Some promising selected industries (for example, automobiles, manufacturing, niches identified by foreign investors over the past decade are and food processing), often in tandem with regional devel- detailed in box 3.3. They include service activities such as call opment plans (see chapter 8). An aggressive approach that centers, software development, consulting and business ser- draws inspiration from such examples is needed throughout vices, and R&D centers, and manufacturing activities such as the region. The Arab world has many unplumbed sources of textiles, automobiles, electronic components, and agribusiness. comparative advantage. The so-called job-efficiency ratio, measured by the number of jobs created per million euros invested, ranges from about 40 The changing conditions of the global economy—with mass indus- to as many as 300. A surprising item is the R&D center func- trial production dominated by China and other Asian countries, tion, which, with 211 jobs created per million euros invested, and recession-dampened demand from the developed world— shows an attractive potential that so far has been underex- call for a reconsideration of trade- and export-led growth ploited in Arab countries. Surprisingly, sectors such as public strategies. In Arab countries, there are some opportunities in works, real estate, utilities, and tourism, and functions such manufacturing for export to markets in Europe and Africa (for as franchises, logistics, and headquarters and administrative example, in parts and components for automobiles, electron- centers, perform rather poorly in terms of job efficiency. The ics, and aeronautics; see box 3.3). But it appears likely that, jobs created by FDI are too costly to allow one to expect FDI in addition to ICT-related industries and services, the sectors to solve the job problem in Arab countries, at least not in the and activities that are likely to be the major sources of growth southern Mediterranean. This is why domestic sources of jobs, and employment in the decades to come include: nontraded promoted through an efficient knowledge economy approach, goods, domestic public and private services, education and are crucial, without disparaging the technology, management, research, construction and building, and activities related to and other inputs that FDI can bring in. Transforming Arab Economies 41 Chapter 3: Shaping new development strategies for Arab countries BOX 3.2 BOX 3.3 How many jobs can be created by new and The job-efficiency ratio: How many jobs will innovative sectors in the Arab world? €1 million bring? Estimating the job-creating power of fast-growing and The following are estimates of the number of jobs created rapidly diversifying economic activities is necessarily a per million euros invested, based on analysis of some 5,000 speculative endeavor, at least until the enterprises behind foreign direct investment projects; 1,500 investment fea- those activities reach a plateau in a given country or region. sibility studies; 1,600 company partnerships; and 20,000 What follows, therefore, is to some extent surmise. One company press releases over the period 2003–10: may reasonably expect a high growth rate for activities 299: Call center (regardless of sector) related to information and communication technology, at 211: R&D center (information technology and automotive) minimum a doubling of the volume of the sector over 10 years. The same may be true for green-growth-related 196: Textile manufacturing sectors. The Marseille Center for Mediterranean Integration 136: Consulting and business services (CMI 2012) predicts that the jobs created by green growth 103: Software (services) could be as many as 3 million to 4 million—10 percent of the total needed in the southern Mediterranean countries 103: Electronic components manufacturing over the next 10 years to avoid an increase in unemploy- 77: Agribusiness ment from the existing level. Adding the job potential of 63: Automotive and aeronautics manufacturing other promising growth sectors (see chapter 8), it is not 39: Green-tech unreasonable to estimate that new activities induced by a knowledge-economy-based model could be the source of Source: ANIMA 2011. at least 30 percent of the total number of jobs needed in the Arab world over the next decade. These estimates are consistent with those provided by the model of the employ- ment elasticity of knowledge economy growth presented in chapter 1. With improvements in skill development, labor  From micro-projects to markets, and economic structures, the number of additional knowledge-economy-related jobs created could range from macro-reforms 25 to 50 percent over a 10-year horizon, with variations from country to country (the impact being stronger in oil- Growth spots stimulate change. The poor governance climate importing developing countries). and business environment found in several Arab countries is not going to be changed overnight. Even in the best-per- Source: Authors. forming countries, everything is far from perfect. It is there- fore important to attack such situations. Change often begins with micro-reforms well tuned and well targeted to specific  dapting knowledge A organizational settings or sets of enterprises that, once their economy policy actions to performance is improved, become role models or sources of development levels inspiration for broader initiatives. There is often an element of serendipity in such processes, but clever management by The countries of the Arab world are at various stages on the path government authorities plays a role as well. Some govern- toward the knowledge economy, and policy should be adapted accord- ments are experts in engineering change in a gradual manner ingly. As previously noted, some countries have already made appropriate for overcoming potential resistance. In the early progress in building a knowledge economy, while others have years of its takeoff, China developed town and village enter- yet to make the decision to begin. A scheme consisting of three prises and export zones. From semi-private production for stages, each lasting three to five years, is suggested in table local markets, these entities evolved into experimental special 3.1. At each stage, key policy measures are needed for each export zones, which gradually were extended in scope and scale. of the knowledge economy pillars, including the promotion of Foreign investors were enticed to bring in their technology and growth sectors. management expertise, and to connect the new enterprises to trade and export networks. Eventually, Chinese high-tech Reflecting the regional imperative of job creation, the table entrepreneurs established their own companies. provides rough indications of the impact (direct and indirect) of the actions implemented for each pillar, if carried out suc- The design and implementation of knowledge economy strategies cessfully. It is impossible to supply precise figures on the should be approached as a pragmatic and opportunistic process. employment impact of policy measures. On the basis of the That means that countries should begin by picking the low- rough estimates provided in chapter 1 (section 3) and in box hanging fruit, building on growth spots, and exploiting natural 3.2, a “moderate impact” would concern up to 20 percent of or constructed comparative advantages in well-defined sectors the labor force, and a “high impact” more than 20 percent. after making initial investments in knowledge and entrepreneur- ship and carrying out basic regulatory reforms. Harvesting the low-hanging fruit creates positive momentum and builds trust, which in turn makes it easier to elicit further investments from both the private and the public sectors. As broader reforms are engaged, a virtuous spiral begins. (See, for example, the experience of Asian comparators, as outlined in annex 2.) 42 Chapter 3: Shaping new development strategies for Arab countries ­  TABLE 3.1   Appropriate policy measures for countries at various stages of advancement toward the knowledge economy Likely employment impacts indicated by shading (see note) Stage I: Beginners Stage II: Adopters Stage III: Advanced Low rank on the Knowledge Economy Index (KEI); Mid-range KEI; evolving toward a knowledge-based High KEI, embryonic knowledge economy policies economy and full-scale reforms with gaps Develop niche activities based on comparative Expand sector programs by entering more Diversify additional competitive advantage, particularly in nontraded services. competitive areas (more complex value chains). sectors and build new ones (services) to become world leaders. Improve the economic and institutional regime Extend EIR reforms and consolidate governance Revisit governance, build (EIR) in enclaves or in selected policy areas reforms; revisit trade agreements. indigenous delivery capability, and (for example, business creation), and begin widen trade. fundamental governance reforms. Make information and communication Build ICT services and promote ICT-based Build an advanced information technology (ICT) as widely available as possible activities (business process outsourcing); and knowledge society that serves and carry out demonstration projects (for small accelerate achievement of nationwide as a model for the larger Arab businesses, community services, and so on). broadband. community. Build innovation capabilities by tapping foreign Develop research and development (R&D) Build top-level R&D structures knowledge; conduct demonstration projects at structures and build innovation systems on that are fully plugged in to global the micro-level. indigenous competencies. networks. Make basic reforms in education systems and Pursue reforms of education systems, Develop top-level education introduce selected changes and pilots in higher generalizing progress across layers. structures as global platforms. education. Source: Authors. Note: The unshaded cells indicate little or no impact on jobs. Pale blue shading indicates a moderate impact in terms of new jobs created or existing jobs saved. Dark blue shading indicates a high impact on jobs. Taking a gradual approach leading from micro-reforms to macro- try, commerce, administration, higher education, and other changes is advisable when implementing overall strategies. sectors and to take steps to nurture them. That is precisely The objective in the early phases is to change mindsets and the role of innovation programs that aim to stimulate new behaviors. Major reforms and employment effects are not to forms of collaboration between university and industry, new be expected in the short term. The approach may be conceived innovative activities, business start-ups, and so on. These have as follows. The first phase must include workable and convinc- materialized in the Arab world, as elsewhere, in the form of ing micro-projects that have demonstration value—that is, that incubators (several hundred of which now exist), and in the have immediate, visible effects. The second phase consists of a 50-odd technoparks found throughout the region. But they series of such projects organized into well-designed programs. need to be improved in their design and functioning, and to be The overall perspective of policy makers and the population complemented by new types of measures inspired by those in then begins to evolve, and they are prepared, in a third phase, place in developed countries (see chapters 6 and 9). for broader and deeper reforms that lead to major changes on a national scale (figure 3.3). Several Arab countries are approaching or have reached the stage where they should envisage full-fledged reforms, having Building a new social already progressed significantly on the various policy pillars and demonstrated obvious capabilities to engineer complex contract through a new sector plans. Morocco, Tunisia, Jordan, and Oman are among the (relatively) advanced reformers. development model In these countries and elsewhere in the Arab world, growth organizations and innovative sites are emerging and need to be exploited and expanded. These organizations and sites have brought economic growth and stimulated change. As seen in  he social pact and economic T subsequent chapters of this report (notably chapter 6), they efficiency have taken the form of nascent industrial clusters, innovative universities specializing in technology or management, and There is a need for a new social contract between ruling powers pioneer venture capital organizations, among others. In several and citizens throughout the Arab world. The Arab Spring called countries, these initiatives are nearly sufficient in number and into question the implicit social contract that had prevailed size to create the momentum required for major reforms. It is between the ruling powers and the population. That contract important to take stock of such promising changes in indus- was based on the government’s provision of secure employment Transforming Arab Economies 43 Chapter 3: Shaping new development strategies for Arab countries Figure 3.3 A pragmatic agenda: From micro-reforms to major changes Top- down initiatives Adoption of Critical Moving major Pilot Scaling mass of full reforms and projects up projects force institutional changes Bottom- up initiatives Immediate Medium-term Long-term agenda agenda agenda Source: World Bank 2007. to a significant segment of the population and acceptable living tries made their way successfully to democracy and a market conditions, notably through subsidies for basic goods (bread, economy after a few years of depressive and chaotic indecision. fuel, and so on). Sometimes referred to as the “authoritarian In general, rallying a country in full mutation behind a set of bargain model” (FEMISE 2011), that contract has gradually efficient economic and political policies is often essential in lost ground and proved unsustainable, as discussed in chapter preventing irreversible decline (Acemoglu and Robinson 2011). 1. Authoritarian regimes have not delivered enough in return for the sacrifices demanded of the population. Instead, they Establishing a new social contract built on efficient political insti- have appropriated a growing share of national wealth for a tutions should prove easier where a knowledge-based economic shrinking share of the population. As unemployment grew, regime has taken root. When it begins to produce wealth and so did frustration, ending with the events of the Arab Spring. jobs, a new economic model helps to reassure frustrated Some regimes have been overthrown, while others, flush with populations. Therefore, knowledge-economy-related reforms oil revenue, have been able to cope by distributing resources to and initiatives make sense even in quite dysfunctional institu- the population. As some countries search for a new democratic tions, for they may be the best way to help institutions evolve. foundation, others are in a state of civil war, with ruling powers Likewise, selling the new knowledge-economy-based model unwilling to change. In these new configurations, religious to the people makes sense, but only if one is realistic about beliefs play a capital role, having influenced the democratic what it can deliver. It is necessary to make commitments on the reforms to be implemented, and on the measures that will transition in Egypt, Tunisia, and Morocco. In their search for a be taken to implement them, so as to manage expectations new social contract, Arab countries will have difficulty finding related to job creation, income generation, and so on. a model to copy in other cultures. They will have to look into the foundations of their own identity to find the basis of a new The new social pact that accompanies the knowledge economy social contract (box 3.4). model should include mechanisms to: After a regime change, the sooner a new and efficient economic • R  edefine the role of the state to support nascent markets and path can emerge, the better, as the new path can help consolidate enforce laws and regulations. Efficient judiciary systems are the new political regime. That is the lesson of several East Asian needed to protect the entrepreneurs and innovators that authoritarian states, in which political leaders who had initiated will emerge in the new economy. regime changes—Deng Xiaoping in China, Park Chung-hee in  rganize the participation of change agents and the people as • O Korea, Lee Kuan Yew in Singapore, and Mahathir Mohamad in a whole in the design of the new economic and political model. Malaysia—put their country on a new path (see annex 2). The Young people, entrepreneurs, and women’s movements same process was key in Central Europe, as several coun- are among the groups that should be included in the design 44 Chapter 3: Shaping new development strategies for Arab countries BOX 3.4 In search of a new social contract for the Arab world Neither the Western nor the Asian system offers an appropriate model for the Arab world as it seeks to evolve away from inefficient authoritarian regimes. A fully democratic system in a Western style, with highly individualistic societies, supposes fully secular gov- ernments, strong and efficient judicial bodies, and so on. An efficient Asian system, whether authoritarian or democratic, is based on secularist principles and on adhesion of individuals to the nation as a collective body—a phenomenon not found in Arab culture, where the national collectivity is more fragmented. The most attra ctive foreign model may be that of Turkey, whose principles are (i) a unique cohabitation between secularism and political Islam; (ii) balanced relations between the state and the market, with a growing business sector benefitting from the actions of an efficient bureaucracy; (iii) integration in the world economy, thanks notably to long-term trade agreements with the European Union (EU); and (iv) military integration in the North Atlantic Treaty Organization (NATO) (Ulgen 2011). But Turkey’s model is a system: each factor allows the others to work. For that reason, it is difficult to imagine transferring it wholesale to Arab countries, where one or more of the key components of the system may be missing or underdeveloped. It would appear, therefore, that Arabs must search in their own identity and culture to build new sociopolitical models. The solution probably lies in a mix of Arab countries’ experiences—including aspects of the relative success of Morocco and Tunisia at the western end of the region, and of the Gulf states (Qatar, United Arab Emirates [UAE], and Oman) at the eastern end. It should be possible to combine strong leadership with clear adhesion to Islam, while remaining tolerant and open to other cultures and gradually integrating values of democracy and civil rights, notably for women. Source: Authors. and construction of the new economic model, given their In the Arab world, several countries have developed a vision, but vocal quest for respect and dignity, freedom of expression, with uneven success. Tunisia pursued the image of a dynamic and the rule of law, as well as their independence from information society, but that pursuit was jeopardized when the old regimes. investments were skimmed by the ruling power. In Saudi Arabia • D  ecentralize, thereby encouraging the mobilization of local the building of new cities and top-level universities was part of a new vision, but lack of success in meeting the job challenge talent, energy, and resources in contexts that have been has sapped its credibility. In Morocco a series of successfully affected by centralized decision-making processes for implemented sector development plans are parts of a vision ages. for the country’s modernization, but their outcomes are not  ngage key knowledge institutions, such as educational insti- • E yet tangible enough to command the strong adhesion of the tutions and research centers, in active reforms to better population to a new development model. To date, it is in the serve the needs of the economy and society. Those reforms small Gulf states that the clearest visions have been formu- can be stimulated through new forms of incentives and lated and concretized. new criteria for budget allocations, among other means. Credible visions require appropriate—and credible—action. Clear, compelling goals must be voiced by national leaders. Powerful The need for vision interdepartmental, interministerial, or interagency committees must coordinate complementary actions. Media campaigns To justify and motivate the effort and performance demanded of must energize the population, offering success stories that the population, a compelling vision is needed. That vision must inspire confidence. The difficulty, of course, is to deliver on the vision. But if appropriate mechanisms are put in place, an express the new development model and give it a concrete inspiring vision and expressive slogans can focus minds and goal. Some striking cases exist among comparator countries ignite change, contributing to success. An important point for (see annex 2). Singapore has constantly reinvented itself to governments is to “walk the talk” expressed by the vision—that hold onto its position as a top global hub, first in logistics is, to take concrete steps to make the vision a reality. Even and now as a higher education destination. Korea set out to small steps matter. For instance, when new or established become a world leader in manufacturing, and succeeded. After regimes have vowed that they will open up societies, increase the setback of the 1997–98 Asian financial crisis, the country transparency, and so on, concrete measures should follow in developed a new vision to transform itself into an advanced the form of freer access to information, liberalization of the knowledge economy. In the West, among the successful media, and other improvements. transition countries, Estonia has promoted itself as a wired country, and Slovakia as a top European manufacturer, which The vision should raise pride. It should remind listeners of the today produces more automobiles per capita than any other extraordinary scientific achievements of the Middle Ages, when country. Arab civilization led the world in preserving and disseminating Transforming Arab Economies 45 Chapter 3: Shaping new development strategies for Arab countries BOX 3.5 The media as change agents The media are instruments for disseminating knowledge and powerful means of exerting pressure for reform in the region. The media make possible the dissemination of knowledge for development and, when they are independent and credible, can help build a sense of urgency about reforms and stimulate demand for change. The degree of media liberalization and freedom differ from country to country, but the existence of radio and television stations not under government control has been a key factor in the transformation of the Arab region. The pioneering Al-Jazeera network provided decisive coverage of the revolutions in Egypt and Tunisia, defeating censorship by the authorities and disinformation in the government-controlled media to ensure that the truth emerged, the protest movements came together, and the resistance of ruling powers fell. Revolution aside, the network is one of the few forums for debate on reforms in the region, even if its independence in dealing with certain questions is occasionally in doubt. Other networks, including some based in Europe, have also improved their Arab-language coverage of the region. The Web, too, is shaking up the region by amplifying the demand for change. Information and expression (but also disinformation) circulate more freely on the Web than in other media, but on balance the existence of the Web makes it difficult for the authorities to hide the truth or dodge debates on key questions. Social networks were the carriers of the revolutions in Tunisia and Egypt, which have 2.5 and 7.7 million Facebook users, respectively. Images of the violence during the Tunisian and Egyptian convulsions were published online in a form of Web-based people power, a principle that could be expanded to include monitoring the implementation of development policies and programs and the struggle against corruption. For example, in Morocco, the national agency responsible for combating corruption has set up a Web site for citizens’ use (http://stopcorruption.ma/). Such a development, made possible by knowledge economy reforms, particularly in the areas of education and ICTs, constitutes a major opportunity to stimulate demand for reform. At the extreme, there are cases in which the media can block reforms. Journalistic ethics may lose out to offers of payment for media coverage designed to defeat the adoption or implementation of reform, offered by those who stand to lose from any change to the status quo. Source: Authors. knowledge and technology derived from Greece, Rome, India, and China. It should validate the contemporary creativity of the Fostering regional Arab world, not, perhaps, in the realm of flashy innovations and technologies, but in the more modest achievements recorded in integration and cities, slums, and rural areas that have created jobs, improved services, protected the environment, and so on. The media international channels that serve the Arab world, such as Al-Jazeera and El Arabia, would be natural allies in this regard. The Web, too, cooperation would be a logical means of circulating the inspiring message of Arab achievement and renewal. Box 3.5 expands on the role The decision to integrate fully into the global economy has been a played by media in recent events and the potential pressure decisive factor in those countries that offer inspiration and success they can exert for reform. Arab countries can be inspired by the stories in building a knowledge economy. As these countries have very efficient initiatives that some countries have undertaken taken internal steps—through business environment reforms, to promote the knowledge and innovation model, such as that FDI incentives, trade openness, and so on—their foreign part- of the Maeil Business Newspaper in Korea, which launched ners have shown goodwill, extended beneficial trade agree- a nationwide campaign to raise awareness about the knowl- ments, provided technical support to facilitate the integration edge economy in schools, businesses, government agencies, processes, and even provided financial assistance. Examples and even prisons. The campaign used a variety of media and of international good include the support of the United States featured a multitude of conferences, competitions, and other for Korea’s early development; the European Union’s treat- events (World Bank 2007). ment of countries seeking membership in the Union (whereby the Union acted as a political and economic anchor driving reforms)3; active bilateral support (such as the support that Finland offered Estonia, with which it shares cultural and linguistic ties); and common regional trade zones in Europe 3. The EU also stimulates institutional improvements through the acquis communautaire (the body of accepted EU law and practice) and the Copenhagen criteria, as noted by Dvorak (2011). 46 Chapter 3: Shaping new development strategies for Arab countries and Asia, often through informal arrangements such as the nnovative approaches to migration-related questions. These • I Japan-led Akamatsu (“flight of the goose”) initiative in the may include temporary increases in immigration limits and 1980s, and agreements such as the Association of Southeast support and incentives for the return of other immigrants. Asian Nations (ASEAN). Incentives might include helping returnees to create busi- nesses in their country of origin, and facilitating transfers The international community can play a decisive role in the of funds. migration of the Arab world to a new development model. At least three levels, or types, of integration are possible: Steps toward integration are discernible. There have been several integration into the global economy, integration within the measures taken by the United States and the EU to support Mediterranean area, and integration of the Arab region. countries that embarked on a democratic transition in the wake of the Arab Spring (Greenfield and Balfour 2012). One outcome of the Deauville meeting was the decision to include Integration into the global partnership countries in the programs of the European Bank economy for Reconstruction and Development (EBRD). The EBRD will support business enterprises’ projects through equity invest- ments and loans, as it has done since its creation in 1991 for The international community has not always exerted a positive the transition economies of Eastern Europe and the former influence on the Arab world, though encouraging signs emerged Soviet Union.5 It will then act as a complement to the European from the G8 meeting that launched the Deauville Partnership in Investment Bank (EIB) (active in the region through the bank’s May 2011.4 But numerous knowledge economy reforms, some Facility for Euro-Mediterranean Investment and Partnership, admittedly partial, have been carried out in the region with the FEMIP) and the World Bank. A recent report on trade and support of the international community, notably development investment (CMI, World Bank, and Islamic Development Bank institutions such as the World Bank, which, in addition to pro- 2012b) provides detailed analysis of ongoing progress toward viding financial support, has performed analytical work to help integration, accompanied by recommendations, notably in guide public policy choices. As noted above, these efforts have relation to preferential trade agreements (also see chapter 4). brought progress, but at a slower pace than in other regions of the world. The missing link in these interventions is prob- ably the sociopolitical dimension, which has two parts: (i) the engagement of all national actors and (ii) good governance. Integration in the Even with the leverage provided by aid, the international com- Euro-Mediterranean space munity has not always supported reforms extending to these areas, which are so important for the knowledge economy. At The development of the Euro-Mediterranean area depends largely times there appears to have been a tacit agreement on the on the actions of the EU. The support given so far to the southern part of political leaders and business interests on both sides to Mediterranean countries has been rather small compared to skirt these subjects. The Deauville meeting may mark a break that offered to Central and Eastern European countries. In the with past practice, provided the principles of the declaration two decades since the European Union launched its coopera- are scrupulously adhered to. tion scheme with Mediterranean partners in 1992, the funds provided to the partner countries have been about 40 times Countries that embark on a democratic transition and greater less than those provided to the Eastern Europe countries. A liberalization of the economy should be encouraged, through large part of EU support has gone to those countries that have incentives, to launch reforms relevant to the knowledge entered in the Union, notably through “pre-adhesion” schemes economy. Such incentives can take three forms: and then through “Structural Funds” once in the Union. This • A  id increases tied to results from knowledge economy reforms. support, along with the prospect of joining the Union, has played This incentive must be structured in a manner that pre- a decisive role in speeding up reform processes in concerned vents the rents that it generates from being captured by countries, guided by the terms of the adhesion negotiations. the opponents of change. National mechanisms should be By contrast, for the southern Mediterranean countries, the favored for the leverage they bring in terms of government absence of the prospect of membership, along with the limited effectiveness, transparency, and accountability. funding received from the EU, has not encouraged reform • P  referential trade agreements with countries that embark efforts. on reforms. This is currently the most practical approach Following the Arab Spring, the EU has developed a new policy because of budget constraints in the North and the impact to facilitate Euro-Mediterranean integration, accompanied by a they may have on growth and employment (and thus on significant increase in funding. Among the policy areas that the sustainability of the dynamic of change). will benefit from the funding increase are efforts to shape a 4. The Deauville Partnership was formed at the G8 Summit in Deauville, May 26–27, 2011. Its aim is to provide aid to support the new democracies emerging from the Arab Spring. http://www.g20-g8.com/g8-g20/g8/english/live/news/declaration-of-the-g8-on-the-arab-springs.1316.html. 5. A special fund of $2 billion was set up in May 2012 to support the four “emerging democracies” (Egypt, Jordan, Morocco, and Tunisia). Both Jordan and Tunisia became members of the EBRD in January 2012. Transforming Arab Economies 47 Chapter 3: Shaping new development strategies for Arab countries Euro-Mediterranean space for research and innovation featur- ing multicountry R&D platforms.6 Although the programmatic Integration in the Arab world aspect of these efforts is still being defined, they appear likely Putting the knowledge economy model in place in the Arab region to complement and significantly increase the programs so far will require enlargement of its market, supported by infrastruc- developed by the EU for R&D cooperation with the southern ture development and the exploitation of synergies in education Mediterranean countries, which, as noted, have been quite and innovation. limited in scope and scale. To accomplish such a project of market expansion and integration, The many networks that have developed between the two rims of a regional approach is needed similar to the European model, with the Mediterranean are a major factor for change and integration. its Lisbon competitiveness agenda and Europe 2020 strategy These networks touch on many different topics—among them (European Commission 2010). The people of the region are finance, education, research, innovation, urban development, attached to their common identity and have shown their support environment, and youth. They should be encouraged through for various plans for political and economic integration. But the appropriate incentives, while being stimulated and nourished heterogeneity of the region’s countries and quarrels among their with adequate information and knowledge exchanged over leaders, sometimes leading to war, have so far limited the scope efficient discussion platforms. Creating and maintaining such of regional political integration. The Arab Spring, by elevating the platforms is a major objective of the CMI in Marseille (box 3.6). role of the people, has inspired new hope for stronger political integration. The region should seize this historic opportunity to build a regional growth and employment strategy based on BOX 3.6 The Center for Mediterranean Integration The Marseille Center for Mediterranean Integration (CMI) was created by a group of Mediterranean governments—Egypt, France, Jordan, Lebanon, Morocco, and Tunisia—along with the European Investment Bank (EIB) and the World Bank. It supports development and integration of practices in the Mediterranean region by: (i) providing a space for evidence-based policy dialogue, (ii) producing and disseminating knowledge products, and (iii) supporting cross-sectoral, multipartner regional efforts. Launched on October 9, 2009, the CMI aims to contribute to the building of a new economic and social development paradigm that reflects the expectations of the democratic movements in Arab countries. The CMI’s programs are organized around three integrating themes: • I ntegrated economies. Increased employment is the overarching economic objective in the region. Raising productivity, instituting knowledge- and innovation-based reforms, and exploiting linkages through trade, investment, and infrastructure are common elements of current deliberations aimed at shaping new economic models and reform paths. Evidence-based policy discussions will be essential in the region’s transition to advanced-economy status.  ustainable growth. The Mediterranean region—unequally rich in energy resources, universally poor in water resources, and • S ubiquitously vulnerable to environmental risk—cannot afford, even in constrained socioeconomic times, to forgo the addition of a strong green dimension to its growth and development strategies.  articipatory governance. At the heart of the radical changes in the region is the aspiration of citizens for a sustained process of • P transformation toward participatory economic and political governance. The CMI’s work—networking, outreach, and advocacy for reforms—embraces a range of stakeholders from the public and private sectors and from civil society. The center encourages a dialogue between government and independent practitioners by:  eveloping knowledge in the form of studies, policy notes, and methodologies for sector work at the regional, national, and local • D levels and providing evidence-based analysis to facilitate public policy debate. • P  roviding a venue in which new leaders, decision makers, and practitioners across the Mediterranean can come together in conferences, workshops, and policy dialogues to discuss pressing issues, reflect with their peers, review best practices and lessons learned, and benchmark progress.  eveloping a knowledge platform on the CMI Web site to disseminate knowledge and create virtual meeting spaces for com- • D munities of practice and mutual interest. The CMI programs are led by various organizations, among them the Agence Française de Développement, the Caisse des Dépôts et Consignations, the City of Marseille, the EIB, the Forum Euroméditerranéen des Instituts de Sciences Économiques, the Deutsche Gesellschaft für Internationale Zusammenarbeit, the United Nations Development Programme, Plan Bleu, and the World Bank. These organizations work with regional and national partners, such as think tanks, training organizations, centers of excellence, and other development institutions, particularly on the southern rim of the Mediterranean, to design and deliver programs that address critical development challenges facing the region. 6. A sum of €2 billion is being reserved in the context of the next Framework Program of the European Commission (which will amount to some €80 billion over the period 2013–18). 48 Chapter 3: Shaping new development strategies for Arab countries the knowledge economy. That strategy must promote economic integration, infrastructure development, education, Arab culture, Conclusion and innovation to meet the challenges of the region and give its workers the resources they need to succeed. The integration initiative could set a more ambitious long-term objective for economic integration in the form of a common market Four strategic principles have been suggested above: and budgetary and monetary union. Both of those goals would • Acting with ambition, tempered by realism, in policy reforms require greater coordination of macroeconomic policies. The current mechanisms of mutual assistance in the region—bilat-  ngineering change pragmatically to build confidence and • E eral and multilateral development institutions—should be create jobs, focusing initially on gathering low-hanging fruit reformed to accelerate economic convergence of the various  ointly building a new economic model and a new social • J countries and, within each country, of the various localities contract between governments and citizens, so that the (provinces, governorates, territories). Also important, because two reinforce each other they may make it possible to shrink, somewhat, the consider-  ursuing active policies of integration within the Arab world • P able intraregional disparities in income, are efforts to reduce and within the Mediterranean space, with the active col- unemployment among youth and women, as well as social laboration of the international community inequalities.7 Progressing simultaneously on all four principles is key for The current political and institutional setting is not suited to the ensuring the success of the transition process. new challenges. The Arab League, founded in 1945, functions on the principles of unity and noninterference in domestic affairs, The first three chapters of this report have established the and the league’s decisions must be unanimous. In the area of key parameters of the proposed new development strategies. economic and social integration, the Arab League has made Chapters 4–7 will discuss in detail current issues and pos- positive contributions, for example, in adopting the Greater sible actions related to the four policy pillars of the knowledge Arab Free Trade Area (GAFTA) and putting in place financial economy. Chapters 8 and 9 will deal with the promotion of institutions for mutual assistance within the region. But it is economic sectors and local and regional developments that not set up to coordinate public policies, develop the standards offer a high potential for diversification and growth. needed for economic integration, or to manage regional pro- grams related to the pillars of the knowledge economy, all of which require a regulatory authority capable of overruling, or at References and bibliography least influencing, national regulations. It is therefore imperative that the organization move toward a new model that is better Acemoglu, D., and J. Robinson. 2012. Why Nations Fail: The adapted to the regional context and that embodies best prac- Origins of Power, Prosperity and Poverty. New York: tices borrowed from other integrated areas, particularly the EU. Crown Publishers. Institutions specializing in the knowledge economy lack dynamism ANIMA. 2011. Mediterranean Niches and Sectors with High and will have to be revisited. The region already possesses insti- Potential for Job Creation and Growth. Unpublished tutions responsible for education and ICT. But their financial report prepared for CMI, Marseille, June. resources are limited, their management model is not based on performance, and their results have not been remarkable. CMI (Center for Mediterranean Integration). 2012. The 2012 As part of the process of developing a regional knowledge MED Report: Towards Green Growth in Mediterranean economy strategy, it will be essential to define an institutional Countries. Marseille: CMI. framework for implementation of that strategy. The relevance of the existing institutions should be reexamined. Those that CMI, World Bank, and Islamic Development Bank (IsDB). 2012b. are not eliminated will need to be guided by performance- From Political to Economic Awakening in the Arab oriented strategic plans and funded adequately. World: The Path of Economic Integration. A Deauville Partnership Report on Trade and Foreign Direct Investment, Draft, CMI, Marseille. Dahlman, Carl. 2012. Lessons from Development Strategies of Other Developing Countries: Implication for MENA Countries. Unpublished background report, World Bank. Washington, DC. 7. The Gini index of distribution of per capita domestic income among the countries of the region is 54 percent (World Bank [2010] and author’s computations, excluding for Palestine and Somalia, based on the distribution of the GDP per capita across the region). Transforming Arab Economies 49 Chapter 3: Shaping new development strategies for Arab countries Dvorak, Pavel. 2011. “Political Economy of Reforms: Lessons Ulgen, S. 2011. From Inspiration to Aspiration. Brussels: Carnegie from the Central and Eastern Europe.” Presentation Endowment for International Peace. at CMI workshop, Marseille, November 13, 2011. World Bank. 2007. Building Knowledge Economies: Advanced European Commission. 2010. “From the Lisbon Strategy Strategies for Development. World Bank: Washington, to ‘Europe 2020’.” June 23. http://ec.europa.eu/ DC. education/focus/focus479_en.htm. ———. 2010. Innovation Policy: A Guide for Developing Countries. FEMISE. 2011. Towards a New Med Region: Achieving Fundamental World Bank: Washington, DC. Transitions. Marseille: FEMISE. World Bank, ISESCO, and Government of Tunisia. 2009. Greenfield, Danya, and Rosa Balfour. 2012. Arab Awakening: Conference on Building 21st Century Knowledge Are the US and EU Missing the Challenge? Washington, Economies for Job Growth and Competitiveness DC: Atlantic Council of the United States. in the Middle East, Tunis, December 1–3. Kuznetsov, Yevgeny, Carl Dahlman, and Abdelkader Djeflat. Zeidane, Zeine. 2012. Institutional Reforms for a Knowledge 2012. How to Facilitate High-Productivity Employment Economy Model in the Arab World. Unpublished in MENA Economies? Sequencing Interventions to background report, World Bank, Washington DC. Promote Innovation. Unpublished background report, World Bank, Washington, DC. Rischard, Jean-François. 2009. MENA Countries in the 21st Century: Building Knowledge Economies for Job Creation, Increased Competitiveness, and Balanced Development. Washington, DC: World Bank. 50 Policy pillars In this part °± Chapter 4. Improving governance and the business environment °± Chapter 5. Educating people for better jobs in a new economy °± Chapter 6. Fostering innovation and technological upgrading °± Chapter 7. Moving to the information society 51 hapter 4 Improving governance and the business environment Weak economic governance is the single greatest hindrance to eco- Figure 4.1 nomic and social development in the Arab world and the main factor MENA governance rankings, 2010 compared limiting the progress of the knowledge economy. Economic reform cannot yield its potential without effective, transparent, and with 2005 credible rules. Shortcomings in the overall governance frame- Control of work, characterized by pervasive corruption and a lack of voice corruption and accountability, have exposed key economic institutions in Arab countries to capture by vested interests, undermining their Rule of law quality and credibility. This has reduced the effectiveness and fairness of policies, distorted competition, and most importantly, negatively affected growth and employment. The lack of account- Regulatory quality ability and transparency and the large gap between de jure and de facto rules have further increased the potential for discretion, Government effectiveness favoritism, and corruption (CMI, World Bank, and IsDB 2012).1 Although the problem is hard to quantify, enterprise surveys Political stability and international indicators, such as the Worldwide Governance 2005 Indicators (WGIs), 2 confirm the seriousness of the issues. Voice and 2010 Governance rankings for the Middle East and North Africa accountability (MENA) stayed at or below the 50th percentile between 2005 and 0 10 20 30 40 50 60 2010 (figure 4.1). During this time period, the region maintained its rankings on rule of law, but experienced deterioration on Source: Kaufmann, Kraay, and Mastruzzi 2010. voice and accountability and on political stability. The latter Note: The governance indicators presented here aggregate the views on are not surprising, given the events that began in December the quality of governance provided by many survey respondents (enter- prises, citizens, and experts) in industrial and developing countries. 2010 and heralded the beginning of the Arab Spring. These These data are gathered from survey institutes, think tanks, nongov- uncertainties in the policy-making environment should not ernmental organizations, and international organizations. The World be understated as concerns for private sector investors and Governance Indicators do not reflect the official views of the World Bank and are not used by the World Bank to allocate resources. entrepreneurs, who are key in the process of value addition and job creation. The current transitions offer a unique opportunity to address deep-seated governance challenges. is democracy. In this regard, data from the Polity IV project show that just one country in the region (Lebanon) has an institutionalized democratic regime.3 The region as a whole scores -3 on a scale of -10 to 10. The Gulf Cooperation Council Strengthening (GCC) countries have a collective score of -8.7 on the same scale (CSP 2011). governance and the Success of the model depends in large part on government effec- functioning of the state tiveness, which remains low in the region (except in the GCC coun- tries). An effective government ensures the best use of available resources to improve the economy’s competitiveness, the out- comes from training and public research, and the moderniza- Participation in the management of knowledge-based develop- tion of the state. Figure 4.2 shows a clear relation between ment requires credible political regimes that are accountable to the government effectiveness and performance in the knowledge people. The political form that best responds to that description economy (based on the 2012 Knowledge Assessment Method, 1. This chapter draws extensively on Zeidane (2012). 2. The Worldwide Governance Indicators (WGIs) report aggregate and individual governance indicators for 213 economies over the period 1996–2010 for six dimen- sions: voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption (http:// info.worldbank.org/governance/wgi/index.asp). 3. The data are for 2010, before the Arab Spring. 52 Chapter 4: Improving governance and the business environment Figure 4.2 Government effectiveness vs. the knowledge economy 10 Non-Arab countries Arab countries Denmark New Zealand United States Japan Spain Singapore Israel France High KEI Lithuania Slovakia Greece Chile Bahrain United Arab Emirates Saudi Arabia Oman Malaysia Russian Fed. Qatar Ukraine Jamaica Brazil Argentina Kuwait Turkey Kazakhstan South Africa 0 5 100 Jordan 50 Tunisia Lebanon China Algeria Iran Vietnam Ecuador Egypt Morocco Vietnam Indonesia Indonesia Low KEI Syria Pakistan Yemen Cameroon Mauritania Sudan Djibouti Ethiopia 0 High governance indicator Low governance indicator Source: Authors. Note: KEI = Knowledge Economy Index. KAM).4 The mean percentile of the region on the indicator of situation varies from one Arab country to another, civil society government effectiveness was 35 percent in 2009 (the middle remains underdeveloped in the region. On the World Bank’s of the fourth decile). The Gulf states appear to be the most indicator5 of voice and accountability, no Arab country exceeds effective (between the sixth and Qatar’s position in the ninth the median percentile (figure 4.3). This critical dimension for decile), followed by Tunisia (65 percent), Jordan (63 percent), the involvement of various social actors and for governance and Morocco (51 percent). as a whole deserves a high priority. Decentralization favors the success of local initiatives and stimu- The emergence of a dynamic private sector—operating in a fair, lates competition among localities. Decentralization is particularly transparent, and competitive environment—is critical to pro- relevant for the region in view of the growing urbanization and ductivity and innovation. The uneven implementation of eco- spatial disparities in development within countries. There was nomic policies has reinforced inequality and the perception a trend toward progressive decentralization across the MENA of injustice. Rent-seeking and capture of the state by elites countries over the past decade, although decentralization was have flourished in this environment of privileges and patron- viewed as an administrative technique—closer to deconcentra- age. This has allowed small groups to dominate the market, tion—rather than as a political process. Still, it has resulted in a with low productivity and no incentive to innovate, stifling modest increase in the autonomy of local government in plan- economic and job opportunities. As shown in World Bank ning and decision making (Bergh 2010). With decentralization, reports,6 this state of affairs has weighed on the develop- however, special attention must be paid to the effectiveness, ment of a knowledge-based and competitive economy. It is transparency, and accountability of institutions. important to correct these imbalances and the underlying governance deficiencies to restore the confidence of economic Civil society is a change agent and has a major role in the manage- operators. Strengthening the mandate and independence ment of knowledge-based development strategies. Although the of key economic institutions, such as competition and tax 4. To measure the knowledge economy, we used the Knowledge Economy Index (KEI) scores (which range between 0 and 10). To measure governance, we used the country’s rank in the WGIs (which range between 0 for the worst performer and 100 for the best performer). The government effectiveness indicator reflects per- ceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies. 5. Indicators on governance, when source is not specified, are derived from the WGI Database (2010). 6. For example, see the Tunisia Development Policy Review (World Bank 2010a) and the MENA flagship report From Privilege to Competition (World Bank 2009a). Transforming Arab Economies 53 Chapter 4: Improving governance and the business environment it possible to establish the credibility of policies and to channel Figure 4.3 the expectations of economic actors, notably firms, toward Voice and accountability rankings of selected the selected targets; (ii) performance-based public financial countries of the region, 2010 management7 to ensure the effectiveness and efficiency of public expenditures (for example, in the area of education, the Lebanon infrastructure needed to make the economy competitive, or in support for innovation, with special attention to the system Kuwait for awarding public contracts to encourage competition and technology transfer); and (iii) an effective public administration Morocco managed on the basis of merit and not on political favoritism or nepotism. An effective government ensures the best use of available resources to improve the economy’s competitive- Jordan ness, the outcomes from training and public research, and the modernization of the state. West Bank and Gaza The rule of law is essential if knowledge economy actors are to have confidence in national institutions. The rule of law, even Bahrain though the details of the concept may vary according to local context, is a pledge that institutions will function as they United Arab Emirates should. Because institutional development is a decisive factor for foreign direct investment (FDI) and efficiency, the estab- Qatar lishment of the rule of law is critical for productivity-driven growth. The World Bank’s global rule-of-law indicator, which Algeria is a component of the Knowledge Economy Index (KEI), places the region in the middle of the fourth decile, with regional subgroups ranked as follows: GCC (62nd percentile, with Qatar Oman among the top 20 percent of countries), the Mashreq (51st percentile), the Maghreb (39th percentile, pulled down by the Iraq poor performance of Algeria), and the others (6th percentile) (World Bank 2010b). Egypt, Arab Rep. Corruption is very damaging for society as a whole and for the knowledge economy in particular. It erodes credibility and inhib- Yemen, Rep. its private initiative, particularly FDI by firms concerned about their reputation. It erodes domestic economic performance 10 25 by interfering with markets; discouraging private investment Country’s percentile rank (0–100) and hobbling competition, the engine of innovation; and lower- 90–100 50–75 10–25 ing supplies of basic services, including education and basic infrastructure. It creates instability that is harmful to the long- 75–90 25–50 0–10 term development of economies. On the indicator of control of Source: Kaufmann, Kraay, and Mastruzzi 2010. corruption, the region as a whole scores in the fourth decile. Note: The governance indicators presented here aggregate the views on The subgroup of the GCC countries is in the seventh decile, the quality of governance provided by survey respondents (enterprises, with Qatar and the United Arab Emirates (UAE) in the top citizens, and experts) in industrial and developing countries. These data quintile, followed by the Maghreb (World Bank 2010b). Most are gathered from survey institutes, think tanks, nongovernmental orga- nizations, and international organizations. The WGIs do not reflect the of the region’s countries have signed and ratified the United official views of the World Bank, its executive directors, or the countries Nations Convention against Corruption (UNCAC).8 But the they represent. The indicators are not used by the World Bank Group to actual implementation of anticorruption legal frameworks allocate resources. is still weak. Essential steps to limit corruption include the simplification of administrative formalities (thus reducing authorities, and launching a transparent regulatory review the contact between individuals and government officials), to reduce discretion and anticompetitive behaviors, can build transparency in public procurement, establishment of inde- the confidence of investors (CMI, World Bank, and IsDB 2012). pendent auditors and regulators, and regular publication of information. Success of the model depends in large part on government effec- tiveness, which remains low in the region (except in the GCC coun- Security is essential for knowledge- and innovation-driven develop- tries). Several factors are critical for the approach to succeed: ment. Without security it is difficult to ensure basic services, domes- (i) strategic guidance of the development process, which makes tic mobility of the factors of production, or the proper functioning of 7. Public financial management in 12 countries of the region was evaluated under the World Bank’s Public Expenditure and Financial Accountability program. For the six for which data were available, the average score was 2.2 on the 1 to 4 scale developed by De Renzio (2009), corresponding to a grade of C or C+, far behind the practices of the Organisation for Economic Co-operation and Development (OECD) countries. 8. The only UN members in the region that have not yet signed are Oman and Somalia. 54 Chapter 4: Improving governance and the business environment markets.9 When an economy depends on overseas markets to public services), which are often monopolies, although Arab buy its domestic production or to supply factors of production cable channels have experienced considerable growth and (capital, labor, or technology), security is indispensable. Recent played a major role in the quest for liberty of Arab youth. The changes have lowered some countries’ rankings on political 2011−12 Press Freedom Index of Reporters without Borders stability in the short term, given the high cost of the recent shows that Morocco is 138th out of the 179 countries ranked. revolutions in terms of human lives, but the same changes Tunisia, which proclaimed its commitment to the information should reduce the likelihood of violence in the medium and society, is in 134th place and was 164th a year before (Reporters long term, provided political, economic, and social measures Sans Frontières 2012). Internet censorship is widespread in the are taken to address the causes of the revolutions, particularly region, with seven countries, which together account for 44.2 limitations on freedom, corruption, unemployment, injustice, percent of the population, deemed inimical to press freedom or and inequality. Given the region’s geostrategic position and its under watch in the classification of Reporters without Borders. natural resource wealth, widespread violence could have very Among the seven are Tunisia and Egypt, which paradoxically negative implications for the world economy. have just undergone revolutions that succeeded in part thanks to the use of Web-based social networks to get around restric- tions on press freedoms (Reporters Sans Frontières 2011). Needed reforms include liberalization of the media, openness Opening up societies to competition in radio and television, transformation of public media into public services, and elimination of censorship. Overly rigid restrictions on immigration can inhibit inflows of inter- national expertise and trade in services. The Arab world is the only developing region that is a net importer of migrants, with This strategic approach to the knowledge economy, as well as its 7 percent of the population coming from abroad—more than implementation through the promotion of creativity and the dis- double the world average. There are wide disparities within semination and use of new ideas, requires guarantees of individual the region, with immigrants representing 87 percent of the and collective freedom. The region’s Achilles heel is the very population in Qatar and close to zero in Egypt. Migration allows low degree of freedom of thought, information, association, countries to import skilled labor that is not available locally and, and the overall lack of free choice of local and national rep- in so doing, to build up human capital and improve productiv- resentatives. According to the indicators of civil and political ity. Currently, the percentage of immigrant labor with some freedom developed by Freedom House, no Arab country is higher education is about 15.8 percent, a relatively low level considered as free. Only Tunisia, Morocco, and Lebanon are that suggests most immigrants work in occupations with a low classified as partly free (Freedom House 2012). Freedom of technological content. Here, too, intraregional disparities are thought and expression is not only essential for creativity and great. Qatar attracts a larger share of skilled labor (64 percent intellectual fertilization, but also for quality public policy. Its of immigrants have some higher education), and Libya attracts curtailment in the countries of the region has created a form a lower-than-average share (7 percent). The average number of group thinking in which the elites settle into supporting the of countries whose nationals need a visa to enter the region existing political regime and raise no objection to government is 150 (World Bank 2009c). The cost of travel documents is decisions, no matter how inappropriate. Those who wish to relatively low in relation to per capita gross domestic product preserve their freedom of thought often have no choice but to (GDP) and does not constitute a major constraint on mobility emigrate.10 The Arab Spring, however, created a favorable new (Neumayer 2006). context. Notable progress has been made in countries such as Libya, Egypt, and Tunisia. The latter two have conducted Gender disparities in the region retard development and are an elections that observers deem competitive and credible, and outward sign of resistance to progress. The participation of freedom of expression has gained momentum in Arab societies. women in political life generally helps to improve the credibility These gains are offset, however, by a decline in civil liberties and effectiveness of public institutions, and thus the enabling in countries such as Bahrain, Saudi Arabia, Syria, and Yemen environment for the knowledge economy (World Bank 2004). (Freedom House 2012). Women’s participation in the region remains low; the rate of women’s participation in parliament averages 10.6 percent Freedom of information is essential to the dissemination of knowl- for the region. But changes are taking place: Algeria recently edge and the improvement of governance. The citizen’s right to became the first and only Arab country where women hold information is rarely codified. Few Arab countries have liber- more than 30 percent of the seats in parliament.11 In Tunisia alized their radio and television industries, and governments and Iraq, women hold more than 20 percent of the seats in continue to control the existing public media (not seen as parliament; in Qatar, Saudi Arabia, and Kuwait there are no 9. The 2011 World Development Report deals with the link between security and development, and presents literature on the computation of the costs of security incidents in several regions of the world in terms of economic growth and the prevalence of poverty, which is more than 50 percent higher in countries with serious violence than in countries with a low level of violence. The report emphasizes that the principal causes of violence are the perception of injustice and unemploy- ment: 39 percent of participants in rebel movements trace their involvement to idleness, compared with 13 percent who cite belief in a cause (World Bank 2011). 10. A World Bank report on migration from the Middle East and North Africa (MENA) region to the OECD countries reveals, through the use of a gravity model, that the absence of political liberties is an explanatory variable for the rate of emigration (World Bank 2009b). 11. This sharp increase—from 7.7 percent in 2007—was due to an Organic Law that requires between 20 and 50 percent of the candidates for parliament to be women (http://www.ipu.org/parline-e/reports/2003_E.htm. Transforming Arab Economies 55 Chapter 4: Improving governance and the business environment women in parliament.12 The presence of women in high gov- seek to attract more FDI. Box 4.1 highlights Jordan’s New ernment posts and in certain occupations such as justice and Opportunities for Women (Jordan NOW), a pilot program to local administration remains very limited in the region. catalyze female employment that could serve as an inspiration for other countries. Despite noticeable progress in the levels of female education, women’s participation in the labor force remains extremely low. An open society eliminates constraints on the participation of young The situation remains worrisome; the labor force participa- people in development. The region’s population aged 15–29 years tion rate of 25 percent (World Bank 2012b), the lowest of any was 125 million in 2010 (e4e, IsDB, and IFC 2011), up from 67 world region, has a concomitant effect on economic growth. million in 1990 (Wrigley 2010); youth account for more than This low rate of participation is estimated to have held back 30 percent of the total population and around 50 percent of growth in per capita GDP by 0.7 percent during the 1990s—a those of working age. The trend in the MENA region is toward missed opportunity equivalent to 40 percent of the growth a high rate of youth unemployment, 25 percent on average,14 achieved during the period (World Bank 2004). As figure 4.4 with particularly high rates in Tunisia (30 percent), Saudi Arabia shows, most of the countries where women have high levels (28 percent), Jordan (27 percent), and Egypt (26 percent). of participation are either resource-rich countries with a large Meanwhile, dropout rates are high, leaving a large segment number of expatriates (such as Qatar [87 percent], UAE [81 of youth without education, at risk of falling back into illiteracy, percent], and Kuwait [68 percent]) (Baldwin-Edwards 2011) or and lacking any particular skill. Youth also lack opportunities to have a high level of women working in the agricultural sector build their skills through volunteering or community service. In (for example, Sudan, Comoros, and Djibouti). In other words, addition, most skills development programs target urban youth women’s participation consists of either nonnational workers and involve only large private firms, even though small and or national workers in vulnerable jobs. medium-sized enterprises (SMEs) represent a significant share of employment and production in the region (Angel-Urdinola, But female employees seem to be increasingly valued by mul- Semlali, and Brodmann 2010). Workers without skills cannot tinational companies, which see them as more accurate and contribute to the accumulation of human capital required for dedicated than male employees in the MENA region (figure the knowledge economy. 4.5).13 This is an interesting finding for Arab countries as they Figure 4.4 Women’s participation in the labor force, select countries, 2012 Iraq 14.3 West Bank and Gaza 14.7 Algeria 14.7 Jordan 15.3 Saudi Arabia 17.4 Lebanon 22.5 Egypt, Arab Rep. 23.5 Yemen, Rep. 24.8 Tunisia 25.3 Morocco 25.9 Oman 28 Mauritania 28.4 Libya 30.4 Sudan 30.8 Comoros 34.7 Djibouti 35.5 Bahrain 39.2 Kuwait 43.3 United Arab Emirates 43.7 World 51.1 Qatar 52.1 0 10 20 30 40 50 60 Women as share of labor force (percent) Source: World Development Indicators. 12. http://www.ipu.org/wmn-e/classif.htm). 13. Also see Hewlett and Rashid (2010). 14. The perception survey conducted in five countries of the region gives levels between 35 percent and 40 percent (e4e, IsDB, and IFC 2011). 56 Chapter 4: Improving governance and the business environment BOX 4.1 Catalyzing female employment in Jordan In Jordan only 17 percent of women between the ages of 20 and 45 work, compared with 77 percent of men. This labor force participa- tion gap also holds among the more educated; among community college graduates it starts immediately at graduation. The Jordan New Opportunities for Women (Jordan NOW) is a pilot program meant to rigorously evaluate the effectiveness of two poli- cies: short-term wage subsidies and employability skills training. Short-term wage subsidies give firms an incentive to take a chance on hiring young female graduates and an opportunity to overcome stereotypes by directly observing the young women working for them. In the pilot, each voucher has a value equal to the minimum wage for six months. Employability skills training augments the technical skills that graduates learn in community college with the practical skills to find and succeed in employment. Many employers say recent graduates lack these interpersonal and other basic job skills. In the pilot, students received 45 hours of instruction in team building, communications, presentations, business writing, customer service, résumé writing, interviewing, and positive thinking. There appears to be strong demand for these policies. Despite low employment rates, the majority of recent female graduates want to work: 93 percent say they plan to work after they graduate, and 91 percent say they would like to work outside the house even after they are married. Those who began the courses gave them positive reviews, claiming the courses had given them much more confi- dence to begin searching for jobs. Four months into the wage-subsidy program, about a third of those using vouchers had found a job. Early results from a midline evaluation suggest that job vouchers have significant employment effects: employment rates among graduates who received vouchers alone or vouchers plus training are 55–57 percent compared with 17–19 percent among those who received training alone or received neither training nor vouchers. In all groups, employment effects are higher for unmarried women. Follow-up surveys will determine whether these employment effects of job vouchers are sustained in the longer term and will also focus on other measures of empowerment and changes in attitudes. The surveys will also allow further investigation of the link between marriage and work, given the early findings that married women are less likely to attend the training, less likely to use the vouchers, and less likely to be employed. Source: World Bank 2012b. Figure 4.5 Advantages of hiring female employees over male employees: A survey of multinational companies 30 25 20 15 10 5 0 MENA India China OECD Others They are more productive They are more dedicated They create better balance/gender diversity They are more trustworthy At the same level of skills and education, No difference females have a higher level of training They are absent less often Meaningless question The cost of hiring a female is less They are more accurate They have better social skills Other advantages Source: World Bank Offshoring Survey 2010. Note: MENA = Middle East and North Africa; OECD = Organisation for Economic Co-operation and Development. Transforming Arab Economies 57 Chapter 4: Improving governance and the business environment Arab youth tend to feel disempowered in regard to their economic On this point, in 2003 just 330 works were translated into future, and very few participate in social and civic affairs. Young Arabic for a population of 300 million speakers, whereas people can be the engines of growth, contributing to both five times that number were translated into Greek for a innovation and productivity. Yet they need open and vibrant population just 4 percent of the size of that of Arab speakers economies that provide plenty of opportunities into which their (UNDP 2003)—a ratio of translations 125 times greater, energies can be channeled. The MENA region has been unable per capita, for Greek than for Arabic. to create these conditions, despite a decade that saw periods of significant growth; this potential has gradually turned into a cause for frustration. It is not atypical to find youth unsatisfied with the quality or nature of their employment. In a recent study on Moroccan youth (World Bank 2012a), participants reported Improving the business their work lives were characterized by boredom, long hours, and heavy loads. There is also an element of precariousness environment to their experience: youth, especially those in the informal sector, work without contracts or job security, their working The persistently large role of the public sector in the economy and conditions are poor, and underemployment is common. But the prevalence of anticompetitive practices hinder the competitive- the study also finds that youth have a very strong desire to ness and innovation of industry. The governments of most of the acquire relevant job skills, and are open to learning. It is this countries of the region continue to control large enterprises in optimism and yearning for knowledge that must be tapped. the industrial production and services sectors,16 often without Youth participation in civic affairs is also critical. Yet the voting insisting on performance-oriented governance (box 4.2). Lax laws in most countries exclude young people from participation state control pulls down the competitiveness of the region’s in political life.15 Overall, there is little structured participa- economies.17 More than 42.4 percent of private firms point to tion in social and civic affairs, whether at the neighborhood, the presence of anticompetitive practices as a major constraint local community, district, or national level—a situation that to the expansion of their activities, a constraint that discour- should be remedied so that they can be active contributors in ages innovation.18 This situation may be due to the existence economic and social life. of barriers to entry19 or to distortions introduced by funding facilities granted through investment codes or public contracts, The establishment of a knowledge-based model requires a return by discretionary and discriminatory application of laws and to the primacy of knowledge and its owners. This implies working regulations, by the asymmetric diffusion of information, by to emphasize the value of talent in society, particularly through the existence of monopolies or oligopolies (or by excessive packages of incentives, including compensation systems, prices concentration in the economy, in general, with banks control- (the recent trend on this point has been positive), and com- ling other sectors of activity, for example), or by the existence munication. Three regional trends raise concern: of more or less developed informal sectors.  rain drain. In 2000 about 8.3 percent of higher education • B graduates emigrated. That proportion, while rising every- The business climate remains a major drag on the region’s attractive- where, varies widely across the region. Relatively high ness to foreign direct investors, even though significant progress has levels are found in Lebanon (43.9 percent); the Maghreb, been made. Drawn by natural resources, in 2009 FDI was equal to especially Morocco (18.6 percent); Tunisia (12.6 percent); 3.3 percent of GDP, one of the highest levels in the world. A large and Algeria (9.5 percent), both because of the pull exerted share of that investment went to the energy sector, which repre- by other countries and the lack of incentives to stay at sented more than a third of the total FDI in the Mediterranean home. The GCC countries, by contrast, have been able to countries that are part of the Barcelona process (ANIMA 2011). limit the brain drain (World Bank 2009b). That share would be even larger if the oil-exporting countries were included—particularly the GCC countries, Libya, and Iraq,  ow social recognition, sometimes expressed in low pay • L where many FDIs are linked to the energy sector. FDI in other for careers in education and research, spurs migration sectors, including those with the greatest technology require- and slows the creation and transmission of knowledge. ments, remains relatively modest. Five types of indicators are  penness to foreign influences is essential for the transfer of • O typically used to assess the business environment. technology. Two dimensions are important: (i) openness to foreign languages, which, although essential for training Enterprise surveys conducted by the World Bank identify the chief an elite that can operate internationally, is often short- constraints on private sector growth in the region as uncertainty changed by educational systems swayed by nationalism, about the business framework (policy consistency, application and (ii) translation of foreign-language works into Arabic. of rules, and so on), tax rates, corruption, access to and cost 15. For example, in Algeria, Jordan, Oman, and Tunisia senators must be at least 40 years old. 16. For example, the weight of the state in production is estimated at 30 percent of GDP in Egypt and Tunisia and at least 60 percent in Algeria (ECIPE 2011). 17. For example, electrical utilities, which are often public, often have ill-adapted technology, high production costs, and low efficiency—all of which push up power prices (or subsidies) and erode the competitiveness of economies. More than 35 percent of enterprises consider electrical power a major constraint on their ability to grow. 18. Enterprises that face strong competition are 50 percent more likely to innovate than those that face no competitive pressure (World Bank 2005). 19. The region is the most restrictive in the world: 27.9 percent of survey respondents view the granting of entry licenses or authorizations as a major constraint on investment. The corresponding figure for East Asia and the Pacific (EAP) is 15.9 percent and for the OECD, 9.7 percent. In addition, FDI is prohibited or discouraged in certain sectors, such as extractive industries, electricity, transport, and even information and communication technologies (ICTs) (Investment Climate Advisory Services 2010). 58 Chapter 4: Improving governance and the business environment BOX 4.2 State-owned enterprises and the business elite A new set of entrepreneurs grew out of the opportunities fostered under the strong governments that held sway from the 1960s. Then, administrations in almost all countries in the region embarked on ambitious programs of state intervention in all sectors of the economy, including investments in newly nationalized state-owned enterprises in priority sectors—often in heavy industry, and also in light manufacturing. This was the case in then-socialist countries—including Algeria, Egypt, Iraq, and Syria—and in more mixed economies such as the GCC countries of Jordan, Morocco, Tunisia, and the Republic of Yemen. The private sector was largely repressed during this period, but niches of opportunity remained in the “shadows” outside state control. The few entrepreneurs who exploited such opportunities enjoyed large returns. This was a time of record growth and public investment. It was also a time of heavy regulation across all sectors. The combination of the two enabled a network of businessmen to expand in monopolistic and protected environments. Many beneficiaries of the policies of that time are still on the business scene today, constituting a large part of today’s business elite. As opposed to the experience of other economies in transition, reforms and increased openness have done little to drive previously protected and privileged entrepreneurs out of business. This has important implications for the relationship between the state and the private sector. Because the old business elite remain prominent in private sector organizations and in formal and informal advocacy groups, the public-private dialogue in most MENA countries is dominated by a few. Source: World Bank 2009a: 184. of financing, anticompetitive practices, and uncertainty about Southeast Asia and Latin America. But the differences between regulatory policy (figure 4.6). the MENA subregions were pronounced. The GCC countries had an average score of 39, far ahead of those of the Mashreq In the World Bank and International Finance Corporation’s (IFC’s) (111) and the Maghreb (112). Marked differences could also Doing Business Report for 2012, the Arab world as a whole earned be found in scores on the various indicators that go into the a composite score equivalent to that of the 103rd country in the overall ranking. The lag is greatest with respect to bureaucracy, rankings20 (with a total of 184 countries ranked in 2012), behind building permits, contract enforcement, protecting investors, Figure 4.6 Leading constraints on MENA firms Simple average of percentage of firms in a given country ranking a constraint as “major or severe” 55 indicates constraint related to policy uncertainty or policy implementation 50 47.6 46.0 44.9 45 43.0 42.4 41.4 40 35.0 35 33.4 33.2 33.1 Percent 30 27.2 26.6 25 23.4 20 15 10 5 0 n its ty n ty ity n ns s n n ng nd te io tio io io tio in tin ic io rm ci la at tit at ra ta up lu tr at an er to tr uc pe pe r ec so x ul rr nc ce fin is Ta ed ss m El eg re Co in g un yu o in ce of m d r ct rc at an lic ic Ac e ad st fli ad ai r m po co e on s nf x tr op no ill Ta /c or /u ry Sk d g/ co m to an al to in e te la rm ro ns s ss ys gu om ac fo ce ce ls Re In M st Li Ac ga Cu Le Source: World Bank 2009a. Note: MENA = Middle East and North Africa. 20. Authors’ calculations in this section are based on the indicators of the Arab countries for which data are available in Doing Business 2012 (all the Arab countries excluding Somalia and Libya). Transforming Arab Economies 59 Chapter 4: Improving governance and the business environment and labor market flexibility. For example, starting a business than half of all respondents in Algeria and Morocco). required an average of 8.3 procedures in the region in 2011, more than twice the number in North America, with Algeria To attract FDI in a context that does not favor reforms, special scoring the worst, at 14 procedures, and Saudi Arabia the best, investment zones have proliferated. International competition for at 3. That performance partly explains the low rate of creation investment, the difficulty of carrying out coordinated reforms to of formal businesses in the region, which has among the lowest increase competitiveness, and the demands of some investors business densities of any world region21 (World Bank 2009a). (sometimes looking to capture rents) all concur to encourage Contract enforcement required an average of 45 procedures, governments to create special zones that will appeal to inves- the highest of all world regions. tors. Such zones enjoy the benefit of simplified administrative procedures (such as a single window), better infrastructure, As mentioned in chapter 2, the region’s average ranking on the Global enterprise clusters, centers for research and training, and Competitiveness Index (WEF 2010) is 66 out of 142, with intrare- direct or indirect subsidies, notably through tax exemptions. gional variances similar to those found in the Doing Business Zones are organized into economic cities (Saudi Arabia), special Index. The GCC countries turned in their best performances, with economic zones (Egypt and Jordan), competitiveness clusters an average rank of 27, and Qatar landed in the top 15, followed (Tunisia), or free zones (Dubai, the UAE, and Tangiers, Morocco). by the Maghreb at 84 (because of the poor competitiveness of These are discussed further in chapter 9. oil exporters Algeria and Libya and despite Tunisia’s rank of 40) and the Mashreq at 88. The World Bank’s Quality of Regulation Access to financing remains a major constraint on the knowledge Index, part of its World Governance Index,22 places the region (as economy. In fact, it is among the leading constraints in the an average of the country scores) in the 35th percentile in 2010. countries of the Maghreb: the most problematic factor for As for the preceding indexes and indicators, the GCC countries, doing business in Morocco (18.6 percent), and the second in in the 70th percentile, are far in front of others in the region Algeria (at 16.4 percent) and Tunisia (at 11.9 percent) after thanks to their reforms of the business environment, followed bureaucratic inefficiency (WEF 2011). The situation is even by the Mashreq (43 percent) and the Maghreb (36 percent), more serious for SMEs, which received only 8 percent of the the latter pulled down by the poor performance of its oil pro- loans made by the region’s banks (Rocha and others 2010). The ducers, even as the rest of the region advanced (figure 4.7). In fact that the financial landscape is largely dominated by the addition to overregulation of the economy, one of the negative banking system is a key impediment to the financing of innova- characteristics of the region is the unpredictable application of tion (figure 4.8). The perception of limited access to financing regulations, as evidenced by enterprise surveys in which a large is reinforced by the low percentage of private sector credit as share of respondents voice this complaint (for example, more a share of GDP—about 48 percent in the region, compared with Figure 4.7 Select country rankings on the Quality of Regulation Index, 2010 Bahrain Oman Qatar GCC United Arab Emirates Jordan Saudi Arabia Kuwait Tunisia Morocco West Bank and Gaza Lebanon Egypt, Arab Rep. Mashreq Maghreb Total Yemen Djibouti Mauritania Algeria Libya Others Iraq Syrian Arab Rep. Sudan Comoros Somalia 0 10 20 30 40 50 60 70 80 Source: World Bank 2010b. Note: GCC = Gulf Cooperation Council. 21. The ratio of the density of new businesses per person is between 1 and 3 in Algeria, Morocco, and Tunisia. 22. This indicator is used in the computation of the Economic Regime Index. It uses various primary sources of information on the business climate to arrive at a score. 60 Chapter 4: Improving governance and the business environment of information, with management often close to the major- Figure 4.8 ity shareholders, and the absence of international influence Bank dominance of the financial sector in the as manifested, for example, by the inclusion of international region experts on corporate boards, as occurred in South Korea. Assets of financial institutions as a percentage of GDP The recent adoption of the Dubai Declaration on Corporate 160 Governance,24 inspired by the Organisation for Economic Middle East and North Africa Co-operation and Development (OECD) principles, is a positive 140 Gulf Cooperation Council step, the implementation of which deserves special attention 120 non–Gulf Cooperation Council in knowledge-driven growth strategies. 100 80 60 Adjusting labor markets 40 20 0 Current labor dynamics in the region pose significant challenges s e s ds g g e s to the development of high-productivity sectors. On the labor et nd nd nc nc in in un s as or ra na fu fu as demand side, the public sector absorbs the majority of the lf ct Le su n n nk ua Fa o io io In icr Ba ut ns ns labor force in most Arab countries (figure 4.9) and sets the M M pe pe terms for employment conditions, while the private sector is e lic at b iv Pu characterized by low dynamism and high informality. In addi- Pr Sources: World Bank staff compilation based on data from Axco, Euromoney, Factors Chain International (FCI), International Monetary tion, the countries that are heavy importers of labor tend to Fund (IMF), Investment Company Institute (ICI), Micro Finance favor workers from outside the region,25 which attenuates the Information Exchange (MIX), World Bank, and national sources. effect of growth on Arab employment. Unemployment rates, Note: Data are from 2009 or latest year available. GDP = gross domestic while high, particularly among youth, are lower than the rates product. of underemployment or employment in unstable jobs—37.1 percent in North Africa in 2007, for example (Radwan 2009). a world average of 138 percent. This situation reflects the lack This situation, which has become an explosive social issue of financial depth23 in the region (73 percent in 2009, against in some countries, particularly those with a labor surplus, a world average of 110 percent). This is due in part to the low shrinks demand for education, investment, technology transfer, rate of bank use among the population, almost nonexistent growth, and, in a chain reaction, public financing for education access to international capital markets, and the poor quality of (Zeidane 2012). financial intermediation (as evidenced, for example, by an 8.3 percent rate of doubtful loans compared with the international On the labor supply side, data show that most Arab youth would average of 3.5 percent)—in a context characterized by insuf- prefer an administrative job in the public sector. More than 50 ficient information on businesses and markets, inadequate percent of the youth in Syria, Tunisia, Iraq, Egypt, Jordan, legal protections for lenders, and steadily growing opportu- Yemen, and the GCC countries seek jobs in the public sector nities for state financing. Venture capital, while growing, is (Gatti and others 2013). To this end, many choose higher educa- still relatively limited and focused more on development than tion degrees that are not necessarily relevant to the needs of on providing the seed money and start-up funding needed to the private sector but might secure a job in the public sector. In support innovation (see chapter 6). Tunisia about half of university students tend to study humani- ties and social science, which represents a heavy opportunity Corporate governance is a determining factor in the acquisition and cost for the region’s productivity and economic growth. In use of knowledge. Large private firms have a weak presence Morocco 54 percent of the highly educated labor is concen- in the region’s economy, which is dominated by parastatals. trated in “nonbusiness services”—the only sector dominated In a setting where shareholders tend to be family members, by workers with a tertiary education degree (51 percent of the the average education of business leaders is limited, as is total sector employment) (Taha 2010). the requirement for long-term performance, which makes it less likely that these leaders will give a high priority to the Recruitment practices also play an important role in the mismatch knowledge economy. Lack of transparent accounting is one of between the supply and demand of labor. Despite the high invest- the impediments to accessing financing. The effectiveness of ments made by young people and their families in education, corporate governance in providing strategic guidance toward the signaling value of higher education degrees plays a rela- growth and stimulating innovation is limited by asymmetry tively limited role in employers’ hiring decisions. According 23. This indicator represents the sum of money and quasi-money divided by the GDP. Many empirical studies have shown the positive relationship between growth and financial depth. 24. Documentation on the MENA-OECD working group on corporate governance is available on the OECD Web site: http://www.oecd.org/document/62/0,3746 ,en_2649_34813_34473150_1_1_1_1,00.html. 25. Owing to the preference for Asian labor, the share of Arabs in the foreign population of the GCC countries fell from 72 percent in 1975 to 32 percent in 2002–04 (Kapiszewski 2006). Thus Arab growth is not raising Arab employment, making intraregional labor mobility an even more important part of any future regional integration strategy. Transforming Arab Economies 61 Chapter 4: Improving governance and the business environment Figure 4.9 Employment shares in the public sector (%) in MENA and comparator countries (averages in the 2000s) 50 40 30 20 10 0 s r p. p. q a il Em o t ia an a ey o n ria a za ai ta te c bi ic si in Ira az ai er Re Re rk Ga oc rd w a ex Qa ne ra ira Sp Ch Br lg g Ku Tu or Jo ab ab M iA Al do d Bu M an Ar Ar ud In ab k Sa n t, an ria yp Ar tB Eg Sy d ite es W Un Source: ILO Laborstat database. Note: MENA = Middle East and North Africa; UAE = United Arab Emirates to Gallup and Silatech (2011), about 30 percent of Bahraini, Figure 4.10 Yemeni, and Iraqi youth report that jobs are given only to people Regional scores of the proxies of meritocracy in who have connections. Such recruitment mechanisms limit hiring the potential for dynamic social mobility across different socioeconomic levels because most informal networks are 6 developed within the same social class. The region needs to 5.3 reform its recruitment practices by encouraging and adopting 4.9 professional services that can help firms attract the best pool 5 4.5 4.2 of talent and skills to match their needs. Non-GCC countries 4.1 4 4 3.8 score the lowest in terms of meritocracy in hiring (3.5 out of 3.5 7), unlike the GCC countries (which scored 4.9)26 (figure 4.10). The high score of the GCC countries could, however, be due 3 to the large recruitment of expatriate workers. 2 As in many other countries, in MENA women are concentrated in specific occupations. For example, 2006 data for Egypt show 1 that most women work in agriculture and education (about 60 percent of all employed women), while most men work in transport, retail, tourism, and manufacturing (which are gener- 0 ally better-paid industries) (Gatti and others 2013). Women in OECD MENA EAP LAC AFR SA ECA MENA GCC non-GCC MENA are marginalized in terms of stable salaried employment (just 14 percent of full-time workers are women, the lowest Source: Gatti and others 2013. of any world region), in corporate management (17.4 percent Note: AFR = Africa; EAP = East Asia and the Pacific; ECA = Europe and women), and in stock ownership (18.5 percent, lower than all Central Asia; GCC = Gulf Cooperation Council; LAC = Latin America and the Caribbean; MENA = Middle East and North Africa; OECD = regions except South Asia).27 Organisation for Economic Co-operation and Development; SA = South Asia. Although in MENA the average employed woman is more edu- cated than the average employed man, female workers generally in the region (figure 4.11). Gaps are much wider in private earn lower wages than men, especially in the private sector. But sector jobs (40 to 80 percent in West Bank and Gaza and Egypt) the estimated gender gap varies significantly from country to and—as might be expected—smaller in the public sector. In country, highlighting the heterogeneity of the phenomenon fact, in West Bank and Gaza’s public sector, women actually 26. Outperforming East Asia-Pacific, Latin America, Europe and Central Asia (ECA), and Sub-Saharan Africa. 27. World Bank Enterprise Surveys. 62 Chapter 4: Improving governance and the business environment higher than the world average of 42.8 percent. Merchandise Figure 4.11 imports were 32.3 percent of GDP. The slightly higher share Male-female wage gap, select countries in of exports, and thus the trade surplus, reflects the weight of MENA energy exports in the region’s international trade accounts. 100 When energy is excluded, the region’s exports constitute less Egypt, Arab Rep. than 1 percent of international trade—a measure of the region’s 81.48 Jordan marginalization. Of course, reforms to liberalize foreign trade 80 West Bank and Gaza have been carried out, with reductions in protective tariffs and some improvements in customs procedures and logis- 60 tics. As a result the average Business Freedom Index in the region29 (Heritage Foundation 2011), weighted by the size of Percent 40.8 40 34.35 the economy, stands at 73.2 percent, but the region is one of 26.24 the most closed in the world. 22.9 20.6 20 16.8 10.3 Tunisia’s economy is one of the most protected—its Business Freedom Index of 53.5 percent reflects high average tariffs 0 (18.3 percent in 2006 and 16 percent in 2008) and the persis- tence of nontariff barriers (NTBs).30 The region’s most serious –10.3 lag is in trade facilitation. For example, on average 28 days –20 All workers Public sector Private sector are required to complete import formalities, compared with 12 days in the OECD countries. The World Bank’s Logistics Source: Gatti and others 2013. Index for the region is 2.7 (on a 1–5 scale), compared with Note: Sample is urban workers working between 30 and 60 hours per 3.5 for the European Union (EU) and 3.7 for the OECD coun- week. WBG = West Bank and Gaza. tries. Further trade liberalization reforms are needed to lower average levels of protection (while still providing a measure earn more than men on average, perhaps because only the of protection for sensitive domestic projects) and to facilitate best female workers self-select for formal public sector jobs trade by modernizing customs administration (by universal- (Gatti and others 2013). izing the use of electronic documents), reducing controls (with more selective inspections and better training for customs officials), and implementing structural reforms to improve logistical performance. Integrating into The region will have to base its growth and employment strategy on regional economic integration. In 2008 intraregional imports global trade represented only 13 percent of all imports (about half the cor- responding level of 25 percent in the developing countries of Asia), although that figure represents a tripling since 1999 An economic regime that favors commercial and financial flows (from 4.5 percent), when the Greater Arab Free Trade Area is essential for the technology transfer and efficiency necessary (GAFTA) accord went into effect.31 This progress occurred for a knowledge-driven growth model. Economies that do not despite the complexity of procedures, which are improving operate at the frontier of technology must be able to import it slowly (Hoekman and Sekkat 2010). The Maghreb subgroup, through FDI, trade, and inflows of skilled workers or previous with their trade oriented toward Europe, chalked up the lowest emigrants. The use of technology is encouraged by a policy level of intraregional trade in the Arab world. Non-oil intra- environment in which enterprises are obliged to innovate to Maghreb trade averaged less than 5 percent of total subregional become more competitive. trade. Empirical studies32 show that the current low level of intraregional trade is well below the potential. The GAFTA The region has made progress in the liberalization of international agreement is limited to the elimination of tariff barriers on trade but remains relatively closed and marginalized in interna- manufactured goods and does not affect agricultural tariffs or tional trade, except in oil. The Openness Index28 of the Arab region NTBs in various sectors (which can be high in tariff-equivalent was 76.4 percent of GDP in 2009 (up from 60 percent in 2000), terms).33 The Arab League should proceed quickly to form a 28. This index measures the sum of merchandise exports and imports divided by the GDP, all in current prices. 29. This indicator is used in the computation of the Economic Regime Index. It is based on the distance from the best average tariff performance (100) before sub- tracting a number between 0 and 20 (in increments of five), reflecting the assessment of nontariff protection. 30. The results obtained by Kee, Nicita, and Olarreaga (2009) show that the overall trade restrictiveness index, which measures the average level of protection, is relatively high in the region and increases considerably when nontariff barriers (NTBs) are added. For example, Tunisia’s index moves from 0.23 to 0.37 when adding NTBs, and Morocco’s doubles from 0.24 to 0.48 . Both are far higher than Turkey’s index of 0.10 (including NTBs). 31. Iraq, Mauritania, Somalia, and the Comoros are not yet part of the GAFTA. 32. See De Wulf and Maliszewska (2009) for an assessment of the effect of GAFTA membership using a gravity model and for a review of earlier empirical work. This work, as well as Behar and Freund (2011) estimate that the potential for intraregional trade is twice the current level. 33. Estimated to be between 22.1 percent and 35.6 percent for countries of the region that have signed association accords with the European Union (Ghoneim and others 2011). Transforming Arab Economies 63 Chapter 4: Improving governance and the business environment customs union,34 while initiating work on standardization and recommendations for the trade partners of MENA countries, regional programs to develop transport and communications as highlighted in the recent Deauville Partnership report on infrastructure, consistent with decisions made at the last two trade and FDI, include the following: regional economic summits. Because market size is important  he EU could deepen its trade relationships with Egypt, • T to foreign direct investors, trade integration will help acceler- Jordan, Morocco, and Tunisia, developed under the ate private investment, increase intrabranch exchanges,35 and Association Agreements and the European Neighborhood allow countries to climb up the value chain as competitiveness Policy, with effective implementation of the proposed Deep improves. The free circulation of workers would complement and Comprehensive Free Trade Areas (DCFTAs). trade and investment reforms, increasing the job content of  n a coordinated and coherent approach and on the basis of • I regional growth. The integration initiative could set a more its growing political and economic influence in the region, ambitious long-term objective for economic integration in Turkey could similarly deepen its existing association the form of a common market and budgetary and monetary agreements with each partnership country to foster trade union, both of which would require greater coordination of and investment in the agricultural and services sectors macroeconomic policies. and promote labor mobility. At the same time, the region will have to accelerate its integration  he GCC could strengthen its relationship with Egypt and • T into the global economy. The first target for external integra- Tunisia (Jordan and Morocco have already been officially tion is the EU, which is already the leading trade partner of invited to join the GCC), in the framework of a deepened the countries of the Maghreb.36 The countries of the southern cooperation with the Agadir agreement. This would allow rim of the Mediterranean have also entered into agreements citizens of member countries to enjoy equal rights and of economic association with the EU that grant it preferential privileges, including the rights to move, settle, and work; trade terms. Those agreements are set to evolve into a free receive social protection, retirement, health, education, and trade zone, although the anticipated date for that evolution social services; and engage in various economic activities passed without substantial progress, and differences on rules and services. of origin and NTBs persist. Resistance on the European side  onsistent and in coordination with initiatives being under- • C to opening agricultural markets and on the southern side to taken by the EU and other Deauville partners, the United opening markets in services hurt the chances of concluding a States could (i) increase the value of its existing agreements free trade agreement (FTA) anytime soon. In the meantime, the with Jordan and Morocco, and (ii) invite Tunisia and, once MENA region will have to develop its own Arab neighborhood the appropriate circumstances are in place, Egypt, and policy37 by turning more toward Sub-Saharan Africa,38 Turkey,39 Libya to enter into FTAs as well. These actions could be Iran, India, and, further still, China and Latin America. Egypt part of the proposed Middle East–North Africa Trade and and Jordan have benefited from preferential agreements with Investment Partnership (MENA TIP), which will include a the United States under which so-called qualifying industrial broad set of arrangements designed to increase job cre- zones succeeded in attracting larger flows of FDI, diversify- ation, trade, and investment between and among the United ing export markets, and stimulating growth and job creation. States and countries in the region. Such arrangements should be expanded as they promise to be  eauville partners could also help promote intra-Arab • D of particular benefit to countries that succeed in completing regional integration and integration of partnership coun- their democratic transition. But increasing trade flows with tries into global markets. The Agadir agreement between neighboring Europe will require Arab countries to improve Egypt, Jordan, Morocco, and Tunisia could be deepened, governance and invest in new areas of regional collaboration and Libya could receive the necessary support to join the such as education and innovation (FEMISE).40 World Trade Organization (WTO). Trade partners share with Arab countries the responsibility for  o signal their determination to pursue a coherent, ambi- • T offering an ambitious vision in support of economic and political tious, and credible vision in support of the political and transition. The Deauville Partnership, launched in May 2011 economic transition of partnership countries, the main as a direct response to the Arab Spring, provides new oppor- Deauville partners could join forces to announce com- tunities to create a common economic space spanning the mitments in six areas with high immediate jobs potential two rims of the Mediterranean, accompanied by a framework (box 4.3). and incentives for implementing difficult policy reforms. Key 34. A draft proposal has already been submitted to the Arab League’s Council of Economic and Social Affairs. 35. The index of intrabranch trade is the lowest in the MENA region. It was about 0.1 in 2007 and has not increased much since 1995 (Behar and Freund 2011). 36. The EU absorbs 60.2 percent of Morocco’s merchandise exports and 55 percent of Tunisia’s. The impact on the region’s exports is mitigated, but the potential still seems relatively large and would likely be very large indeed if the region moved to a common market (De Wulf and Maliszewska 2009). 37. The region is close to two future sources of growth, Asia and Africa, and will be able to take advantage of that proximity. 38. Summit meetings between the Arab world and Africa and Latin America have been instituted to promote exchange. 39. The Eastern Business Forum—which includes Turkey, Syria, Lebanon, and Jordan—is an example of a neighborhood framework that the Arab region as a whole would do well to consider. 40. Calculation of trade potential through appropriate methodologies is based on new developments in gravity models (FEMISE 2011). 64 Chapter 4: Improving governance and the business environment BOX 4.3 Global and regional integration: Key recommendations to Deauville partners Agriculture. Improve partnership countries’ access to the agricultural, processed agricultural, and fisheries markets of Deauville partners, particularly for fruits, vegetables, and olive oil. Steps would include the progressive abolition of quotas, reference prices, seasonal restrictions, domestic and export subsidies, and other nontariff barriers (NTBs) to agricultural trade. Manufacturing. Negotiate mutual recognition agreements, such as agreements on conformity assessment and acceptance of industrial products, between partnership countries and Deauville partners to reduce the market fragmentation effect of technical barriers to trade. This is especially relevant in priority sectors that account for a large part of partnership countries’ exports and employment, such as mechanical and electrical industries and construction materials. Services. Negotiate specific sectoral commitments on labor mobility between partnership countries and Deauville partners, especially for skilled workers (as part of Mode 4 on the movement of persons in future deep and high-quality trade agreements with Deauville partners). Energy. Negotiate a multilateral agreement on solar energy imports from MENA that will govern how the parties share the burden of paying for the incremental cost of solar imports. (European subsidies for renewable energy could be made available for imports, with appropriate adjustments.) The agreement could be concluded initially between Morocco and interested EU member states, such as Germany, Spain, France, Italy, and others. Other partnership countries could also be invited to join the agreement, depending how fast they move with concentrated solar power projects. Migration. Launch labor mobility partnerships or similar mobility schemes between partnership countries and Deauville partners, including visa facilitation for some categories of workers, readmission, concerted border management, and easier access to the job market of the Deauville partners, especially for less-skilled workers from partnership countries. Intra-Arab integration. Adopt and implement simpler and more liberal rules of origin in preferential trade agreements between part- nership countries and Deauville partners, including an improved EU regional convention on preferential Pan-Euro-Mediterranean rules of origin. Source: CMI, World Bank, and IsDB 2012. Conclusion These efforts need to be pursued and enlarged to two major areas: the strengthening of government effectiveness and the development of a fair and competitive private sector. At the institutional level, the establishment of the rule of law is critical for productivity-driven growth. Simplification of administrative formalities, transparency in public procurement, and regular Sound macroeconomic policies, good governance, and a business- friendly climate provide the basis for knowledge-based strate- publication of information are essential steps toward limiting gies, as they do for virtually all development strategies. They opportunities for corruption. Because local governments play are, however, all the more important for the development a key role in the transition to the knowledge economy, current of a true knowledge economy, since only a transparent and processes of decentralization should be reinforced. Lastly, accountable governance system and an efficient business greater participation of women and youth in the economic and climate can support the creation and diffusion of new ideas civic life of Arab countries is a necessary condition for the and the emergence of a competitive and innovative private development of inclusive knowledge economies. With regard sector. Shortcomings in the overall governance framework to the business climate, it will be important to facilitate the have undermined the effectiveness of key economic institu- emergence of entrepreneurial activity, to reduce bureaucracy in tions in Arab countries, but the ongoing transitions now offer a its various forms, to eliminate regulations that stifle initiative, unique opportunity to address these deep-seated challenges. to remove unearned privileges currently enjoyed by groups Some countries have already initiated key reforms in popular close to ruling powers, and to improve access to finance. Labor access to information and the involvement of civil society in markets need to be reformed, trade channels widened, and public policy debates. exchanges of technology facilitated. 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Institutional Reforms for a Knowledge Organization). 2012. “UNESCO Institute of Statistics Economy Model in the Arab world. Unpublished Database.” http://stats.uis.unesco.org/unesco/ background report, World Bank, Washington, DC. TableViewer/document.aspx?ReportId=136&IF_ Language=eng&BR_Topic=0. Transforming Arab Economies 67 hapter 5 Educating people for better jobs in a new economy Education is the fundamental enabler of the knowledge weak, the divide between education and employment has not economy—beginning with early childhood development and been bridged, and the quality of education continues to be basic education, which provide the foundations for learning, disappointing. and moving on to secondary and tertiary education, which foster the core skills needed for creative and critical thinking. Beyond For too many students in the Arab world, schooling has not been this, an effective lifelong learning system is needed to enable synonymous with learning. An illustration is the lackluster people to upgrade their skills throughout their lifetimes to results of Arab countries on the 1999, 2003, and 2007 Trends in remain competitive in the new global economy.1 International Mathematics and Science Study (TIMSS) assess- ments of eighth-graders’ achievements in math and science. In recent decades, tremendous progress has been made across Of the 14 countries that participated in the 2007 math test, the the Arab region in widening access to education. But challenges Middle East and North Africa (MENA) average was 389, com- remain as the region positions itself to compete in world pared with the international average of 451 (on a scaled average markets and to build the skilled human capital needed for its of 500). Figure 5.1 shows that countries in the region have been transition to the knowledge economy. The foremost of these relatively unsuccessful in achieving qualitative improvements challenges is creating work opportunities for an increasingly in education, as measured by how well students perform on educated labor force. This chapter briefly highlights aspects learning assessments. The World Bank’s Education Strategy of the current education system in the region and underlines 2020 notes that a country that increases its reading and math some of the areas that need strengthening across all levels scores from the median to the top 15 percent can expect a to better link education with employment. significant 2 percent increase in annual gross domestic product (GDP) per capita growth (World Bank 2011a). The current situation Figure 5.1 Learning deficit: The difference between being enrolled and learning the subject 120 Since the early 1960s, Arab countries have made immense progress in providing equitable access to formal education, fighting illiteracy, 100 and reducing gender disparities. Most countries in the region have achieved full or nearly full enrollment in basic educa- 80 tion, and rates of secondary and tertiary education that are 60 equivalent to countries in other regions at comparable levels of development. Moreover, the region no longer suffers from 40 severe gender disparities in secondary and tertiary education. 20 These impressive achievements have improved the quality of life for citizens through longer life expectancy and lower 0 a ite pu ia S c m s ss Ma ia n a ai d. ba d Jo on In or n n a Co lge ia lo ria or ia Qa co Gh tar a fertility and infant mortality rates. Ar tate d bli ec ith re ia lt do gi an Ge rda Le lan Un Re uan en A es M mb Th Fe oc n Cz L Ko Notwithstanding these successes—and the considerable h Ru resources invested in education—education reforms in the Percentage of 8th-graders who have learned basic math Arab region have not yet fully delivered on their promise. The 8th-graders as a percentage of 14-year-olds in country relationship between education and economic growth remains Source: Reproduced in Jimenez, King, and Tan (2012). 1. This chapter draws on several references, including World Bank (2008) and Ezzine (2009; 2012). Mourad Ezzine, Juan Manuel Moreno, and Simon Thacker pro- vided helpful comments. 68 Chapter 5: Educating people for better jobs in a new economy Despite heavy investment in education, returns in terms of average The universities of the region are not featured prominently in inter- years of schooling are modest. The region has invested about national rankings, they do not produce significant research, and 5 percent of GDP and 20 percent of government budgets in they have weak links with industry. The University of Alexandria education over the past 40 years, registering many gains. But in Egypt is the only university from the MENA region that ranks its educational outcomes have trailed those of many com- among the top 400 universities in the world, according to the petitors. For example, the MENA region needs to do more 2012 Times Higher Education World University Rankings. to catch up with the rest of the world in terms of average There is a need to build closer university-industry linkages, years of schooling (for the population aged 15 and above); both in education to address the demand for skills and in it registered 7.12 years in 2010, compared with 7.94 years applied research to ensure that research and development in East Asia and Pacific (EAP), 8.26 in Latin America and the (R&D) carried out by universities is related to industry needs. Caribbean (LAC), and 9.65 years in Europe and Central Asia There are some interesting initiatives under way in the Gulf (ECA) (World Bank 2012a). Cooperation Council (GCC ) countries: the Education City in Qatar is designed to promote education and research under The MENA region continues to have relatively low rates of secondary the triple helix of the university-industry-government model. and tertiary enrollment. In 2009 the average gross enrollment Saudi Arabia’s 2009 National Science and Technology Plan aims rate of countries in the region at the secondary level was 75 to create a chain of cooperative technology innovation centers, percent, compared with 78 percent for EAP, 90 percent for LAC, a partnership between private firms (both local and global) and a high 96 percent for ECA. The average gross enrollment and leading universities. In 2011 centers designed to respond rate for tertiary education in MENA was 28 percent in 2009, to industrially relevant problems were established at three the same level as in EAP but lower than the levels in LAC (37 universities: King Fahd University of Petroleum and Minerals, percent) and ECA (58 percent) (figure 5.2). King Saud University, and King Abdulaziz University. Types of university-industry cooperation include joint funding, sharing of In more than half of the MENA countries, approximately two-thirds resources, and in-kind support (Al-Sultan and Alzaharnah 2012). of secondary school students major in the social sciences or human- ities, a pattern of enrollment that is the opposite of what is Laudable investments in human development have not yet translated observed in East Asia. The experience of Japan, the Republic into commensurately higher rates of participation by women in eco- of Korea, and Taiwan suggests that if a country is to assimilate nomic and political life. Women’s labor force participation rates technology, one-third or more of its university graduates need in the region (at 25 percent) are half the world average and the to have studied science and engineering at the graduate level lowest of all world regions. Women continue to face significant (World Bank 2011b). Only 22.6 percent of the MENA students restrictions on mobility and agency; these are underpinned by pursue degrees in science, engineering, or technical fields the legal framework, social and cultural norms, and regulations (World Bank 2008). Given the role that technological innovation that restrict work and political participation (World Bank 2012b). and adaptation play in the knowledge economy, MENA schools are not yet producing the right mix of competencies. The situ- Creating jobs and increasing productivity are at the top of policy ation is exacerbated by the fact that a large number of social makers’ agendas across the world, not least in the Arab world. The science diploma holders are unable to find jobs. There is thus Skills Toward Employment and Productivity (STEP) approach a need to reshuffle the orientation of the education system to provides a simple yet comprehensive way to look at skills devel- produce more graduates in technical areas, as well as to adapt opment for more jobs and higher productivity (box 5.1) (World the education and training system in social sciences toward Bank 2010a). It also helps to orient the areas of action needed greater employability. in the Arab world highlighted below. Figure 5.2 Secondary and tertiary gross enrollment rates, by world region, 1990 and 2010 a. Secondary gross enrollment rates, 1990 and 2010 b. Tertiary gross enrollment rates, 1990 and 2010 120 80 1990 1990 100 2010 70 2010 60 80 50 Percent Percent 60 40 40 30 20 20 10 0 0 ro nd sia Ea C ean d ia op d c es sIa ro nd a sia As bbe and c sia es sIa a ric ric b n As Eur an at at ci ci Ce pe an e Ce pe an n lA lA lA Eu a a ib a tA Eu a a tA Af Af a Pa Pa st st ar ica l ar ica Ea ern tra ra ra ra es es rn ic rn ic n n ab b d d te er e C er te er e C er nt nt nt ra ra W W st en a i Ar Ar es m th m es m th m Ce ha ha d d W th A A W th A A ia an an Sa Sa tin tin b- b- h h r r La La ut ut st st No No Su Su Ea So So Source: UNESCO Institute of Statistics (UIS). Transforming Arab Economies 69 Chapter 5: Educating people for better jobs in a new economy BOX 5.1 The Skills toward Employment and Productivity (STEP) Approach Productivity Invest early Invest in quality Listen to & equitably the market & growth 1 2 3 4 5 Getting infants off Ensuring that all Building Encouraging Facilitating labor to the right start students learn job-relevant skills entrepreneurship mobility and job and innovation matching Source: World Bank 2010a. Step 1: Developing the technical, cognitive, and behavioral skills conducive to high productivity and flexibility in the work environ- ment—by starting right through early child development, emphasizing nutrition, stimulation, and basic cognitive skills. Step 2: Ensuring that all students learn—by building stronger systems with clear learning standards, good teachers, adequate resources, and a proper regulatory environment. Lessons from research and ground experience indicate that successful systems must answer key questions about how much autonomy to allow and to whom, accountability from whom and for what, and how to assess performance and results. Step 3: Training to build additional job-specific skills that employers demand—by developing the right incentive framework for both preemployment and on-the-job training programs and institutions (including higher education). There is accumulating experience showing how public and private efforts can be combined to achieve more relevant and responsive training systems. Step 4: Encouraging entrepreneurship and creativity—by creating an environment that encourages investments in knowledge and innovation. Emerging evidence shows that addressing the need for creativity, leadership, time management, and communication skills requires innovation-specific skills that can be developed early in life, connecting people with ideas (for example, through collaboration between universities and private companies), and risk management tools, including safety nets. Step 5: Matching the supply of skills with the demand—by moving toward more flexible, efficient, and secure labor markets. None of the first four steps matter if people cannot find jobs that match their skills. Avoiding rigid job protection regulations while strengthen- ing income protection systems, complemented by efforts to provide information and intermediation services to workers and firms, provides the final complementary step in the process to transform skills into actual employment and productivity. Source: World Bank 2010a. Improving the quality Viewed in this light, all Arab countries, irrespective of their initial conditions, require a shift from managing educational inputs to of education engineering the education system to obtain better results. Rather than controlling the allocation of educational inputs and resources, Arab governments need to set clear learning and skills-acquisition objectives (as measured by performance on Educational advances in the Arab world in recent years have been tests, including international tests, and by improvements in based on inputs—that is, on what the countries of the region have employability), to establish incentives to induce an assortment put into schools: more teachers, more schools, and more coverage. of public and private actors to pursue those objectives, and But when the focus shifts from “education for all” to “learning to coordinate the actions taken. The approach needs to focus for all,” such inputs should be complemented by actions to not only on improving the technical relationships between the improve the quality of education, ensuring that students actu- inputs and outputs of education (education engineering), but ally learn to read, write, and handle numbers; that they learn also on the incentives facing the actors involved (teachers, to solve problems and think critically; and that they acquire schools) and on the public accountability of policy makers the life skills with which to function effectively as productive to citizens. economic actors and responsible citizens. 70 Chapter 5: Educating people for better jobs in a new economy The purpose of student assessment should be enlarged from its care for mothers. In the critical years up to age three, lan- present narrow purpose of selection and academic placement to guage and sensory development take hold. Yet these years providing evidence of education quality, evidence that can be used are largely overlooked by ECD services in MENA countries. to adjust policy and manage for results (Ezzine 2012). By using Those services that are provided (by both public and private assessments to monitor and evaluate the quality of education, nongovernmental sectors) are fragmented and too thinly educators can make steady adjustments to the curriculum, spread to achieve the intended learning outcomes. A recent increasing the relevance of education to market demands and study in Egypt shows that children who receive early childhood opportunities. Managing for results would also level the playing education and care are significantly less likely to drop out field for students across the social spectrum, removing the before completing their primary and early secondary educa- built-in bias in favor of students from the educated classes tion. The change in educational attainment resulting from the and those whose families are able to pay for private tutoring. decreased dropout rate is approximately one additional year Jordan’s reforms in education that began in 2002 illustrate the of schooling (Krafft 2012). improvements made in the quality, relevance, and efficiency of In 2009 only 21 percent of four- and five-year-olds in the region the kingdom’s systems of early childhood, basic, and second- attended preschool, ranging from lows of just 3 percent in ary education (box 5.2). Djibouti and 10 percent in Syria to highs of 75 and 79 percent in Algeria and Lebanon, respectively (UIS 2009). Lack of coordi- nation and the poor quality of programs compound the problem Investing in of access. ECD services come from a variety of sectors (health, education, social protection), and are delivered by both public early childhood and private actors. Public spending is low and services are of poor quality. To the extent that ECD services are provided by development the private sector, they typically are limited to families that can pay for them. What is needed is to raise awareness about the importance of ECD Early childhood development (ECD) has been shown to improve and to scale up proven initiatives. This calls for greater under- learning ability, school performance, and labor market produc- standing of the importance of setting a foundation for human tivity. It is also cost-effective: the earlier the investment, the development in the early years, developing sufficiently nurtur- greater the economic return (Heckman and Masterov 2007). ing environments at home, providing access to early and quality Early development begins even before birth, with prenatal child care at home or in community centers, and investing in BOX 5.2 Jordan’s Education Reform for the Knowledge Economy (ERfKE) program The ERfKE program in Jordan is a 10-year, multidonor program to deliver comprehensive education reform. The first phase (ERfKE I, 2003−09) focused on general education system reforms. ERfKE II (2006−10) focused on increasing the level of skills necessary for participation in the knowledge economy at all levels of education. In tandem, the Jordan Education Initiative was launched in 2003 under the umbrella of the World Economic Forum (WEF), as a multistakeholder partnership that integrates information and com- munication technologies (ICTs) into the education process in grades 1–12. The results of the reforms are tangible. By 2010 Jordan had the highest literacy rate in the Middle East and North Africa (MENA); gross enrollment rates at the primary and secondary levels reached 98 percent and 97 percent, respectively, by 2006; up to 3,000 schools were connected to online learning portals, with 80 percent of schools connected to the Internet; and there was a 37 percent increase in qualified kindergarten teachers with a bachelor’s degree and certification. The target of training 50,000 teachers in basic ICT skills was surpassed: more than 85,000 teachers were trained and 55,000 certified (compared with a baseline of 5,000 trained ICT teachers in 2003). New curricula and teaching methods emphasizing higher-order thinking, critical thinking, and student-centered learning, while other aspects of knowledge-economy-based education were developed. Assessments of learning show improvements owing to the new curricula, learning materials, and teacher training. The results of the 2008 National Assessment for the Knowledge Economy showed a clear improvement in performances in math, science, and reading. The 2007 TIMSS results showed positive and marginally significant improvements in performance. In science, Jordan improved its regional and international ranking. Although the increase in TIMSS scores from the previous assessment was not statistically sig- nificant, Jordan’s regional and international ranking improved consistently during this time period, an achievement unmatched by most other participants worldwide. Between 2003 and 2007, Jordan moved up in the international TIMSS ranking from 25 to 20 in science and from 32 to 31 in mathematics. The results were achieved in consistent steps that began with a broad consultation process. From that process a national strategy was developed to guide the Ministry of Education. A decision-support system was created to provide timely information on education activities, with 90 percent of decision makers and researchers using the system by 2008. Constant improvements were made to the curricula, learning environments, and broadband connections, the latter through cooperation between industry and the national network. Source: World Bank 2011c; Bannayan and others 2012. Transforming Arab Economies 71 Chapter 5: Educating people for better jobs in a new economy ECD by establishing incentives for private sector supply and need today. Jordan, Tunisia, and Lebanon have progressed allocating more public resources to this vital pursuit. the furthest in student-centered pedagogy, inspired by inter- national trends to include innovations in their curriculum and The World Bank has supported ECD initiatives in several MENA textbooks, in-service teacher training, and equipping schools countries.  The Bank provided a $20 million loan to the Egyptian with Internet connections and computers (World Bank 2008). government to increase access and improve the quality of learn- The curricular reforms being undertaken in Malaysia and ing in kindergartens for four-and-five-year-olds. In 2011 it Singapore offer examples for MENA countries interested in loaned over $15 million to Lebanon to help provide more and making such changes (box 5.3). better preschool services to children in disadvantaged areas of the country (Wright 2012). The transformed global economic climate therefore demands that Arab governments rethink how their education systems can be reformed to better respond to the needs of the economy by producing competent and flexible graduates who possess Developing new skills the skills and expertise needed to compete in a world where knowledge is essential to progress. The Arab Knowledge Report and competencies 2010/11 analyzes the process of preparing young Arabs for the knowledge society and proposes a model for action based on the triad of skills, values, and an enabling environment (box 5.4). Globalization demands a new and different mix of skills and com- petencies, creating new demands on education systems. To rise to the challenge of global competition and rapid technologi- cal change, students must master a variety of so-called soft skills—problem solving, communication, teamwork, as well Improving technical as mastery of ICTs and foreign languages—that are essential for employability and productivity. and vocational The mismatch between the skill needs of the economy and the education and training outputs of the education and training system is apparent in the widespread perception in the private sector that lack of skills Technical and vocational education and training (TVET) has tradition- (especially soft skills) is an important obstacle to their busi- ally been the poor cousin of the education family. In the knowledge ness operations (figure 5.3) (World Bank 2012c). economy, however, TVET’s role is quickly changing to become the Unfortunately, most schools in the region do not presently empha- revolving door for skill renewal and requalification. In the MENA size the development of such skills. Rote learning remains pre- region, preservice TVET programs have been relatively unsuc- dominant in the Arab world, with little emphasis on problem cessful in linking training with employment. Furthermore, as solving and interactive teaching methods that demand initia- preservice TVET is usually the reserve of those who have not tive from students.2 Student assessments in mathematics, done well in compulsory education, many students do not have for example, in most Arab countries strongly rely on recalling a firm grasp of the basic skills needed to learn more challeng- definitions, facts, and concepts, and on applications rather ing technical competencies. Also, preservice TVET largely fails than the ability to think critically. Findings from TIMSS 2007 to put students on a clear pathway to further education and confirm this conclusion. The TIMSS 2007 asked both teachers training options. It is also rare for TVET students to pursue and students about the frequency of using memorization in studies at universities. Some countries such as Jordan, Syria, teaching problem solving in mathematics. The overwhelming West Bank and Gaza, and Yemen have some tertiary education majority of Arab eighth graders said that they memorized for- options in technical and vocational fields, although these are mulas and procedures in about half their mathematics lessons restricted to a narrow range of students (World Bank 2008). or more. This high percentage varied between 57 percent in Algeria and 84 percent in Jordan as compared to 48 percent Although students’ choices following completion of compulsory for Chinese Taipei, the best-performing country in TIMMS 2007 education have increased in MENA countries in recent years, in mathematics (figure 5.4) (Faour 2012). transferability between different types of academic institu- tions remains limited. Few students have the option of pursuing Educational reform must include retraining teachers and rede- higher education at the university level after opting for voca- signing the curriculum all the way from basic to higher educa- tional and technical education. Exceptions include Jordan and tion to facilitate transformation toward the knowledge economy. Tunisia,3 which, having developed nonformal vocational training Governments need to carefully consider how every investment programs to respond to employers’ training needs, are now will contribute to improving the education process, including developing formal options to better meet labor market needs how teachers are trained and whether they are trained in the through short-track postsecondary programs in technology, inquiry-based and interactive teaching methods that students business, or trades, most of which require two years of study. 2. In 1995 a research study on education quality in the MENA region showed that students were instructed in how to learn and retain “answers to fairly fixed ques- tions in problem situations with little or no meaningful context,” and that the education system tended to reward passive knowledge recipients. Although the study is out of date in some respects, many of its findings still hold: higher-order cognitive skills such as flexibility, problem solving, and judgment remain inadequately rewarded in the region’s schools (World Bank 2008). 3. In Tunisia postsecondary technical education is provided in the country’s system of Instituts Supérieurs des Etudes Technologiques. 72 10 20 30 40 50 60 70 Percentage of students who reported 0 memorizing formulas and procedures in at 80 least half of their mathematics lessons Syr 0 10 20 30 40 50 60 70 80 90 Al Leb ian Ar g ano ab R Figure 5.4 Figure 5.3 er n2 ia Egy 009 epubl Ba pt, ic 2 Eg Ara 009 yp hr bR t, ai ep. Ar n 200 ab 8 Re p. Jo Alg rd eria an 200 7 Note: MENA = Middle East and North Africa. Ku w ai t Source: Faour 2012, citing TIMSS 2007, exhibit 7.6. Le Jor dan ba 200 no 6 n Rote learning of mathematics in MENA Om an M or oc co We Pa st le Yem Bank st en, an in e Rep d Gaz . 20 a2 10 006 Qa Sa ta Distribution of 136 countries u di r Sy ria A ra n bi Share of firms identifying lack of skills as a business constraint Ar a ab Re p. Tu ni si a Ye m en Du In ba te rn i Hi at g he io na st ac l hi ev er Transforming Arab Economies Grade 8 Grade 4 73 Chapter 5: Educating people for better jobs in a new economy Source: World Bank Investment Climate Surveys, 2006–10. Chapter 5: Educating people for better jobs in a new economy BOX 5.3 Curricular reform in Malaysia and Singapore In both Singapore and Malaysia, government-funded schools follow a centralized, common curriculum leading to common exams. Some changes in the revised curricula of basic and secondary education in Malaysia include: Use of English rather than Malay as the major language for teaching math, science, and technology. •   ew elements within subjects (such as in the teaching of Malay and English) to encourage creative and critical thinking, and the • N gradual addition of new topics (for example, information technology and music). Greater use of ICTs in teaching and learning. •   ew options at the secondary level to give students greater opportunity to choose areas based on their interests and abilities • N (for example, construction, manufacturing, home economics, agricultural technology, and computer applications).  ptional courses in foreign languages (such as Spanish, French, Arabic, Japanese, and German), in addition to the use of English • O in math, science, and technology. The school curriculum in Singapore is regularly reviewed and revised, a case in point being the revision of the A-level curriculum in 2007. A new subject, knowledge and inquiry, was designed to expose students to the construction and nature of knowledge, creating the need to cut across disciplines. To gain acceptance into university, students must pass the knowledge and inquiry course or the general paper, which tests general knowledge. About 25 percent of the A-level cohort gain seats in one of Singapore’s three universities. The quality of Singapore’s secondary education system is borne out by the country’s consistently excellent performance on the TIMSS. For example, among children age 13, Singapore ranked at the top in both math and science in the TIMSS cycles of 1995 and 2003, and third and first, respectively, in the most recent cycle. Malaysia participated in the TIMSS eighth-grade assessment in 1999, 2003, and 2007. Although Malaysia’s performance improved from 1999 to 2003, average scores in math and science in 2007 remained significantly behind those of Singapore. Source: UNDP and Maktoum Foundation 2012; Altbach and Salmi 2011. For TVET to become more effective, it will be important to improve accountability, public provision of TVET in the region is not based governance, find new sources of funding, and introduce greater on performance or outcomes. In the presence of guaranteed participation, accountability, and decentralization in public provision. public subsidies, the incentive for change and relevance is In most countries of the region, the state plays a predominant weak. New funding mechanisms that would operate alongside role in financing and delivering TVET. Initiatives to include busi- or in place of traditional direct allocations could encourage ness and union representatives in governance have for the most public providers to respond better to the needs of individuals part relied on the establishment of ad hoc national committees and businesses. Private sector contributions to TVET will need with nominal representation of various stakeholders, and in to increase to sustain a more diversified provision of TVET practice, have proven to be largely ineffectual. In terms of services of higher quality. BOX 5.4 Preparing future generations for the knowledge society The Arab Knowledge Report 2010/11 sets out three core principles for educating future generations for the knowledge society. The document reports on field surveys conducted on a pilot basis in four Arab countries: Jordan, Morocco, the United Arab Emirates (UAE), and Yemen. The surveys investigate the triad of the skills, values, and enabling environments of Arab youth in these countries. The findings reveal poor results among the student sample in cognitive skills (searching for and processing information, written com- munication, problem solving, and the use of technology) compared with social skills (communication with others, teamwork, and participation in public life) and noncognitive abilities (self-esteem, motivation for learning, and planning for the future). At the level of values, the results reveal that students’ values generally qualify them for the knowledge society. A gender-based comparison shows that girls tend to score better than boys. While the enabling environments of students and their teachers seem to lack several basic components, other components, particularly the family’s role in preparing the young, are positive. The report suggests a strategy for preparing future generations that includes four aspects of action: willingness to act (political, social, innovation), ability to act (including addressing political, legislative, and social impediments), how to act (building and adopting appropriate methodologies and approaches), and the prerequisites for action (institutions, social, economic, and financial). It concludes that there is an urgent need to set Arab countries on a fast track to the knowledge society by unleashing the potential of their people and institutions for learning, freedom, and development. Doing so requires an Arab renaissance built on a comprehensive process of economic, social, political, and cultural mobilization. Source: UNDP and Maktoum Foundation 2012. 74 Chapter 5: Educating people for better jobs in a new economy Accountability, Setting targets and measuring progress toward those targets incentives, and governance: The keys It is hard to know whether you are making progress unless you have a goal and a way of measuring advancement toward that goal. to stronger education Every MENA country would be well advised to adopt national performance standards at all levels of education (as touched systems on in the section on improving the quality of education), and to continuously monitor progress toward meeting those standards. One way to do that is to set targets for average national perfor- mance on one or more of the major international testing pro- Strengthening the education system depends on successfully grams,5 as Brazil has done, and require each school to develop aligning its governance, management, financing, and perfor- a plan for improvement consistent with the established goal. mance incentives to produce better learning outcomes, as articulated in national policies and measured by local, national, In higher education, quality assurance and certification mechanisms and international assessments. Strengthening the system also need to be developed at the national and regional levels. Egypt, for depends on replacing accountability to the state with account- example, has adopted a strong approach to external quality ability to the public.4 Well-performing educational systems assurance in the face of growth in private higher education. know how to respond to the admittedly complex demands of Initiatives include World Bank–financed quality assurance their diverse clientele—governments, parents, students, staff, and accreditation projects, the establishment of the National employers. Three areas for improvement are highlighted below. Authority for Quality Assurance and Accreditation of Education, BOX 5.5 Assessing university governance: A benchmarking tool The “University Governance Screening Card” responds to the Mission Self-assessment need for a tool to benchmark the governance of higher educa- 4.3 Objective assessment tion institutions in the MENA countries. The screening card makes it possible to assess whether universities in the region are following good governance practices aligned with their 3.6 institutional goals. It does not impose a particular model of Participation Management good governance, but allows universities to compare them- 3.1 3.6 selves with other institutions and to monitor their progress 2.9 1.3 over time. To date the screening card has been tested in 40 universities in Egypt, Tunisia, Morocco, and West Bank and Gaza. Six other countries—Algeria, Bahrain, Iraq, Kuwait, 3.0 Lebanon, and Sudan—have shown an interest in participat- 3.1 ing in the project. 3.4 4.3 The screening card encourages meaningful change by raising Accountability Autonomy awareness of governance concepts within institutions and revealing gaps between self-perceptions and results based on the questionnaire. Another key takeaway from the scorecard is the difference between perception (blue area) and reality (red area): overall, universities perceive that they are more autonomous, have more clearly defined mission statements, have better levels of participation among stakeholders, and are more accountable than what is revealed by the test. This scorecard is a first step toward developing a more comprehensive tool to monitor university performance, providing an entry point for assessing other dimensions such as quality assurance, student learning outcomes, quality of teaching and research, and employability of graduates. Source: Jaramillo 2012; Altbach and Salmi 2011. 4. In MENA accountability has usually been organized by governments in the form of consultative events, parliamentary oversight committees, advisory commit- tees, or nongovernmental representation in oversight agencies. In other regions, civil society has supplemented such mechanisms with advocacy and “watchdog” organizations, specialized journals, independent research institutes, and professional associations. Similar moves are starting to appear in the MENA countries and should be recognized and encouraged. Institutional mechanisms must be put in place to allow stakeholders to influence educational policy, resource alloca- tion, and service delivery. 5. Example programs are TIMSS (Trends in International Mathematics and Science Study, http://www.iea.nl/timss_2011.html), PIRLS (Progress in International Reading Literacy Study, http://www.iea.nl/pirls_2011.html), and PISA (Programme for International Student Assessment). PISA is managed by the Organisation for Economic Co-operation and Development (OECD). Transforming Arab Economies 75 Chapter 5: Educating people for better jobs in a new economy and the development of national academic reference standards learning outcomes. Promotions could less controversially be for various fields of university study. Much of the necessary tied to teachers’ efforts to upgrade their skills and competen- groundwork has been laid: quality assurance documentation has cies. Shifting more decision-making responsibilities to the been developed and made available to academic staff of higher school or university level would increase flexibility and incen- education institutions, training and professional development tives, provided it also promotes accountability. In parallel, in opportunities have been provided, and assurances have been terms of incentives, additional public financing could be tied given that strong performance will be recognized and rewarded. to outcomes and innovation, thus ensuring accountability for But important work remains to be done at the institutional level performance. in moving beyond compliance to nurture a culture of quality and management capacity (OECD and World Bank 2010). A culture of quality and good institutional governance go hand in hand. Both are essential to ensure better outcomes (World Bank Linking higher 2011a). Altbach and Salmi (2011) highlight that important factors for successful world-class universities include leader- education with ship, government policy and funding, the ability to continually focus on a clear set of goals and institutional policies, develop- employment ment of a strong academic culture, and quality of academic staff. One way to improve governance is through scorecards that Although unemployment has increased worldwide as a can be used to evaluate the governance strategies employed by consequence of the global financial and economic crisis, higher education institutions in the region and their progress high unemployment rates of tertiary-educated graduates toward policy goals (box 5.5). in MENA have been observed during the past decade as compared to those in the OECD countries. In Tunisia the unemployment rate for adults with tertiary degrees Gathering and disseminating has dramatically increased in the past 10 years (figure 5.5). information about school outcomes This young population—hungry for knowledge, quite capable in the use of ICTs, and eager to obtain skilled jobs—poses growing demands on the higher education systems of the region. A major When parents, taxpayers, and policy makers know how the problem lies in the fact that the labor market in many countries education system is performing, they are better equipped to remains dominated by the public sector, with the result that ensure that public financing is producing desired outcomes. university graduates pass up opportunities in the private sector Educational information systems tend to be weak in the MENA to wait two, three, or four years for a public sector job offering region. Basic information on student outcomes, attendance, lifetime employment and better benefits than what private dropout rates, teacher absenteeism, and teacher training and employers offer. Not only does this create a major distortion of qualifications is not readily available to education officials, let the labor market, but it also deprives higher education institu- alone the public on a timely basis. The weakness appears to tions of signals about which skills are in demand and which reflect a lack of political will to disseminate information about are not. The strong preference of graduates for public sector school performance to parents and stakeholders. More than employment is a major reason why the relationship between a technical incapacity to measure outcomes, this lack of will education and the private sector is weak. A promising effort is a major obstacle to successful reforms. to strengthen that relationship is the multinational Education Participation in international testing programs6 is one way to for Employment (EFE) project (box 5.6).7 provide feedback on performance and promote accountability. In the MENA region, about 95 percent of the economy is made up But such participation is neither necessary nor sufficient. An of small and medium-sized enterprises (SMEs). To make those accurate, credible, and regularly updated information system firms more competitive, the region needs graduates steeped in is needed to improve educational outcomes and ensure that innovation and entrepreneurial thinking. This means integrat- all vehicles of public accountability function on the basis of a ing innovation and entrepreneurial thinking into the education firm foundation that provides the data needed for evidence- process to foster the skills, aptitudes, attitudes, and entrepre- based policy and reform. neurial mindsets that the youth of the region need to acquire to succeed and grow. A recent example of fostering entrepre- neurship and self-employment in Tunisia is offered in box 5.7. Improving incentives Finally, although informal employment is increasingly common, Linking teachers’ rewards (in terms of salary or promotion) to class skills acquisition among workers in the informal sector does not yet outcomes is controversial, but many countries are experimenting play an important role in the policy agenda.8 Traditional apprentice- by offering incentives to teaching teams (sometimes schoolwide, ship based on the skills of master craftsmen is the principal sometimes specific departments) to work together to improve channel into the labor market for dropouts from basic and early 6. Such as TIMSS, PIRLS, and PISA. 7. Education for Employment (EFE)—a Washington-based nongovernmental organization (NGO) with a network of partners in business, government, civil society, and international organizations—has established independent, locally run foundations in six MENA countries that provide young people with training and job- placement services, to build their future and contribute to their communities. Local business and community leaders serve on the board of directors or advisory council of each local foundation. 76 Chapter 5: Educating people for better jobs in a new economy Figure 5.5 Proportion of unemployed adults with a tertiary degree in select countries, 2000 and 2010 8.7 Tunisia 21.9 Syrian Arab Rep. 9.1 28.4 Morocco 17.8 14.7 Jordan 15.5 27.7 Egypt, Arab Rep. 24.8 Korea 2.9 3.6 2.1 United Kingdom 1.8 3.0 Sweden 3.4 Spain 2.9 9.5 1.9 Netherlands 3.6 1.6 Ireland 2.3 Germany 2.3 4.2 France 3.8 5.1 4.7 Finland 4.8 3.0 Denmark 4.9 2000 EU average 3.8 3.5 2010 OECD average 3.5 3.3 0 5 10 15 20 25 30 Percent Source: Jaramillo and Melonio 2011. Note: EU = European Union; OECD = Organisation for Economic Co-operation and Development; UK = United Kingdom. secondary education.9 But these apprenticeships have signifi- cant shortcomings, including incomplete transfer of knowledge Expanding regional from masters to apprentices, large variations in the quality of the training provided, the perpetuation of low-productivity cooperation technologies, passive and nonexperimental learning, and a tendency for slow innovation. Masters tend to lack pedagogical skills, and apprentices are always subject to the risk of being Euro-Mediterranean cooperation is important to support mod- employed as cheap labor for menial jobs. A key challenge in the ernization processes in higher education. To improve the educa- region is to improve such informal training practices through tion system, disseminate results, and inform policy making public partnerships, with a view to certifying those who gain in this crucial area in the Arab region, national efforts can be high-quality informal training. Tunisia offers an example of a effectively supplemented by regional approaches that promote government response to improve traditional apprenticeships, the sharing of good practices and facilitate the emergence of focusing on apprenticeship contracts, regulated remuneration regional networks of experts. levels, and incentives to employers in terms of exemptions from Increased cooperation in the field of higher education, research, and social security obligations.10 In Egypt and Lebanon, nongovern- innovation can increase competitiveness in business, help create mental organizations (NGOs) that administer training contracts new job possibilities, and prepare countries and regions to meet the play an intermediary role between master and apprentice. challenges of globalization. At the university level, some MENA countries (such as Morocco, Tunisia, Algeria, Lebanon, and 8. In poorer MENA countries and rural areas, most workers with little education work in micro-entrepreneurship and low-yield agriculture. Targeting some well- designed interventions to improve the skills of these workers could be beneficial. Programs such as India’s Barefoot College suggest training should be delivered hands-on, be community based, and combine learning with earnings. It is also most effective if provided with job search assistance and soft-skills training (Gatti and others 2011). 9. Kinship or personal relations predominate in traditional apprenticeships. Apprentices or their families bear the cost of training either by direct payments to the master or through reduced wages. This type of training can last between four and eight years, while the apprentice progresses from helper to skilled worker. There is no certification of acquired competencies. 10. In 2005, 45,000 apprenticeship contracts were signed, but only around 12,000 apprentices worked under the new rules. This illustrates the scale of the chal- lenge in improving workers’ skills in the informal sector (World Bank and ETF 2005). Transforming Arab Economies 77 Chapter 5: Educating people for better jobs in a new economy BOX 5.6 Connecting education and employment The high unemployment rate of young Arabs has been attributed to the mismatch between education and market needs. The multi- national Education for Employment (EFE) project focuses on the role that the private sector can play in reducing that mismatch. The project comprises a network of locally run, not-for-profit organizations that provide youth with real jobs, rather than training without the solid prospect of a job. EFE provides companies with qualified human talent based on one to three months of training. EFE projects are currently based in Egypt, Jordan, Palestine, Morocco, Yemen, and Tunisia. EFE identifies areas of the economy that offer strong potential for growth and job creation but that lack qualified personnel. Local businesses agree to hire a specified number of graduates from the program, provide funding, and offer in-kind contributions (such as office space and administrative staff). They encourage other business leaders to hire graduates and introduce EFE to government leaders and other decision makers. EFE is also implementing a new entrepreneurship program to help aspiring young entrepreneurs start their own enterprises. Since launching operations in 2006, the EFE network has trained and placed in jobs more than 2,300 disadvantaged young people from across MENA. EFE-Egypt  FE-Egypt has trained and placed more than 175 young people in jobs. • E Forty-four percent of EFE graduates are female. •  From inception to the end of 2011, EFE-Egypt placed 79 percent of all graduates in jobs, with a 100 percent retention rate after •  three months on the job. Eighty-five percent of EFE-Egypt students graduate from their training programs. •  In 2012 alone EFE-Egypt is expected to train and place more than 325 young people. •  Jordan Career Education Foundation (JCEF) •  CEF has trained and placed more than 1,283 youths in jobs. J • Forty-seven percent of JCEF graduates are female.  • Ninety-four percent of JCEF students graduated from their training programs in 2011.  • From inception to the end of 2011, JCEF placed 69 percent of all graduates in jobs; of these, 64 percent had retained their jobs  after three months.* EFE-Morocco •  FE-Maroc has trained and placed more than 420 young people in jobs. E •  Fifty percent of EFE-Maroc graduates are female. • Ninety-one percent of EFE-Maroc students graduate from their training programs.  • From inception to the end of 2011, EFE-Maroc placed 58 percent of all graduates in jobs; of these, 93 percent had retained their  jobs after three months. In 2012 alone EFE-Maroc is expected to graduate more than 3,060 youth from employment training programs. •  Palestine EFE (PEFE) •  EFE has trained and placed more than 285 youth in jobs. P • Fifty-three percent of PEFE trainees are female.  •  Ninety-three percent of PEFE students graduate from their training programs. • From inception to the end of 2011, PEFE placed 69 percent of all graduates in jobs, with a 95 percent retention rate after three  months on the job. In 2012 alone PEFE is expected to graduate more than 245 youth from employment-training programs. •  EFE-Tunisia  FE-Tunisia launched operations in 2012. • E In its first year, EFE-Tunisia is expected to graduate more than 495 young people from employment-training programs. •  Yemen EFE (YEFE) •  EFE has trained and placed more than 580 young people in jobs. Y • Forty-two percent of YEFE graduates are female.  •  Ninety-nine percent of YEFE students graduate from their training programs. •  From inception to the end of 2011, YEFE placed 76 percent of all graduates in jobs, with a 94 percent retention rate after three months on the job.* In 2012 YEFE is expected to graduate more than 1,700 youth from employment-training programs.  •  Source: Education for Employment (http://www.efefoundation.org). Note: * In both Jordan and Yemen, EFE affiliates are working with very vulnerable youth populations (such as high school dropouts), which has made it more challenging to meet the network target of an 85 percent job placement rate. 78 Chapter 5: Educating people for better jobs in a new economy BOX 5.7 space), networks of education and training institutions that share resources efficiently (such as EMUNI, the Euro-Mediterranean Entrepreneurship training and self- University),11 and the mobility of students (as demonstrated by employment among university graduates: Europe’s Erasmus Mundus program).12 These initiatives should Evidence from Tunisia be replicated within the Arab world by scaling up external coop- eration and increasing resources for the Erasmus and Tempus programs geared toward the Arab world. In Tunisia unemployment rates are especially high among recent university graduates. Yet little is known about the There are excellent opportunities within the framework of the effectiveness of training programs aimed at increasing self-employment among highly educated youth. In this Erasmus Mundus external cooperation window and the prospects context, a new entrepreneurship track that provides busi- offered by the EuroMed scholarship scheme for university students ness training and personalized coaching to university stu- and higher education staff from partner countries. Since the launch dents was evaluated by Premand and others (2012). In this of the Erasmus Mundus scheme in 2004, more than 3,000 grants track, students in the final year of their licence appliquée have gone to students and researchers from MENA countries. program were given the opportunity to prepare a business In 2011 the European Commission announced a doubling of plan instead of a conventional thesis. Of the 1,702 students scholarships for southern Mediterranean countries to include who applied to the entrepreneurship track in 2009−10, half were randomly chosen to participate and the other half a further 559, on top of the 525 scholarships already planned assigned to the standard curriculum. Comparing labor for 2011–12 through Erasmus Mundus (European Commission market outcomes of participants and control students one 2011). The Mediterranean Office for Youth is in its second year year after graduation, the study found that the entrepre- of interuniversity mobility partnerships modeled on Erasmus neurship track increased self-employment, particularly and Tempus.13 The Euro-Mediterranean Information Society among men. On the other hand, the employment rate among Initiative (EUMEDIS) is another program that makes connections others remained unchanged. The evidence suggests that between European and Mediterranean research networks in the the program fostered business skills, expanded networks, and affected a range of behavioral skills. In the context of areas of education, e-commerce, health, tourism, and research the Tunisian revolution, participation in the entrepreneur- applied in industry, business, and innovation.14 These connections ship track heightened graduates’ sense of opportunity and merit expansion. Initiatives such as UNIMED (the Mediterranean optimism. Universities)—an association of universities from countries in the Euro-Mediterranean basin with the aim of developing sci- Source: Premand and others 2012. entific and educational cooperation in the region—should also be encouraged.15 Egypt) have focused on adopting the licence (bachelor)-master- Institutions to promote regional cooperation should be strength- doctorate (LMD) degree cycles that are being standardized ened. Despite the presence of a number of Arab regional throughout Europe. Morocco introduced LMD reforms in 2004 organizations in addition to the Arab Maghreb Union—such to harmonize its university degrees with international systems. as the Arab League and the Arab League Educational, Cultural There has also been cross-Mediterranean consultation among and Scientific Organization, both of whom have the objective Maghreb countries, much of which has been undertaken with to promote cooperation—neither national nor regional Arab an eye to extending the European Higher Education Area to organizations devote serious resources to promoting regional incorporate the Maghreb into what would become the Euro- integration (African Development Bank 2012). The World Bank Mediterranean Higher Education and Research Area. The new has been working to find ways to cooperate with regional insti- system should make higher education systems of the region tutions to launch initiatives, notably for the use of empirical more compatible with the European one, thus increasing the evidence in the formulation, implementation, monitoring, and international mobility of students and faculty from the region evaluation of policies aimed at improving education systems. (African Development Bank 2012). The Arab Regional Agenda for Improving Education Quality is one such initiative.16 The Arab Network for Quality Assurance The region needs cooperation to develop coherent qualification frame- in Higher Education offers yet another opportunity for Arab works and quality assurance mechanisms at the higher education countries to exchange information about quality assurance, level. Further economic integration requires greater labor mobil- develop quality-assurance agencies and standards for new and ity rooted in international quality standards (as exemplified by the existing bodies, disseminate good practices, and strengthen Bologna Process in the Euro-Mediterranean higher education links between such agencies in different countries. 11. http://www.emuni.si. 12. http://eacea.ec.europa.eu/erasmus_mundus. 13. http://www.officemediterraneendelajeunesse.org/en. 14. The EUMEDIS program operated from 2000–06 and was extended as EUMEDRegNet in 2009 (until 2012) (http://www.enpi-info.eu/mainmed.php?id_ type=10&id=331). EUMEDIS has established a regional community of professionals, researchers, and students: about 1,000 people have been directly involved in its projects. Over 30,000 students use the EUMEDIS-produced distance-learning courses in a number of universities (IEMed 2010). 15. http://www.uni-med.net. 16. http://arabworld.worldbank.org/content/awi/en/home/initiatives/improving_education.html. Transforming Arab Economies 79 Chapter 5: Educating people for better jobs in a new economy Conclusion Bannayan, Haif, Juliana Guaqueta, Osama Obeidat, Harry Anthony Patrinos, and Emilio Porta. 2012. “The Jordan Education Initiative: A Multi-Stakeholder Partnership Model to Support Education Reform.” Policy Research Working Paper 6079, World Bank, Washington, DC. Countries in the Arab world have made significant progress in reforming education systems to expand access to all levels of edu- European Commission. 2011. “Erasmus Mundus: Funding cation and reduce gender disparity, but the quality of education has Boost for Arab Spring Countries.” Press release, not kept pace with the needs of the economy. The education systems December 16. http://europa.eu/rapid/pressreleas of the MENA region do not adequately support the development esaction.do?reference=ip/11/1558. of soft skills—analytical skills, problem-solving skills, critical thinking, and teamwork—that are critical to employability and Ezzine, Mourad. 2009. “Education in the Arab World: Shift to Quality innovation. These systems are in need of thorough reform if they in Math, Science and Technology Faltering.” MENA are to provide more and better early child education; quality Internal Fast Brief, World Bank, Washington, DC. primary, secondary, and higher education programs that prepare graduates to access and use knowledge; and a system of lifelong ———. 2012. “The Education Challenge: 204 ÷ 4 = err???” World learning that enables people to learn and produce throughout Bank blog, March 22. http://menablog.worldbank their lifetimes. The reforms will require a shift in school focus, .org/education-challenge-204-%C3%B7-4-err. to the fundamental and transversal skills that students need Faour, Mohammad. 2012. The Arab World’s Education Report to excel in a more competitive environment. Card. Washington, DC: Carnegie Endowment for Acknowledging that each country is unique and must chart its International Peace. own path, the countries in the region would do well to press on Fryer, Roland G., and Steven D. Levitt. 2010. “An Empirical with reform in three main areas. First, is shifting their emphasis Analysis of the Gender Gap in Mathematics.” from buildings and material inputs to improving results and American Economic Journal: Applied Economics 2 (2): solidifying partnerships with stakeholders. Second, is reorient- 210–40. ing their management practices toward incentives to promote better performance by and responsiveness from providers Gatti, Roberta, Diego F. Angel-Urdinola, Joana Silva, and of education services. Third, is moving from accountability Andras Bodor. 2011. “Striving for Better Jobs: to the state to accountability to the public so as to ensure The Challenge of Informality in the Middle East that education reaches and enriches the greatest number of and North Africa Region.” MENA Quick Note 49, citizens, producing students with the kinds of skills needed World Bank, Washington, DC. by the productive sectors of the economy. To strengthen the connection between education and employment, educational Heckman, J. J., and D. V. Masterov. 2007. “The Productivity institutions and the private sector need to cooperate much Argument for Investing in Young Children.” Applied more closely. Technical and vocational education and training Economic Perspectives and Policy 29 (3): 446–93. should assume new and wider roles in imparting the relevant, IEMed. 2010. “Towards an Euro-Mediterranean Area of Higher up-to-date skills necessary for the knowledge economy. 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King, and Jee-Peng Tan. 2012. “Making the Grade.” Finance and Development 49: 1. Altbach, Philip G., and Jamil Salmi. 2011. The Road to Academic Excellence: The Making of World-Class Research Klaus, David, Charlie Tesar, and Jane Shore. 2004. “Language of Universities. Washington, DC: World Bank. Instruction: A Critical Factor in Achieving Education for All.” Unpublished World Bank mimeo, World Bank, Washington, DC. 80 Chapter 5: Educating people for better jobs in a new economy Krafft, Caroline. 2012. “Is Early Childhood Care and Education a ———. 2011a. Learning for All: Investing in People’s Knowledge Good Investment for Egypt? Estimates of Educational and Skills to Promote Development: World Bank Group Impacts, Costs, and Benefits.” Presentation at the Education Strategy 2020. Washington, DC: World Bank. World Bank, Washington, DC, May 31. ———. 2011b. Skills and Research for Productivity and Growth: OECD (Organisation for Economic Co-operation and Higher Education in East Asia. 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Bank. 2012. Arab Knowledge Report 2010/11: Preparing Future Generations for the Knowledge Society. Dubai: ———. 2012c. “MENA Regional Update 2012.” Internal UNDP and Maktoum Foundation. Presentation, World Bank, Washington, DC., February 28. World Bank. 2008. The Road Not Travelled: Education Reform in the Middle East and North Africa. Washington, DC: World Bank and ETF (European Training Foundation). World Bank. 2005. “Integrating TVET into the Knowledge Economy: Reform and Challenges in the ———. 2010a. “Jordan Prepares for a Global Knowledge Middle East and North Africa.” http://sitere Economy.” World Bank, Washington, DC. http:// sources.worldbank.org/EDUCATION/Resour siteresources.worldbank.org/NEWS/Resources/ ces/278200-1126210664195/1636971-11262 Jordan_Education_4-13-10.pdf. 10694253/TVET_Knowledge_Economy.pdf. ———. 2010b. Stepping Up Skills for More Jobs and Higher Wright, Christine D. 2012. “Early Childhood Development: An Productivity. Human Development Network, World Essential Building Block.” MENA blog, World Bank, Bank, Washington, DC. Washington, DC, May 27. http://menablog.world bank.org/early-childhood-development-essential- ———. 2010c. “Early Child Development in the Middle East building-block. and North Africa.” Internal World Bank document, World Bank, Washington, DC. Transforming Arab Economies 81 hapter 6 Fostering innovation and technological upgrading Innovation renews the economic and social fabric. It boosts been modest (figure 6.1). One finds a similar modesty in research productivity, improves competitiveness, and raises welfare. It and development (R&D) efforts, which account for less than 1 helps society deal with environmental issues. It is the channel percent of GDP for practically all countries in the region (figure through which the knowledge economy transforms society. 6.2). Moreover, governments fund the bulk of R&D, with limited Innovation is not just a matter of technological change and its dif- engagement from the private sector (figure 6.3). There are, fusion. According to the Organisation for Economic Co-operation however, slightly positive trends in non-oil-exporting countries and Development (OECD 1996), innovation is the development (notably Tunisia). The exception among oil exporters is Qatar, and commercialization of products and processes that are where R&D expenditures reached 2.8 percent of GDP in 2009. new to the firm, the market, or the world. Innovative activities range from identifying problems and generating new ideas and High-tech exports are low, but increasing. Because oil-related solutions to implementing those solutions and diffusing new exports dominate their trade structure, the Arab countries technologies (Gill and Raiser 2012). Central to innovation is the exhibit a low share of high-technology exports among total active engagement of people and organizations, coupled with exports, as compared with the rest of the world (figure 6.4), and entrepreneurship, communication, and risk taking—all within therefore exhibit low competitiveness in global manufactur- an economic climate and social system conducive to innovative ing production. But the share of high-technology exports has ideas and initiatives. grown over the years, as has the share of medium-technology exports—trends that point to a gradual improvement in the Policies inspired by those in place in industrialized econo- region’s industrial competitiveness. The progress made by mies have begun to improve the innovation climate in Arab those countries that are more engaged in high-tech manu- countries. But much remains to be done. After a brief presen- facturing and exports, notably Lebanon and Tunisia, is clearly tation of the current situation in Arab countries, this chapter apparent in figure 6.4c. offers some suggestions to guide policy makers. An important point to make at the outset is that innovation policy should focus Some advances in innovation effort and performance have not only on bright innovative achievements that gain world or therefore been made. In addition, a few countries, such as national renown in high-tech fields—it should adopt a broad Jordan, exhibit a higher degree of efficiency in innovation than and inclusive perspective, attending to modest achievements, one might expect given their science and technology endow- even (or perhaps especially) in the poorest segments of society.1 ments (see chapter 2, and for more details see Diop and Ghali [2012]). These encouraging signs should be amplified by effi- cient policies. Innovation effort and performance in the Broadening the Arab world concept of innovation policy Efforts to innovate, and the results of those efforts, have been modest. Innovation indicators, as measured by the World Bank’s Knowledge Assessment Methodology (KAM)2 and plotted Going beyond science policies. As in many countries, Arab against per capita gross national product (GDP), confirm that policy makers, believing that innovation would emerge natu- the innovation-related efforts and performances of the Arab rally from an enhanced R&D effort, invested massively in aca- countries, compared with those of the rest of the world, have demic research, R&D structures, and public laboratories. Then, 1. This chapter uses background contributions by Radwan, Strauss, and Bell (2011); Kuznetsov, Dahlman and Djeflat (2012); and Djeflat (2012). 2. The three indicators used in the KAM for measuring innovation performance are (i) royalty receipts and payments in U.S. dollars, (ii) the ratio of patents granted by the U.S. Patent and Trademark Office to the population, and (iii) the ratio of articles published in scientific and technical journals to the population (World Bank 2012). These indicators measure inputs or intermediary products rather than innovation outcomes, but they are the only standardized data available worldwide that approximate innovation capabilities. 82 Chapter 6: Fostering innovation and technological upgrading Figure 6.1 Innovation performance and GDP per capita: Select Arab countries compared with the world 10 9 8 United Arab Emirates 7 KAM innovation index Oman 6 Tunisia Lebanon 5 Bahrain Egypt, Arab Rep. Saudi Arabia Jordan 4 Morocco Algeria 3 Syrian Arab Republic 2 Yemen, Rep. Sudan Rest of the world 1 Arab world 0 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 GDP per capita (US$) Source: World Bank 2012; World Development Indicators. Note: UAE = United Arab Emirates; GDP = gross domestic product. Figure 6.2 Gross national R&D expenditures as a percentage of GDP in select countries, 2000–09 1.2 Algeria Bahrain Egypt, Arab Rep. 1 Jordan Kuwait Morocco 0.8 Saudi Arabia Tunisia 0.6 0.4 0.2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: UNESCO Institute of Statistics. Note: GDP = gross domestic product. Transforming Arab Economies 83 Chapter 6: Fostering innovation and technological upgrading Figure 6.3 Figure 6.4a Gross national R&D expenditures in select Total exports by technology category, world countries, by source of funds excluding MENA, 2005–09 100 45 Percentage of total manufacturing exports 90 40 80 35 70 30 Percent 60 25 50 40 20 30 15 Resource-based exports 20 10 Low-technology exports 10 Medium-technology exports 5 High-technology exports 0 Tunisia Morocco Kuwait Turkey Malaysia 0 (2009) (2006) (2009) (2009) (2006) 2005 2006 2007 2008 2009 Financed from abroad Financed by higher education Year Financed by private nonprofit Financed by government Source: UNIDO 2011. Financing source not specified Financed by business Figure 6.4b Source: UNESCO Institute of Statistics. Total exports by technology category, MENA, Note: R&D = research and development. 2005–09 70 Percentage of total manufacturing exports when the results of these investments proved disappointing, 60 and inspired by then-fashionable global trends, they began to devote sizable resources to the building of innovation sites 50 in the form of incubators and technoparks—a trend that has Resource-based exports 40 Low-technology exports developed over the past decade and has largely concerned Medium-technology exports information technology businesses, which account for about High-technology exports 30 half of the firms and jobs created in those sites. More recently, policy makers have expanded and honed their instruments of 20 intervention, drawing on international evidence. The need to broaden the concept of innovation, and its policy arms, should 10 be strongly reaffirmed. To appreciate an efficient innovation policy, it is useful to examine the characteristics of the so-called 0 “gazelles”—innovative firms with high-growth potential—and 2005 2006 2007 2008 2009 the actions needed to support their development (box 6.1). Year Source: UNIDO 2011. Innovation policy must be cross-departmental. By its very nature, innovation touches many policy areas—among them research, industry, education, trade, finance, and competition Figure 6.4c (figure 6.5). Countries that have grasped this essential truth Share of high-tech exports among total have established coordinating bodies for innovation policy, manufacturing exports of selected positioning them at the prime ministerial level, with the capacity Arab countries, 2005–10 to make decisions and the authority to implement them. In the early 1990s Finland set up its Science and Technology Policy 14 2010 Council (transformed in the mid-2000s into an Innovation Policy 12 Council) that brought together concerned ministers, includ- 2005 10 ing the minister of finance, along with high representatives from business, the trade unions, and civil society, under the Percent 8 chairmanship of the prime minister. Such bodies have been 6 decisive in putting innovation policy at the forefront of national development strategies. 4 2 Promoting innovation is like gardening. While being cross- departmental and cross-sectoral, innovation policy must also 0 Jordan Lebanon Morocco Tunisia United Arab focus clearly on the promotion of innovation. From this perspec- Emirates tive, the tasks to be performed include supporting innovators, Source: Authors’ compilation based on Comtrade database 2010. 84 Chapter 6: Fostering innovation and technological upgrading BOX 6.1 The sources and carriers of innovation extend well beyond science and technology. Innovators come in three basic forms: PhD-level What it takes to promote innovative firms innovators and originators in science and technology, creative recombiners of existing knowledge (academic degrees being A recent study (Stone and Badawy 2011) observes the more or less relevant), and reinventors (with MBAs) who inno- characteristics of fast-growing small and medium-sized vate through new business models and processes (appendix enterprises (SMEs) included in the World Bank’s Investment 6.1). The last two categories should not be neglected, particu- Climate Assessment Surveys in the MENA region. The larly in low- and medium-income countries, which do not have characteristics associated with high growth among SMEs strong R&D structures and import the bulk of their technology. include being an innovator, offering workers formal training, Each type of innovator needs different types of support. and receiving an international quality certification. In Egypt a panel data set allows observation of true “gazelles”— Bridge institutions that connect the different actors involved SMEs that grew an average of 20 percent or more over in successful innovation processes and systems are an more than four years. Their analysis links gazelle status among manufacturers to training employees, using e-mail essential tool of innovation policies. They include, among or having a company Web site, being less than 10 years old, other things, incubating structures, technoparks, dynamic getting a high number of inspections, experiencing fewer universities, venture capital bodies, and diaspora networks power interruptions, and using foreign-licensed technol- (Kuznetsov, Dahlman, and Djeflat 2012). Such tools should ogy (considered here a type of innovative behavior). The receive special attention, along with incentives and programs cross-country analysis highlights the link between high that facilitate collaboration between concerned actors. Inspired SME growth and innovation, workers’ education, formal training, firms’ quality certification, and e-mail use. It links by these principles, Morocco’s recently established innovation innovation to these factors, and to competitive pressure, policy includes a program to support the development of clus- whether local or international. Attention is then directed ters, a program to support start-ups (including the provision to human resource policy on education and training, the of expertise through networks), and a program to support the policy framework and incentives for firms to train workers, financing of R&D projects conducted in collaboration between national quality-assurance systems, and telecommunica- the business sector and public or university laboratories. tions policies that support e-mail and Internet use. The paper concludes with the exhortation to “educate, train, The following sections focus on a series of key functions, certify, link, compete!” inspired by the gardening analogy: supporting innovators, Source: Stone and Badawy 2011. bringing R&D structures into the service of the economy and society, tapping into global knowledge and technology, and edu- cating innovators. The building of innovation sites is discussed removing all sorts of weeds that keep innovation from spread- in chapter 9. Removing obstacles to innovation is treated as ing (anticompetitive behaviors, bad regulations, and so on), a cross-cutting issue.3 The chapter concludes with remarks nourishing the knowledge base by improving R&D structures on “soft” measures for stimulating change, which should be or tapping global sources, and educating the population at dif- implemented with the support of international cooperation ferent levels to stimulate its interest in innovation (figure 6.6). programs. FIGURE 6.5 Innovation policy positioning Source: World Bank 2010. Note: S&T = science and technology. 3. These points are echoed in a forthcoming interim report from the CMI program on Knowledge Economy, Innovation, and Technology, which is led by the European Investment Bank (EIB) (http://cmimarseille.org/Knowledge-Economy-Innovation-Technology.php). Transforming Arab Economies 85 Chapter 6: Fostering innovation and technological upgrading There is a serious lack of development of venture capital Figure 6.6 in the Arab countries, particularly in the middle-income, Innovation policy as gardening resource-poor countries (figure 6.7). The financial markets are dominated by a conservative banking sector, and inves- tors’ rights are poorly protected. The venture capital market is Watering limited, compared with the situation in developed economies. ( nance, support for innovators) It will take time to develop a vibrant financial environment in which venture capitalists and business angels can operate securely. Meanwhile, measures can be taken and institutions established to support innovation. An example from Lebanon is given in box 6.2. The development of innovative forms of financing is already competing with traditional financing models in economically Removing weeds (promoting competition, deregulation) advanced and emerging economies (Rocha and others 2010). Chief among those is crowdfunding, which is based on the idea that the decision of a large group may be sounder than that of an individual. It marries that idea with the power of the Internet Enriching the soil to bring groups together to pool their resources and identify (research, information) investment opportunities. Small businesses with exciting ideas and no other way of tapping venture capital can now attract Preparing the ground financing by pooling large numbers of small pledges. Now that (education) social media, online communities, and micropayment technol- ogy make it easy to solicit and accept donations from a group of potentially interested supporters at very low cost, the idea is developing rapidly. Crowdfunding has been used for a variety Source: World Bank 2010. of purposes, from raising money for charity to financing music tours and producing movies. Entrepreneurs can use crowd- funding to solicit small amounts of money from individuals who are typically not professional financiers. Inspired by this Supporting innovators approach, a team from Cairo University has recently launched an initiative to support inventors and entrepreneurs from the city’s slums, providing them with technical support and other sources of expertise (box 6.3). A variety of policy measures is needed to provide comple- Figure 6.7 mentary types of support. Three are particularly important: Availability of venture capital in select measures for project incubation, for financing, and for legal Arab countries issues (intellectual property). Incubators host would-be innovators and business creators Egypt, in structures that provide common services —from basic Arab Rep. services such as photocopying machines to more sophisti- cated ones such as connecting with trade channels or venture Jordan capital funds. There are some 500 incubators operating today in the Arab world, a number of them installed in technoparks or in universities.4 Many of them have been established by Lebanon government authorities, or with their active support, either by national ministries or by municipalities. A recent assess- ment (ANIMA 2012) reports the mixed performance of such Morocco structures, pointing out a lack of professionalism, an excess of informal connections and lack of solid evaluations in selecting projects, and weak links with supportive groups such as busi- Tunisia ness angels. The best incubators seem to be those that actively involve the business and private sector in their management 0 1 2 3 4 5 6 and governance, with motivated local actors from government, 1 = very difficult for entrepreneurs with innovative but risky academic, and other circles. projects to find venture capital; 7 = very easy. Source: WEF 2011. 4. The first initiatives appeared in Maghreb countries. There are currently 30 incubators operating in Tunisia and a dozen in Morocco. In Morocco, the average number of incubees is 10 per structure (for 16 proposed projects). 86 Chapter 6: Fostering innovation and technological upgrading BOX 6.2 cedures, can provide the necessary protection. When seeking stronger protection, notably for patenting abroad—in particular Kafalat, a Lebanese institution providing in the triadic system (United States, Europe, Japan)—innovators venture finance and inventors require financial and technical support. It is vital that Arab countries equip themselves with appropriate patent agencies.5 This is an area where inter-Arab cooperation and a Kafalat, a Lebanese company that was created in 1999, provides loan guarantees to small and medium-sized regional approach would be particularly beneficial. In a similar enterprises (SMEs) based on business plans and feasibil- vein, to stimulate technology transfer and upgrading, efficient ity studies that show the viability of the proposed business mechanisms should be established to facilitate the licensing activity. It targets innovative start-ups and SMEs in industry, of technology from foreign firms, including the negotiation of agriculture, tourism, traditional crafts, and high technology. related contracts. Kafalat-guaranteed loans benefit from interest rate subsi- dies financed by the Lebanese Treasury and administered by the Central Bank of Lebanon. Kafalat aids borrowers by using its feasibility studies to induce lenders to require lower collateral. Kafalat also serves the lender’s interest by lowering loan risks. Kafalat-guaranteed loans in Lebanese Putting R&D structures pounds are exempt from the statutory reserve requirement of the Central Bank of Lebanon. This reduces the costs of in service of the the lending bank, allowing it to lend to customers with lower interest rates. Kafalat’s credit guarantee system encour- economy and society ages business formation and increased domestic invest- ment, output, and employment. Currently the maximum loan amount for a Kafalat Innovative guarantee is 300 million Lebanese pounds (approximately $200,000). The level of scientific production in the Arab world is Source: http://www.kafalat.com.lb. relatively low but growing in some countries (figure 6.8). Publication of scientific and technical journal articles by authors residing in Arab countries has increased in volume over the Small innovators need efficient systems of intellectual prop- past decade (figure 6.8). But the level is still low compared erty protection to support and shield their ideas and inven- with economically advanced economies (Japan accounted for tions. In most cases, the protection afforded by the system of 49,627 articles in 2009, Germany 45,003), and with certain utility models, which is less expensive than standard patent pro- rapidly developing countries, such as China (74,019 articles BOX 6.3 Yomken (“It’s possible!”) Yomken.com is the first open-innovation and crowdfunding platform in the Arab world that tries to bridge the gap between (i) the challenges faced by micro- and small entrepreneurs (MSEs) working mainly in low-tech and informal manufacturing industries (designing new products and upgrading current products and production processes) and (ii) the innovative ideas and skills of poten- tial problem solvers (graduation projects, innovative solutions from recently graduated engineers, designers, researchers who are looking for a job, the Arab diaspora); and then, once the gap is bridged, using crowdfunding to finance the products that emerge from the matchmaking process. Yomken offers MSEs and nongovernmental organizations (NGOs) working across the Arab world a space to post challenges that they encounter. Potential solutions are posted by problem solvers, capitalizing on the “wisdom of the crowd.” A group of volunteer experts review the proposed solutions to choose the best one for implementation. To tap the potential for innovation, Yomken’s team began in its pilot phase by supporting more than 60 workshops in Manshiet Nasser, Cairo’s mega slum of some 800,000 residents. The range of the workshops’ products included toys, souvenirs, plastic gadgets, and handmade furniture. In crowdfunding, buyers prepay for products from their e-wallets, and if the targeted amount (including the production costs and profit) is pledged, both the workshop owner and the innovator together initiate production. Funders can track the use of their contribu- tion during the production process all the way through the social impact the project has after production is completed (for example, creating more jobs, increasing the income of the workshop owner, and so on). The initiative has received seed funding from the World Bank’s Youth Innovation Fund and is being implemented in partnership with the Istebdaa’ Initiative. Source: http://www.yomken.com. 5. Few residents of Arab countries file patent applications in their national patent system. In 2010 Egyptians filed only 605 applications, Saudi Arabia 288, Morocco 152, Algeria 76, Jordan 45, and Yemen 20. Compare these figures with Japan (290,081 applications) and Finland (1,731 applications) in the same year. Transforming Arab Economies 87 Chapter 6: Fostering innovation and technological upgrading in 2009, with an increase of more than 10,000 from two years grams can also provide useful support to selected teams and before).6 Arab countries produce fewer books and fewer sci- well-defined scientific and technical areas for collaborative entific and technical articles than other world regions. Egypt R&D projects developed with the business sector. Egypt put had the highest level of publication in both 2002 (1,564) and in place an exemplary program with support from the European 2009 (2,247), with an increase of more than a third over the Commission (box 6.4). period. Egypt is followed by Tunisia (from 354 to 1,022) and Saudi Arabia (from 582 to 710). In addition to putting in place financial incentives and sub- sidies to stimulate collaboration, governments can support The scientific potential of Arab countries is not negligible the interactions between research and industry through many (figure 6.9). The proportion of science graduates among total different types of mechanisms that have proven their utility tertiary graduates in the Arab countries does not deviate greatly and efficiency in countries at various levels of development from the same proportion in high-income countries, though (World Bank 2010). There is ample room for improvement in rates of enrollment in tertiary education are much lower (25 Arab countries. For instance, in Egypt, a recent field study percent versus 50 percent or more). But when it comes to the (Dubarle 2012) highlighted the need for technology transfer number of researchers in R&D per million inhabitants, the gap offices focused on indigenous capabilities (to complement widens, with the high-income countries having roughly six times existing offices focused on technologies brought in by foreign the number of R&D researchers per million inhabitants as the firms); the absence of incentives (financial and otherwise) for Arab countries. Moreover, the level of R&D resources per capita faculty and researchers in universities to collaborate with the is low, even when compared with countries at a similar level business sector; and the absence of business-oriented modules of development.7 This is a factor in the low scientific output of for students in science and engineering programs. the Arab countries. More resources for the R&D system would certainly be useful. Meanwhile it is important to find ways and Obstacles to collaboration with business need to be removed. means to put the existing R&D capabilities to better use in To complement measures designed to improve the interface service of the economy and society. between research institutions and industry, it will be important to remove administrative and regulatory obstacles that prevent One way of ensuring that R&D structures are more respon- or limit collaboration. A recent study on Morocco (Djeflat 2012) sive to economic and social needs would be to require them noted the Ministry of Finance’s requirement that research and to obtain a significant share of their budgets (30 percent training contracts between universities and external clients— or more) from contracts with outside sources—business, notably business enterprises—receive prior review as a bureau- public agencies, or foreign partners with which they cooper- cratic hurdle with very negative consequences. ate through bilateral or other arrangements. This rule, which is now systematically applied in developed economies, can be Technology services for metrology, standards, and the like effective as long as the R&D structures have enough talent and need to be fully available and functioning. A last point of fun- receive enough resources from the national budget to ensure damental importance is to organize and improve as necessary decent salaries and equipment for researchers. Targeted pro- the infrastructure of technology services that operate in Arab Figure 6.8 Publication of scientific and technical articles by authors residing in Arab countries, 2002 and 2009 2,500 Number of articles published 2002 2,000 2009 1,500 1,000 500 0 . p. n a n ic co s n ep r ia an t ti ria ta ai bi te ai no da Re bl ou s oc ,R Om hr ra w Qa ni ira pu ba r ge ib or Ku Jo ab Tu iA Ba en Em Re Dj Le Al M Ar ud m ab Ye ab t, Sa yp Ar Ar Eg n d ria ite Sy Un Source: World Bank 2012. 6. http://data.worldbank.org/indicator/IP.JRN.ARTC.SC. 7. Levels of annual expenditures on scientific research per capita in the Arab world do not exceed $10, compared to $33 in Malaysia, and $1,304 in Finland (UNDP and Mohammed bin Rashid Al Maktoum Foundation 2009), http://www.slideshare.net/AlHaqqNetwork/arab-knowledge-report-2009. 88 Chapter 6: Fostering innovation and technological upgrading Figure 6.9 Availability of scientists and engineers in the Tapping into Arab world global knowledge Yemen, Rep. and technology United Arab Emirates Tunisia Syrian Arab Republic Many countries have demonstrated the importance of Saudi Arabia drawing on global knowledge, including India and China, Qatar whose technological take-offs depended on the good use of Oman imported know-how. Three points will be discussed in this Morocco section: research cooperation, linkages built on foreign direct Lebanon investment (FDI), and the mobilization of diasporas. Kuwait Participation in global and regional research networks is of Jordan crucial importance. The Gulf countries, which have made huge Egypt, Arab Rep. investments in new universities, have rightly put international Bahrain cooperation at the core of their operations. Initiatives taken Algeria with the support of the European Commission to benefit the 0 1 2 3 4 5 6 southern Mediterranean countries have raised the research capabilities of several dozen organizations by pairing them with 1 = scientists and engineers are not available at all; 7 = they are widely available northern institutions, mounting technical assistance programs, and offering internships in foreign laboratories. Bilateral coop- Source: WEF 2011. eration programs have also been important. The benefits and impact of such cooperation mechanisms can be maximized by drawing lessons from past experiences and applying good countries to ensure that these often large bodies truly serve the practices. The lessons drawn from German bilateral coopera- needs of the economy and society. The improvements should tion are presented in box 6.5. begin with the establishment of powerful, modern facilities for metrology, standards, testing, and quality control (MSTQ), where FDI is an essential source of technology transfer. Improvement appropriate at the regional level to achieve economies of scale, of the overall business environment is key to attracting FDI, as concentrate expertise, and ensure greater standardization. discussed above, but campaigns to inform and attract potential Structures at the national level and subnational levels should investors are also useful. Such measures include: providing train- be properly equipped, administered, and financed, while being ing and building capacity in investment generation (targeted to systematically opened to inventors, innovators, and enterprises development agencies, chambers of commerce and industry, in need of technical measurement, testing, or assays.8 and business organizations); following up and promoting FDI BOX 6.4 Promoting collaborative R&D projects between university and industry in Egypt The Innovation Fund, established with resources from the European Union (EU), was the principal component of Egypt’s Research, Development, and Innovation Program, which supports innovation and entrepreneurship. While it was active, the Innovation Fund supported cross-cutting projects related to industrial challenges and national priorities. Projects were initiated and run in collabora- tion between research bodies and industry. Grants were awarded on a competitive basis to collaborative consortia from universities, research institutes, and industry. From a large number of high-quality applications that indicated clear demand from the research and business communities, the Innovation Fund was able to select 51 projects for funding before encountering budget limitations. Almost 43 percent of the fund’s 134 beneficiaries were from industry, which contributed about €1.6 million (as cofinance) to Egypt’s R&D expenditures, reflecting clear interest in R&D based on applied research and market demand. Because of the fund’s support for international collaboration, more than 26 European and Mediterranean partners participated in the development of funded projects that led to exchange of knowledge and know-how with Egyptian counterparts. Seven collaborations have developed new products/services that are expected to generate a return on investment of approximately €40.4 million by 2014. The Innovation Fund’s “Scheme 2” provides funding for projects that address specific industrial challenges not requiring mega finance, in addition to funding measures to create and support the innovation culture in Egypt. Source: http://www.rdi.eg.net. 8. One of the foundations of the Japanese technological take-off in the 19th century was the opening of some 80 prefectural laboratories that provided technical assistance to SMEs, as well as facilities in which to build prototypes and test technologies. Transforming Arab Economies 89 Chapter 6: Fostering innovation and technological upgrading and partnerships in the region (with monitoring, regular reports, Diasporas, particularly those consisting of highly educated newsletters); advocating for and following up on reforms to restore and talented people, are precious assets. They have played key trust and increase the attractiveness of countries and regions roles in helping raising the technological level of large countries (for example, through the World Bank Doing Business exercise); such as China and India as well as of smaller countries, such and promoting safer transactions through guarantee schemes, as Ireland, which has systematically tried to attract educated arbitrations, and measures to protect intellectual property. migrants from Europe and North America. There are more or less formal diaspora networks in several Arab countries, notably in the FDI takes many forms, including business acquisition, creation Maghreb, thanks to long-lasting links with the French grandes of representative offices, so-called greenfield investments, joint écoles.10 Some are fairly active and have already contributed con- ventures, cooperation agreements, franchise shops, joint R&D siderably to the economic and technological development of their centers, and technological partnerships. The last few are the countries of origin, notably in Morocco and Tunisia. They help most productive from a technology transfer viewpoint. As noted elite institutions to develop (box 6.7), while also exerting more in chapter 3, joint R&D centers are efficient investments in jobs, diffuse effects, which nevertheless can be of great importance.11 as measured by dollars per job created. FDI in manufacturing should be accompanied by linkage programs that will help raise Arab countries would do well to organize mechanisms the technological and management level of local businesses through which their diasporas can contribute to the develop- that supply parts and components (and enhance the efficiency ment of their homeland. International experience (described in of clients in downstream value chains) by improving standards Kuznetsov [2006]) demonstrates that it is important to combine and certification and delivering after-sales services, for example. a bottom-up approach in which committed groups and indi- Linkage programs that formalize mechanisms for technology viduals become involved in more or less formal networks with transfer and management improvement should follow inter- central arrangements through the Ministry of Foreign Affairs national best practices. Renault’s new manufacturing plant in that help support those networks. Then, to facilitate invest- Morocco is an excellent example, which includes agreements for ments by diaspora members in specific projects, whether the provision of training, technical assistance, and certification they return to their country of origin or operate at a distance, and contracts with local firms, themselves operating in joint sector ministries or regional offices should be prepared to venture with foreign suppliers, for components and materials.9 help match the assistance proffered by diaspora members with local demands. The combination of a bottom-up approach with a focus on specific projects is possible through dedicated networks, as illustrated by proven initiatives in Scotland and BOX 6.5 Chile. Table 6.1 summarizes the approaches. Good practices for international cooperation in research The following lessons have been gleaned from years of Educating for German collaboration with southern Mediterranean partners: innovation  nsist on funding from both northern and southern • I partners, even if the funding provided by the latter is small. Improving competencies and skills to support a knowledge- economy-based development process was discussed in chapter nsist on the inclusion of young scientists as a criterion • I for selecting and supporting projects. 5. This section considers the more specific issues of cultivating a mindset of innovation and entrepreneurship among young  isten to alumni (notably doctoral candidates) when • L they return from stays in Europe. Provide start-up people. It begins with higher education, discusses training grants to help them launch their activities in their for unemployed youth, and ends with primary and secondary home country. school students.  ake use of bilateral support, as a kind of seed money, • M to prepare applications and obtain funding from larger Growing numbers of postsecondary programs in engineering EU projects. and management train students in innovation and entrepreneur- • T  rain universities, research teams, projects, and pro- ship, often through twinning with prestigious institutions grams in management and good governance. abroad. Twinning not only delivers top-notch experiences, but also helps to attract and retain the country’s brightest stu- Source: Hülschörster 2012. dents. Particularly promising from the point of view of the knowledge economy are research universities that embrace 9. One of the most efficient programs was launched by Ireland in the 1990s to promote the Irish electronics industry, notably through contracts with American firms (World Bank 2010). 10. Three associations are connected specifically to the grandes écoles, one for each country of the Maghreb: Association Tunisienne des Grandes Ecoles, Association des Marocains des Grandes Ecoles, and Réseau des Algériens Diplômés des Grands Ecoles et Universités Françaises. 11. As an example, Moroccan workers laid off from a steel plant in France received severance payments to start up their own businesses. Rather than carrying out individual projects in France, the migrants decided to return to Morocco and use their severance payments to address the key binding constraint to the develop- ment of their own villages—lack of electricity. Scaling up the small but successful electricity grids was a long process—about 20 years in the making—yet the process yielded a sophisticated NGO that leveraged complex search networks involving the migrants, French consultants (as sources of formal expertise), and international donors. Eventually the process changed how the national government handled rural electrification (Djeflat 2012). 90 Chapter 6: Fostering innovation and technological upgrading Diaspora strategy: Combining top-down and bottom-up approaches  TABLE 6.1   ­ Narrow Agenda: Broad Agenda: Dialogue and Coordination Focused and Specific Projects Centralized approach Central focal point Incorporation into everyday practice Diaspora ministry Reliance on diasporas as an extension of work of sector agencies (for example, FDI promotion by diaspora) Bottom-up (decentralized) Diverse entry points Guided serendipity approach Diaspora NGOs, research groups Managed networks (as GlobalScot and ChileGlobal) Source: Kuznetsov and Morgandi 2009. Note: FDI = foreign direct investment; NGO = nongovernmental organization. innovative approaches. A good example is Morocco’s devised training schemes to assist unemployed individuals International University of Rabat, a private establishment wishing to start their own business. These schemes, inspired launched a few years ago that has attracted businesses, by an active employment policy and often implemented in con- including Moroccan subsidiaries of foreign companies, to the nection with chambers of commerce and industry, require technopark surrounding the school (box 6.6). The emergence sustained coaching and combined technical and financial of dynamic private universities has stimulated change in higher support. Morocco’s ANAPEC (Moukawalati) program is among education systems by stimulating competition and emulation. the most developed of such schemes. There is also a population In Morocco top engineering schools such as Mohammedia of potential entrepreneurs among the ranks of marginalized have significantly adapted their programs to respond to new youth, whose creative potential can flourish in well-adapted demands and challenges. Bureaucratic hurdles of various types schools. A good example is provided by the Second Chance have hampered the transformations that such schools could Schools, a model pioneered in the French city of Marseille about have stimulated. For instance, decrees establishing equiva- a decade ago, which has been emulated throughout France to lences between the diplomas offered by private and public improve the prospects of marginalized young people living in universities have been delayed, to the detriment of private poor suburbs and slums.12 The aim is to raise the competencies institutions. of students to basic levels in writing, reading, and arithmetic in a year of intensive courses. At the same time, students are Complementing the support offered to would-be entrepre- placed in businesses, where they work half time. The busi- neurs through incubators and related means, agencies have nesses commit to employ the student for 18 months after the BOX 6.6 The International University of Rabat The International University of Rabat is the first private university in Morocco, established in 2006 by a member of the Moroccan dias- pora, a former professor at the Polytechnic University of Nantes. The university is an internationally oriented, R&D-driven university housed in the Technopolis of Rabat, an industrial area that aspires to host high-tech industries. The university began offering its undergraduate and graduate courses in English and French in 2012, charging annual tuition of about $10,000, high for Morocco but internationally competitive. The target audience is elite students from the African continent who would normally study in Europe. The university’s public-private partnership (PPP) with the government of Morocco has allowed it to use academic personnel from the public sector and to gain official recognition of its degrees and diplomas. In addition, the university enjoys the patronage of a powerful segment of the local economy: it is built on land donated by the king and has representatives of leading local financial institutions and companies on its board and among its donors. The crucial element of the institution’s success is its autonomous status. Autonomy allows the institution to bypass the civil service code and define its own policies for recruiting and managing talent, above all diaspora members. Forty percent of positions are reserved for faculty working in partner universities that allow students to spend semesters in Europe or in the United States. The university is able to pay internationally competitive salaries for a few department heads who act as magnets for talented younger researchers. Staff are expected to connect with clients in the local private sector and are rewarded for their results (such as patents, research grants, and contracts with the private sector). The R&D strategy is tailored to generating “inexpensive innovations” for the domestic and African economy: (i) infrastructure devel- opment for transportation, tourism, and affordable housing; (ii) renewable energy using local sources; and (iii) local niches (such as railway, naval, automobile, and aerospace engineering). Recent successes include an R&D contract with a local micro-camera export company, the creation of a start-up producing patented solar and wind-fueled devices, and technical assistance to the state-owned foreign currency exchange office. Source: Djeflat 2012. 12. Currently there are 106 Second Chance Schools in France, enrolling a total of 12,000 young people. Transforming Arab Economies 91 Chapter 6: Fostering innovation and technological upgrading end of the one-year program. These Second Chance School  ublic campaigns using media, including social media, to • P experiences have proved very efficient in placing students in build awareness in society at large by spotlighting promis- jobs. About 60 percent of graduates obtain a long-term contract ing achievements and success stories. with the firms in which they trained. Some create their own  emonstration projects with high growth and job poten- • D businesses. Most graduates become active change agents tial, such as those supported by the World Bank through within their communities of origin. rapidly delivered schemes (box 6.7). Inculcation of a culture of innovation and entrepreneur- The measures currently undertaken in Jordan to stimulate ship begins in secondary school, or even at the primary innovation combine those different instruments (see annex 3). level. Enterprise creation and management can be taught in secondary schools through simple kits that use games to Within a regional perspective, a broad program of innova- present the necessary concepts and methods. There are also tion support has been proposed by the Marseille Center for well-tested and proven programs to familiarize students with Mediterranean Integration (CMI), European Investment Bank the culture of science, such as the French initiative entitled (EIB), and its partners (ANIMA 2012) that includes: La Main à la Pâte (www.lamap.fr), designed by 1992 Nobel  he mobilization of innovation actors through an online • T prize winner Georges Charpak, which has been successfully platform and sector task forces applied in Latin America and Africa.  utual information tools such as technology monitoring • M and project promotion actions • C  oordination of national services for project support, seed Stimulating change funding, living labs, and so on  overnance-related initiatives (for example, to improve • G through international the management of technoparks and incubators through a more entrepreneurial approach, and better coordination reviews and joint between policies to attract foreign investors, industrial policies, and innovation policies) projects In the field of R&D policy, the European Commission has Innovation policy requires precise incentives, regulatory recently launched a call for proposals for regionwide initia- actions, and often consequential investments in research tives involving the codesign, coownership, and mutualization laboratories, educational institutions, or logistics and of efforts and benefits in several priority areas, including other infrastructure. But it often begins with, or derives renewable energy, water management, the environment, and momentum from, subtler actions aimed at changing mind- transport (among others).13 With a budget of €40 million, the sets, perceptions, and behaviors. Among the measures that program should be an important step toward a strong Euro- have proven to be efficient, based on global experience, are Mediterranean research and innovation space. the following:  ational policy reviews by international bodies such as • N BOX 6.7 the OECD or the United Nations Industrial Development Organization (UNIDO), which have formalized method- iMENA: An innovation agenda for jobs and ologies to gather information, conduct field studies and financing of innovation in the Arab world evaluations, and discuss outcomes with government authorities and concerned stakeholders. The innovation systems of several Arab countries have been the subject of Some of the most important avenues for job creation are start-ups and small businesses (including micro-enter- in-depth analysis, as for example, the work on Abu Dhabi by prises). But these enterprises often have trouble secur- Andersson and others (2010) and on Morocco by Andersson ing funding from traditional sources. The World Bank has Djeflat and Johansson de Silva (2006). thus been working on creating and supporting innovative • F  oresight exercises in which information is collected on funding opportunities for these so-called gazelles (high- growth companies). Examples of this work include matching future technological trends or industrial developments of grant schemes in Tunisia, building networks and links with particular interest for the concerned countries, notably diasporas through initiatives like Oasis500 in Jordan, and through groups of selected national and international South–South learning exchanges based on similar inno- experts. Such exercises are useful to shape future stra- vative development agendas. These activities are feeding tegic choices. into a regional MENA Innovation Strategy (iMENA) that will become a living document that collects the knowledge and  udits of industrial sectors or activities, in which com- • A understanding gained from the various activities. petencies, gaps, and needs are identified and plans drawn up, notably for the purpose of supporting niches with high Source: Authors. growth and employment potential (see chapter 8). 13. Follow-up to EC Euro-Mediterranean Conference on Research and Innovation, April 2–3, 2012, Barcelona. 92 Chapter 6: Fostering innovation and technological upgrading Conclusion Kuznetsov, Yevgeny, ed. 2006. Diaspora Networks and the International Migration of Skills: How Countries Can Draw on Their Talent Abroad. Washington, DC: World Bank. Kuznetsov, Yevgeny, and Matteo Morgandi. 2009. Towards a Innovation efforts and performance in the Arab world are New Diaspora Agenda in North African Economies. low but increasing. Government policies and program are Unpublished report, World Bank, Washington, DC. being deployed to create and exploit innovative opportunities. Public authorities are involved in an ongoing learning process. Kuznetsov, Yevgeny, Carl Dahlman, and Abedelkader Djeflat. Further support from the international community would be 2012. H o w t o F a c i l i t a t e H i g h - P r o d u c t i v i t y useful to foster the innovation climate. Employment in MENA Economies? Sequencing Interventions to Promote Innovation. Unpublished background report, World Bank, Washington, DC. References and bibliography OECD (Organisation for Economic Co-operation and Develop- ment). 1996. The Knowledge-Based Economy . Andersson, T., A. Djeflat, and S. Johansson de Silva. 2006. Paris: OECD. http://www.oecd.org/dataoecd/51/ The Innovation System and Related Policy Issues 8/1913021.pdf. in Morocco. Prepared for the United Nations Conference for Trade and Development (UNCTAD), Radwan, Ismail, Pierre Strauss, and Simon Bell. 2011. IKED, Malmö, Sweden. Financing Innovation. Unpublished background report, World Bank, Washington, DC. Andersson, T., E. Carayannis, P. Formica, S. Johansson de Silva, and S. Mahroum. 2010. “Towards Innovation Rocha, Roberto, Subika Farazi, Rania Khouri, and Douglas Policy in Abu Dhabi: Indicators, Benchmarking, Pearce. 2010. “The Status of Bank Lending to SMEs and Natural Resource Rich Economies.” General in MENA : The Results of a Joint Survey of the Union Secretariat of the Executive Council, Abu Dhabi. of Arab Banks and the World Bank.” World Bank, Washington, DC. ANIMA. 2012. “Promoting Innovation in the Mediterranean: Profiles and Expectation of Business Incubators, Stone, Andrew, and Lina Tarek Badawy. 2011. “SME Innovators Technology Parks and Technology Transfer Offices.” and Gazelles in Mena—Educate, Train, Certify, Study 63. Marseille. November Compete!” MENA Quick Notes Series 43, World Bank, Washington, DC. Diop, Ndiamé, and Sofiane Ghali. 2012. “Are Jordan and Tunisia’s Exports Becoming More Technologically UNDP (United Nations Development Programme) and the Sophisticated? And Why it Matters.” MENA Quick Mohammed bin Rashid Al Maktoum Foundation. Notes Series 57, World Bank, Washington, DC. 2009. Arab Knowledge Report 2009: Towards Productive Intercommunication for Knowledge. Djeflat, A. 2012. “Morocco’s Effort on the Knowledge Economy.” Dubai: UNDP and the Mohammed bin Rashid Al Unpublished background note, CMI, Marseille. Maktoum Foundation. Dubarle, Patrick. 2012. Draft Paper Prepared for CMI Innovation UNIDO (United Nations Industrial Development Organization). Policy Program (IT1). Unpublished background 2011. Industrial Development Report 2011. Vienna: report, CMI, Marseille. UNIDO. EIB (European Investment Bank), World Bank, Medibtikar, WEF (World Economic Forum). 2011. Global Competitiveness and Ville de Marseille. 2010. Plan and Manage a Report 2011–2012. Geneva: WEF. Science Park in the Mediterranean: Guidebook for Decision Makers. Luxembourg: EIB. World Bank. 2010. Innovation Policy: A Guide for Developing Countries. Washington, DC: World Bank. Gill, Indermit S., and Martin Raiser. 2012. Golden Growth: Restoring the Lustre of the European Economic ———. 2012. Knowledge Assessment Methodology 2012. Model. Washington, DC: World Bank. Knowledge for Development Program, World Bank, Washington, DC. http://www.worldbank.org/kam. Hülschörster, Christian. 2012. “Changing Science: A New Way of Doing Science in the Context of the Mediterranean Region.” Presentation at Euro Med innovation con- ference “Changing Science in Changing Societies workshop,” Barcelona, April 2–3. Transforming Arab Economies 93 Chapter 6: Fostering innovation and technological upgrading Appendix 6.1 The different types of innovation and related ecology New services New business models Which innovation New products or ways of doing things outputs? New processes Which types of S&T-based origination-type Creative recombination-type Business model/process innovators and innovators (PhDs mostly) innovators (degree +/– irrelevant) reinvention-type innovators (MBAs) innovation? A growing community of first-rate High caliber, variety, and size Quality, variety, depth of country’s scientists and engineers of the creative class enterprise universe A critical mass of respected Respect and autonomy bestowed Quality and number of bold, university research centers on creative types by society innovative firms within it Absence of barriers impeding An exceptionally favorable Number in rapidly changing, What kind of an scientist entry or return environment for startups complex fields environment A minimum basic research base An absence of impediments to Number with flexible will they thrive within the country professional service exports organizational approaches in? A balance of basic, applied, and A critical mass of sophisticated Exposure to strong worldwide commercialization R&D service industries, esp. IT competitive winds Strong incentives for private A critical mass of design and Openness to business model sector involvement in R&D other creative industries reinvention, few legacy hangups Proper emphasis on payoff Plenty of sophisticated users Proneness to use of IT as trigger through commercialization for innovators to engage with and vehicle for this openness What will attract Good research environment, Outstanding living conditions Enticing FDI conditions as a them into the salary, and social standing as and a lively creative industries magnet for frontier enterprises country or a magnet for elite science types ecology as a magnet for and game-changing retain them from home and the diaspora creative types from the world entrepreneurs from all over in it? over the world Innovator Upgrade a few basic and applied Attractive “in” cities, UA. Cataly- Special zones, tax and other steps attractions and research centers to worldclass. tic creative industries programs. to attract innovative TNCs. innovation Neutral and universal private R&D incentives. Comprehensive programs Linkage programs for local SMEs support policies for technological incubators, startup support, and VC funding. around resident TNCs. Innovation Vigorous tertiary education and LLL reforms to rapidly enhance the supply of first rate S&T, design/creative, MBA, and personnel other graduates. Upgrade quality and respect for mid-level technicians degrees. development Early childhood, basic, secondary and vocational curriculum changes with a strong pitch towards creativity, design, policies teamwork, problem-solving, IT, foreign language and other platform skills. Dynamic entrepreneur- Systematic entrepreneurship training in secondary and tertiary education. Top-rated business environment. ship policies Superb business development support services. Reinforced IPR and MSTQ regime. Networking Smart support and good legal setup for academia/research/industry links. Strong support for global knowledge and knowledge access and networking (e.g., science attaches; fairs; diaspora networks, study tours). English for all program. access policies World-class, highly competitive ICT services, with high broadband coverage. IT-related SME support programs. Ambitious IT diffusion and IT literacy programs. Advanced e-government as catalyst. Innovation Innovation-promoting public procurement policies. Turning selected government services into innovation powerhouses, demand- and outsourcing others. Standards & norms that promote innovation. side policies AGILITY Top-rated and innovation-friendly business environment. High-performing general business support institutions. High level of competition within business and finance sectors. What are the key success NETWORKING Full participation in global value chains. Deep relationships with worldwide investment banks, factors in an VC/PE players, pioneering firms, sophisticated users. Well-oiled partnering routines. innovation economy? CONSTANT LEARNING Systematic scanning of global knowledge, technologies, patents, ideas, market data. Intense exchanges with outside peers, gurus, pioneers firms, top innovators. RELIABILITY High-performing public services. Excellent power, water, transport, telecom infrastructure. Adequate capital, export, working capital finance. Up to date IPR and MSTQ setups. 94 hapter 7 Moving toward an information society In today’s knowledge-based world, countries are developing Figure 7.1 dynamic information societies. 1 These societies are founded Effect of various ICTs on GDP growth in high- on advanced information infrastructure, as measured by the spread of mobile telephony, computers, Internet access, and and low-income economies, 2000–06 new e-applications, all supported by a fast-changing informa- 1.5 High-income economies tion technology (IT) industry that has become a major source 1.3 Low-income economies of employment and an important contributor to growth. There is ample evidence that information and communication 1.1 technology (ICT) plays an increasingly important role in economic GDP growth (%) growth. The World Bank reported in 2009 that in low- and mid- 0.9 dle-income countries, every 10 percentage-point increase in broadband penetration accelerates economic growth by 1.38 0.7 percentage points.2 The study further found that the develop- 0.5 ment impact of broadband is greater in emerging economies than in high-income countries, which “enjoyed a 1.21 percent- 0.3 age point increase in per capita GDP [gross domestic product] growth” for each 10 percent increase in broadband penetra- 0.1 tion (World Bank 2009b). The study also demonstrates that broadband has a potentially larger growth effect than other –0.1 Fixed Mobile Internet Broadband ICTs, including wireline telephony, mobile telephony, and the telephony telephony Internet, as shown in figure 7.1 (Kelly and Rossotto 2012). Source: Adapted from Qiang and Rossotto 2009: 45. Events of the recent past have highlighted the power of ICTs Note: Measures the percentage point increase in GDP that is associated to effect change in the Arab world. 3 In the aftermath of these with a a 20 percent increase in different ICTs. ICTs = information and communication technologies; GDP = gross domestic product. events, there is a great opportunity to extend reforms of the ICT sector, increase competition, broaden access to mobile telephony,4 improve broadband access, remove restrictions services to citizens. In addition, special attention must be paid on Internet access and use, and provide new opportunities to to upgrading workers’ skills and competencies to enable them increase employment, foster entrepreneurship, and enable to use new applications and technologies. This chapter provides better transparency and governance. Efforts should also be a brief overview of the state of the information infrastructure in made to develop ICT applications to facilitate improvements the region and highlights some areas that still need strength- in the delivery of vital economic, social, and government ening in the Arab world. 1. This chapter draws on many published works, among them Rossotto and others (2011) and Kelly and Rossotto (2012), and on background studies by Radwan and Strauss (2012), Koivisto and Larsen (2012), and Hätönen (2012). 2. The term “broadband” may refer to several aspects of telecommunication networks and services, including (i) the infrastructure or “pipes” used to deliver services to users, (ii) high-speed access to the Internet, and (iii) the services and applications available via broadband networks, such as Internet Protocol televi- sion and voice services that may be bundled in a “triple-play” package with broadband Internet access. Further, many countries have established definitions of broadband based on speed, typically in megabits per second or kilobits per second, or on the types of services and applications that can be used over a broadband network (that is, functionality). Reflecting each country’s unique needs and history, including economic, geographic, and regulatory factors, definitions of broadband vary widely (Kelly and Rossotto 2012). 3. An example of the power of social media can be seen in their role in the 2011 Arab Spring uprisings. Protest organizers used Web sites such as Facebook, Twitter, and YouTube, in addition to texting and other narrowband technologies, to coordinate protest activities. Social media facilitated the spread of informa- tion about citizens’ actions, through YouTube videos and conversations on social Web sites. These online tools enabled the organizers to spread awareness and increase participation and attendance at demonstrations faster than more traditional media could allow (Kelly and Rossotto 2012). 4. A recent report looks at the impact of mobile telephony (substituting 2G connections with more advanced 3G connections) on economic growth (Deloitte, GSMA, and Cisco, 2012). It highlights that: • A doubling of mobile data usage increases the per capita gross domestic product (GDP) growth rate by 0.5 percent (based on data for 14 countries). • Substituting 10 percent of 2G connections with 3G connections boosts GDP by 0.15 percentage points (based on penetration data for 96 developed and develop- ing markets). • A 10 percent increase in mobile penetration boosts total factor productivity by 4.2 percent. Transforming Arab Economies 95 Chapter 7: Moving toward an information society Information Emirates (UAE) has one of the highest rates of smartphone pen- etration: 61 percent (The Economist  2012). infrastructure in Progress has also been made in Internet penetration. the Arab world Between 2000 and 2010, the number of Internet users in the Middle East and North Africa (MENA) grew tenfold to more than 100 million, with wide variation across countries, ranging from 12 users per 100 people in Algeria to 81 per 100 in Qatar Arab countries have made great strides in ICT diffusion since (figure 7.3). Internet penetration can have beneficial effects the mid-1990s, thanks to a host of liberalization reforms and the on the economy. A 1 percentage point increase in the number global development of ICT technologies, which have driven down of Internet users is correlated with a boost in exports of 4.3 costs and made access easier. Fixed telephone lines connected percentage points and with increases in exports from low- only about 10 percent of the population of the Arab world in 2010. income to high-income countries of 3.8 percentage points As in many developing countries, it is the mobile cellular segment (Qiang, Rossotto, and Kimura 2009). But Internet diffusion that has grown—from almost nothing in 2000 to 87 subscriptions in many countries has been hindered by the lack of broad- per 100 people in 2010 (figure 7.2). For example, the United Arab band access and by international bandwidth that lags well Figure 7.2 Mobile and fixed-line telephone penetration in the Arab world, 2010 250 Mobile cellular subscriptions (per 100 people), 2010 200 Telephone lines (per 100 inhabitants), 2010 150 100 50 0 p. ria ld n p. an n co t ti an r a ia s . ep ai ta te bi ai no Re ou is Re r oc rd Om w ge wo Qa ra hr ,R ira n ba ib Ku ab or Jo Tu ab iA Al Ba Dj en Em Le ab M Ar Ar ud m Ar ab n Sa Ye t, ria yp Ar Sy Eg d ite Un Source: World Bank 2011a. Figure 7.3 Internet users in MENA countries, 2010 100 Internet users (per 100 inhabitants) 90 80 70 60 50 40 30 20 10 0 ld ria in ti p. q an t n a co an r a ab Em ia en s . ep ai ta te by bi Ira no ou s a Re r oc Ar rd Om w ge wo ni Qa ra hr ,R ira Li ba ib Ku or Jo Tu b Al iA n Ba Dj Le b ra ria M a ud m ,A Ar Sy ab Sa Ye pt Ar y Eg d ite Un Source: World Bank 2011a. 96 Chapter 7: Moving toward an information society behind many potential competitors. In 2009 available Internet 2011). Given the high Internet usage of this segment of the bandwidth per capita was 18 to 20 times greater in Bulgaria population, young people will be the main driver of increased than in Tunisia, Morocco, and Jordan. The price per megabit demand for digital content and, in turn, increased demand for in Bulgaria was three times lower than in Morocco, five times bandwidth and speed. lower than in Tunisia, and 45 times lower than in Jordan (CMI, World Bank, and IsDB 2012). But even among young people, there is a digital and gender divide in MENA. The gender gap in mobile phone ownership The telecommunications sector plays an important role in is twice the global average, with women 24 percent less likely the economies of the region. Telecommunications revenues to own a mobile phone. Only 37 percent of Facebook users are account for about 3.5 percent of GDP in Egypt, 4.2 percent in female, compared with 56 percent in the United States. Twice Tunisia, 4.6 percent in Morocco, 4.9 percent in Lebanon, and 6.5 as many MENA men as women use Twitter, contrary to the percent of GDP in Jordan. These shares are generally higher global figure of 55 percent female users. The regional gender than in Western Europe, where the figure ranges between 1.5 gap in technology use is narrowest in Jordan and Lebanon. and 4 percent of GDP. The range is between 3 and 5 percent of In Jordan, for example, women account for 45 percent of all GDP in Eastern Europe (Hätönen 2012).5 Telecommunications Internet users. With respect to the digital divide among young operators in the countries covered by the European Investment people, addressing challenges on the supply side (for example, Bank’s (EIB’s) Facility for Euro-Mediterranean Investment and lack of competition) and the demand side (affordability, lagging Partnership (FEMIP)6 have invested between 10 and 25 percent education and literacy) will enable youth across the region of their revenues in their respective countries, similar to the to reap the benefits of ICTs (La Cava, Rossotto, and Paradi- levels reported in Western and Eastern Europe. Cumulative Guilford 2011). investments in telecommunications infrastructure and services in the FEMIP countries came to about €500 million in 2011, Despite some progress, there is still much to be done to creating new employment opportunities and significant eco- expand broadband capacity and to spread ICT usage, both nomic benefits in the region. The share of employees working of which are essential to improve productivity. Average directly in the telecommunications sector ranges from 0.25 bandwidth in the region is low at around 1 megabit (Mb) per percent to 1.25 percent of the total workforce in the FEMIP 1,000 people, compared with 40 Mbs/1,000 people in the United countries (Hätönen 2012). Kingdom and 30 Mbs/1,000 people in France (WEF 2010). High prices for ICT services are a constraint on their use and on the Yet countries need to do more to leverage ICT for enhanced competitiveness of the economy, a situation that in several competitiveness. The differences in ICT use and impact across countries can be traced to the presence of monopolies in the region are so vast as to constitute a digital divide (WEF certain segments. In 2008 Egypt, Lebanon, Syria, and Tunisia 2012). The Gulf Cooperation Council (GCC) countries stand still maintained monopolies over international long-distance on one side of that divide, with five of them ranked between communication calling. Lebanon still had a monopoly on mobile position 27 (Bahrain) and 40 (Oman) of 142 countries covered service. Internet service was partly competitive in Syria and in the World Economic Forum’s (WEF’s) Global Information Tunisia. With voice penetration approaching saturation in many Technology Report 2012. 7 The rest of the MENA countries Middle Eastern markets and Internet penetration taking off, stand on the other side of the divide (box 7.1). the region stands on the edge of exponential growth in broad- Young people are key consumers of technology and a major band connectivity (figure 7.4)—an opportunity that it cannot force shaping the ICT sector. As in the rest of the world, youth afford to miss. has been the primary driver behind technology uptake in the MENA region. Many of the region’s young people use the Internet as part of their daily lives: for social applications such as Facebook, Twitter, YouTube, and peer-to-peer file sharing; for educational purposes through the use of Google, Wikipedia, Increasing the Yahoo, and other search engines; and for entertainment to play contribution of ICTs games, download music, or watch videos online. The number of Facebook users in the Arab region grew 78 percent in 2010, to growth while in Tunisia the proportion of users increased 8 percent in the first two weeks of January 2011, following the begin- ning of demonstrations (Kelly and Rossotto 2012). Using Web The ICT sector can be a major source of growth, as has 2.0, youth also generate digital content from mobile phones been the case in the developed and emerging economies. to social media. In MENA 85 percent of mobile phone owners IDC (2011) defines the Internet economy as the sum of the use them to access the Internet and to download applications value of the goods and services exchanged over the Internet for social networking (La Cava, Rossotto, and Paradi-Guilford by businesses and consumers, plus the value of investments 5. Western Europe: Belgium, Denmark, Germany, Greece, Spain, Ireland, France, Italy, Luxembourg, Netherlands, Austria, Portugal, Finland, Sweden, and the United Kingdom. Eastern Europe: Bulgaria, the Czech Republic, Estonia, Cyprus, Latvia, Hungary, Poland, Romania, Slovenia, and the Slovak Republic. 6. The FEMIP includes Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Syria, Tunisia, and the West Bank and Gaza. 7. The WEF’s Global Information Technology Report 2012 covers 142 countries, both developed and developing. Most GCC governments have embraced ambitious digital strategies coupled with pro-business reforms and infrastructure development to attract foreign investors and to diversify their economies. This government- led push is reflected in the strong performance achieved in several dimensions of the report’s networked readiness index (NRI). See http://www3.weforum.org/ docs/Global_IT_Report_2012.pdf. Transforming Arab Economies 97 Chapter 7: Moving toward an information society BOX 7.1 The Networked Readiness Index (NRI): Rankings across the Arab world, 2012 With an NRI ranking of 27 (out of 142 countries covered by the World Economic Forum’s Global Information Technology Report 2012), Bahrain leads the Arab world, thanks to a fairly sophisticated enabling environment for entrepreneurship and innovation, coupled with good information and communication technology (ICT) readiness (in terms of infrastructure, affordability, and skills). This process has been government led and not yet followed with the same intensity by the business community. As a result, higher rates of innovation and shifts toward knowledge-based activities have yet to appear in the country. Efforts to integrate ICT into a more general innovation ecosystem at the corporate level should help to boost the desired economic impacts of ICT, and of technology more broadly. Qatar follows closely in position 28. Qatar has created one of the region’s best environments for entrepreneurship and innovation, evidence of the government’s strong commitment to boosting ICT-related infrastructure and spillover effects across the economy. On a less positive note, the low level of competition in the ICT and telecommunications sectors affects the overall affordability of accessing ICT, especially broadband, hindering a wider diffusion and usage of ICT (such as of broadband Internet subscriptions) across the country. The United Arab Emirates (UAE), in 30th place, presents a profile similar to that of Qatar, with good ICT-related infrastructure, thanks to the government’s commitment to use ICT to diversify its oil-dependent economy. The UAE could derive further benefits by expanding its overall skill base and increasing participation in tertiary education. Liberalizing the ICT and telecommunications markets would help reduce the high costs of accessing the Internet. Saudi Arabia, in 34th place, has recognized the importance of ICT as a key driver of its economic transformation. A strong government- led effort to prioritize ICT, coupled with a very favorable environment for business development, has yielded fairly good results, espe- cially in terms of infrastructure development. But as in the case of the UAE and Qatar, immediate priorities should include boosting competition to reduce the costs of communications, improving the skill base by reducing adult illiteracy, and increasing participation in tertiary education. All would further increase ICT uptake. Despite fairly good ICT-related infrastructure development, Kuwait, at position 62, is hindered by the high costs of access and the population’s relatively low level of skills. As a result, it shows fairly poor rates of ICT usage that, coupled with a less business-friendly environment for entrepreneurship than in other Gulf Cooperation Council states, result in low levels of ICT impact. Jordan is in 47th place. Despite the need to improve its ICT infrastructure, especially in terms of getting access to greater international Internet bandwidth, the country—led by the government’s strong commitment—has managed to liberalize markets and improve its business and innovation environment, although some weaknesses remain. Tunisia ranks 50th due to strong government commitment. Improving affordable access to a more robust ICT infrastructure and developing digital content would help improve ICT uptake by individuals and businesses. Egypt is in 79th place. Upgrading the country’s ICT infrastructure, developing more digital content in Arabic, improving the general environment for entrepreneurship and innovation, and enhancing the skill base are needed to encourage higher and more homo- geneous usage. Morocco (91), Lebanon (95), Algeria (118), and Syria (125) all suffer from important weaknesses in ICT development that hinder their capacity to take full advantage of the benefits accruing from the deployment and use of these and other technologies. Low levels of ICT infrastructure development, coupled with insufficient available skills, translate into low uptake of technology by all agents, espe- cially the business community and individuals. In the case of Algeria, the unfavorable business environment hampers the capacity of already-scarce efforts to achieve economic benefits from technology. Addressing these weaknesses will be crucial to start the national economy toward more knowledge-rich and productive activities. Source: WEF 2012. made to deploy, access, and use the Internet. In the European with 75 percent of the benefits captured by companies in more Union (EU), estimates suggest that the Internet economy rep- traditional industries. The Internet is also a catalyst for job resented as much as 4 percent of GDP in 2010. 8 According to creation. Among 4,800 small and medium-sized enterprises a recent study by McKinsey, the Internet’s impact on global (SMEs) surveyed, the Internet created 2.6 jobs for each job growth is rising rapidly. On average, the Internet contributes lost to technology-related efficiencies (Pélissié du Rausas and 3.4 percent to GDP in the 13 countries studied (the G-8 plus others 2011). In Egypt the ICT sector’s value-added reached $5.6 billion in 2009, corresponding to 3.8 percent of GDP. Brazil, China, India, South Korea, and Sweden). It accounted Moreover, in 2009, it recorded the highest growth rate of all for 21 percent of GDP growth over the past 5 years among the industries in the country (UNCTAD 2011). developed countries, a sharp acceleration from the 10 percent contribution in the past 15 years. Most of the economic value Digitization in the MENA region contributed $27 billion to eco- created by the Internet falls outside of the technology sector, nomic growth and generated 1.3 million jobs between 2007 and 8. The contribution of the Internet economy to GDP in Europe appears to be greatest in the United Kingdom, at just over 6 percent of GDP in 2010, suggesting that it benefits from its high level of “eReadiness” and its leading position in ICT services. McKinsey’s (2010) study estimated the French Internet economy at a little over 3 percent of GDP in 2009, with that share expected to grow to around 4.5 per cent in 2010 (Tsang and others 2011). 98 Chapter 7: Moving toward an information society Figure 7.4 Mobile and internet penetration in MENA, 1999–2009 80 Mobile telephone subscriptions Internet users 70 Mobile broadband subscriptions Fixed broadband subscriptions 60 per 100 inhabitants 50 40 30 20 10 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009F Source: International Telecommunications Union. Note: MENA = Middle East and North Africa. 2010 (Booz and Company (2012). But ICT’s share in total exports from the region is stagnant at about 1 percent, well below the Improving broadband world average of 12 percent. This need not be so, as Egypt has demonstrated. According to the WEF (2012), Egypt has intro- access duced ICT into its educational system, developed e-content, created technology parks, developed incubators to encourage the creation of SMEs focused on ICT, and established an ICT Broadband access in MENA is constrained, despite large trust fund that uses ICT to promote and enhance the perfor- untapped demand. Although mobile penetration in MENA mance of these enterprises. As a result, it has emerged as countries is on par with the countries of the Organisation for one of the largest ICT exporters in the MENA region, with 27 Economic Co-operation and Development (OECD) and other percent annual growth in ICT service exports between 2005 regions with advanced ICT infrastructure, broadband pen- and 2009. Such efforts need to be accelerated throughout the etration is low (below 5 percent of the population, figure 7.5), region so as to allow ICTs to make a greater contribution to mainly as a consequence of the lack of competition in the growth, export diversification, and job creation.9 broadband market. This situation needs to be remedied, as potential employment gains (estimated at 2.5–4 additional jobs Several countries of the region, such as Oman, Tunisia, and for each broadband job) could result from effective broadband the UAE, have made progress in developing the legal and development (Kelly and Rossotto 2012). institutional framework for secure electronic transactions, 10 which can, for example, help spur development of online sales Insufficient competition, weak regulation, and content restric- and allow businesses in the region to capture a larger share of tions are a major constraint to the development of broadband offshore business processes, an area in which Egypt and the in the region. Box 7.2 highlights the state of broadband in UAE are already top competitors (A.T. Kearney 2011). the FEMIP countries. As backbone networks and other fixed 9. In Egypt’s ICT sector targeted government policy, more than any other factor, has played a vital role. In 2004 the government established the Information Technology Industry Development Authority to develop the ICT sector and boost its exports. A partnership between the Ministry of Communications and Information Technology and the private sector, the Authority is dedicated to developing IT in Egypt. It runs an education program called EduEgypt that liaises with universities to train students for careers in business process outsourcing. The government also created special technology parks for promoting ICT service exports. The idea behind the Smart Village, which was inaugurated in 2004, was to create a space where IT companies could operate within a community conducive to their business needs (Goswami, Mattoo, and Sáez 2012). 10. The UAE created a legal framework for electronic transactions when it enacted the Law of Electronic Transactions and Commerce no. 2/2002 (Law no. 2) in 2002 (http://isper.escwa.un.org/Default.aspx?TabId=65&item=23). Transforming Arab Economies 99 Chapter 7: Moving toward an information society ICT market in the region, impeding the delivery of ICT-enabled Figure 7.5 services. Regional comparison of mobile and broadband penetration (%) The evolution of mobile telephony in the region is contrasted with that of broadband penetration in figure 7.6. While mobile 140 penetration has taken off, broadband penetration remains MENA rather low for several reasons. Internet service providers are 120 OECD few, as dominant operators control most of the Internet infra- structure. On the demand side, local content is underdevel- 100 oped. Governments have tended toward restricting access to information, limiting the transparency of government action, Percent 80 and offering few opportunities for citizens to engage in civic and political life. While these multiple restrictions still exist, there is a large untapped demand for information and Internet 60 access, and recent events place a strong emphasis on the need to promote legal and policy reform to increase freedom 40 of access to information. 20 Progress in broadband connectivity is doubly important because it creates opportunities for new services to emerge 0 and for existing services to expand, such as business process Mobile Broadband outsourcing (BPO). The MENA region’s geographic proximity Source: Rossotto and others 2011. to Western Europe is complemented by the widespread use Note: MENA = Middle East and North Africa; OECD = Organisation of French and English in the region. Some service-sector- for Economic Co-operation and Development. oriented and resource-poor countries in MENA are well placed to exploit this opportunity, thanks to their educated, multilingual work force. (Examples include Egypt, Jordan, Morocco, and broadband infrastructure for the delivery of ICT-enabled ser- Lebanon.) The right kind of telecommunications infrastructure vices increase in importance, the severe lack of broadband in these countries would make them an attractive destination development will quickly become a binding constraint on the for investments in the BPO sector. BOX 7.2 The state of broadband in the countries of the Facility for Euro-Mediterranean Investment and Partnership (FEMIP) The broadband market is still in its early stages of development in the FEMIP countries (Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Syria, Tunisia, and the West Bank and Gaza), except in Israel, where fixed broadband penetration—DSL, cable, fiber (FTTC, FTTH), fixed WiMAX, and satellite technologies—stood at 81 percent of households in 2010. Penetration in all other FEMIP countries is still lower than 20 percent of households, except for Jordan and Lebanon, with penetration rates of 23 percent and 34 percent, respectively. Penetration of mobile broadband—HSPA, HSPA+, and LTE technologies—has been growing rapidly in recent years in most FEMIP countries, reaching 36 percent and 17 percent of households in Israel and Jordan in 2010, respectively. Mobile broad- band penetration in Morocco, Egypt, and Syria has exceeded the penetration of fixed broadband. Mobile broadband has not yet been launched in Lebanon, Algeria, or the West Bank and Gaza. The total number of fixed and mobile broadband subscribers in all the FEMIP countries reached approximately 9 million in 2010, with Egypt accounting for 31 percent of subscribers. Broadband penetration reached 41 percent of households in Jordan in 2010, whereas it remains extremely low in Syria, at 5 percent of households. Prices for a fixed broadband subscription of up to 1 Mb range from €9 per month in Morocco to €63 per month in Lebanon. Syria and Lebanon are at the upper end of FEMIP countries in terms of fixed broadband prices, whereas Morocco, Egypt, Tunisia, and the West Bank and Gaza have the lowest prices. The broadband packages available in Algeria, Israel, Morocco, and Tunisia offer unlimited data usage, whereas other FEMIP countries have imposed usage caps on their broadband offers. The price for the cheapest mobile broadband packages available in each FEMIP country ranges from €3 a month in Egypt to €25 a month in Syria. Mobile broadband is in direct competition with fixed broadband in most FEMIP countries, and sometimes the prices for mobile broadband are cheaper than for fixed broadband, as in Egypt, Jordan, and Syria. Prices for 1 Mb fixed and mobile packages are relatively high—even in nominal terms and certainly as a percentage of monthly disposable income. For instance, in the European Union, the typical price for a similar package is around €10 per month for mobile and €15–€20 for fixed line, where minimum offer- ings today provide 4 Mbs. Source: Hätönen 2012. 100 Chapter 7: Moving toward an information society Strengthening Figure 7.6 Increase of mobile penetration vs. broadband in competition in the MENA, 2003–10 ICT market 120 115 Mobile telephone penetration Fixed broadband penetration 101 Most countries in the Arab region have successfully opened 100 88 up their markets to competition in mobile communications, reaping excellent results in terms of penetration and service extension. Even so, market liberalization in the mobile sector 80 73 came rather late to the MENA region as compared to the rest of the world. Jordan and Morocco were the first countries to 58 Percent issue second mobile licenses in the late 1990s, and Morocco 60 was one of the first countries to award 3G licenses in the region, 45 while the more-developed GCC countries were rather late in 40 32 opening up competition in the fast-growing mobile sector. The UAE and Saudi Arabia, for example, had incumbent monopoly 24 operators that did not see competition until 2005. 20 At the moment mobile tariffs in the Arab world are more 3 4 5 0 1 1 2 than twice those in Asia (figure 7.7). Countries such as Egypt, Morocco, and Tunisia could do more to complete this reform 0 agenda and bring down prices further. India leads the world 2003 2004 2005 2006 2007 2008 2009 2010 in call centers and offshore services. Although many factors Source: Telegeography (2010) and World Bank database (population data, have led to this outcome (Radwan 2006), having a competitive 2008). domestic industry and low-cost voice and data services are Note: MENA = Middle East and North Africa. important components that the MENA countries could replicate. Countries in the region have been slow to extend liberaliza- present considerable entry barriers. Whereas all countries in tion to other telecommunications segments (Rossotto and Europe and Turkey have full competition in all networks and others 2011). Jordan and Bahrain are alone in the region in services, most countries in the MENA region have a de facto having implemented full competition in telecommunications monopoly over the domestic backbone, relying on the network (though they still need to strengthen the regulations and insti- of the incumbent operator, resulting in high prices and low tutions that govern competition). Elsewhere, barriers to entry quality. Some of the major utility companies11 have deployed in the data, fixed-line, and international calling markets still or plan to deploy fiber-optic cable for their own use, but it is Figure 7.7 Mobile tariffs in select countries of the Middle East and Asia 25 Mobile cellular prepaid tariff ($/month) 20 15 10 5 0 p. p. . n a ia n an n s co a ka a ia ep nd te in Re Re da di ai bi no er s oc Om an ,R ni Ch hr In ra ira la r ba g ab b Jo or Tu iL ai Al iA en Ba a Em Le Th M Ar Ar Sr ud m Ye ab n t, Sa ria yp Ar Eg Sy d ite Un Source: World Bank 2011a. Transforming Arab Economies 101 Chapter 7: Moving toward an information society still uncertain whether the abundant spare capacity can be project in Tripoli, Lebanon, includes the creation of a customiz- used for telecommunications purposes. able geographic information system (GIS) platform that has allowed the city to create and maintain a directory of streets Governments have allowed only a few politically connected players and postal addresses and to better plan municipal services to operate in the telecommunications sector. In the international (UNDP and CMI 2012). gateway segment, for example, governments in the region have allowed only a few players, making it easier to control A variety of ICT applications for e-learning, e-health, e-money, and the Internet. Asymmetric conditions placed on the award of e-government show great potential in the region. With respect to 3G licenses distorted the market in mobile telephony and Internet use in schools, country variations are wide, with the broadband. Meanwhile, regulatory frameworks, regulators, Internet reaching 100 percent of schools in Bahrain, 80 percent and antitrust authorities in the region remain weak and often in Jordan and Tunisia, but only 20 percent in Morocco and are captured by vested interests usually linked to the govern- almost none in the low-income countries. An example of using ment and to powerful groups. Monopoly power and carteliza- ICTs in education is the Jordan Education Initiative, created to tion of the economy is a major concern, one that extends well leverage public-private partnerships (PPPs) to improve the beyond the ICT sector. application of ICT in grades 1–12. Online health information systems can also convey knowledge to the region from the tech- The ICT sector is therefore only partially liberalized, preventing nological frontier and bring needed health services to citizens in the Arab region from achieving the benefits of full competition disadvantaged areas of the region. An e-health pilot in Tunisia that already exist in other regions, such as Latin America and allows users of health services to report on the quality and Eastern Europe. MENA countries would do well do take a availability of health services, a reporting model that creates reform path similar to that followed by the Eastern European accountability feedback loops from people to the authorities. countries and Turkey, setting a date for full liberalization as In 2012 the prime minister’s office in Tunisia created a citizen a short-term objective and issuing as many telecommuni- scorecard on health—the Tunisia National Health Insurance cations licenses as the market demands, eliminating all Fund Scorecard (in Arabic)—to further inform the authorities restrictions to entry, and abolishing the “discretion” reserved and the public about citizens’ views on how to improve and for governments to decide on the number of operators. To reform health services (Elgazzar 2012). A successful example make further progress in this sector, governments need to of how to facilitate job matching comes from SoukTel, which fully liberalize the telecommunications sector, step up com- provides a mobile-phone-based service called JobMatch to petition, increase broadband capacity, and upgrade mobile reduce the gap between demand and supply of labor in Morocco technology by moving toward 4G licensing and using it to give and the West Bank and Gaza (www.souktel.org). existing operators full telecommunications licenses so as to foster greater competition (CMI, World Bank, and IsDB 2012). ICTs can accelerate the opening up of government data, make Finally, as the region moves to a more competitive telecommu- e-procurement possible, and enhance citizen engagement to nications sector, governments will need to review and develop improve government transparency and accountability. In 2009, policies toward rural areas, which often are not attractive to for example, Lebanese citizens were encouraged to send SMS profit-oriented operators. An example worthy of consideration reports on irregularities in the parliamentary election to the is Saudi Arabia’s universal broadband service in rural areas citizens’ reporting project known as Sharek961.org. Morocco (Dymond 2012). was also the first country in MENA to provide at least a portion of government data online (https://data.gov.ma). Opening up such information is an important way to facilitate data-driven accountability of government to citizens. In this spirit, the Open Making more effective Development Technology Alliance (ODTA; www.opendta.org) use of ICT applications is a knowledge platform that aims to give voice to citizens and improve accountability by offering ways to provide feedback on public services. This will help to make governments more accountable for the public services they provide. There is vast potential to use ICTs for the delivery of gov- ernment services in education, health, business, and other The United Nations E-Government Survey 2012 finds that many economic activities. Areas with strong potential in the MENA countries in the world have already put in place e-government region include Arabic and Islamic services and applications, IT initiatives and ICT applications to boost public sector efficiency services and smart devices for the energy and utilities sectors, and support sustainable development (UN 2012).12 Tunisia’s e-education and e-health systems, and devices and systems national government portal (www.tunisie.gov.tn) provides quick for urban and infrastructure management to complement access to information on services such as obtaining a driver’s the development of several so-called economic cities (Booz license or acquiring personal and home loans. Also, under a and Company 2011). For example, the ongoing ART/ISI@MED new social accountability policy supported by the World Bank 11. Such as Tunisia’s electricity and gas utility STEG, the Egyptian railways, and Morocco’s electricity utility ONE. 12. http://unpan1.un.org/intradoc/groups/public/documents/un/unpan048065.pdf. 102 Chapter 7: Moving toward an information society BOX 7.3 e-payment. Mobile payments can improve the efficiency of the financial sector, widen access to financial services, and increase YESSER and effective e-government in the efficiency of government services such as cash-transfer Saudi Arabia programs. Efforts to expand e-government services could be combined with efforts to simplify administrative procedures, widen the dissemination of public information, expand com- Saudi Arabia’s national e-government program, known as YESSER, is designed to provide better government ser- puter training and Internet use in schools, and develop online vices and enhance efficiency and effectiveness in the public educational content and e-learning applications. sector. Complementary regulatory and policy actions are aimed at fostering competitiveness and establishing a busi- Smart ICT and Internet applications also have the potential to ness environment supportive to ICT. In its first five years improve the environment and tackle climate change. Top areas of operation, YESSER made progress on two important of application are manufacturing, energy, transport, and fronts: (i) implementing robust shared services that ensure building construction. A better understanding of smart ICTs secure flows of government information and the delivery provides policy makers with options for encouraging clean of secure online services, and (ii) providing organizational innovation and greener economic growth. ICTs can also support infrastructure to help government agencies develop and implement their e-government transformation plans, by sustainable growth and employment through smart grids, which traditional services are placed online, with benefits smart meters, smart buildings, intelligent transport systems, in terms of convenience, timeliness, and lower costs. and smart cities—all significant opportunities waiting to be exploited (OECD 2010). The Saudi national e-government program is now enter- ing its second five-year phase, with a renewed focus on Finally, ICTs are reshaping the global job market. They are opening creating a skilled workforce. By considering and promot- up new frontiers and are enabling new job trends through ing e-government—not just as a set of measures to bring more public services online, but as a transformation tool to opportunities such as micro-work,13 ICT-enabled contracting, improve the relationship among government, business, and online gaming work, and in the growing “app” economy. These citizens—YESSER has developed human resources policies new trends have risks and benefits. But with the appropri- and innovative ways to attract and retain talent within its ate enabling conditions, they can create jobs and new income own team. Today, the experience gathered by Saudi Arabia opportunities. ICT-enabled work can be performed anywhere in this area can help other parts of the government, as well through regular computers and Internet connections, has low as other countries. entry barriers, offers high flexibility in skills requirements, Source: WEF 2010. and is resilient and countercyclical to economic downturns. Finally, as forms of telework or virtual work, these trends may have a positive environmental effect by reducing commuting and delivery costs (Rossotto, Kuek, and Paradi-Guilford 2012). in 2011, the office of the prime minister in Tunisia created the Barometer of Public Services, its first citizen scorecard Thus, the development of IT-based services and the improvement platform to build social accountability and good governance of IT skills among the labor pool can increase productivity, generate in public services. The initial results of this scorecard were new jobs, and accelerate economic growth. In MENA there is a published in Arabic in 2012 on the main page of the prime mismatch between the talent pool and industry requirements. minister’s Web site (Elgazzar 2012). E-government is also part This situation should be addressed, because ICTs offer oppor- of Morocco’s Maroc Numéric 2013 strategy. Saudi Arabia’s tunities for young people to enter the job market, providing YESSER initiative is profiled in box 7.3. flexibility in the value chain and enabling them to compete for higher-level jobs based on their skill advantage in tech- Despite some progress, e-government applications are not yet suf- nology. Figure 7.8 maps the degree of employment formality ficiently developed in the region to create an environment conducive and compensation potential of a variety of ICT jobs open to to enhanced productivity. The public sector has a greater role to young people around the world. The creation of easy-to-use play in developing e-government applications that can provide and accessible software services can dramatically reduce the citizens with public services and timely information. Special barriers to employment by enabling micro-tasking and crowd- attention should be devoted to facilitating trade through elec- sourcing (Chamlou 2012).14 The job-creation potential of ICTs tronic data interchange and e-customs for filing declarations in MENA is discussed further in chapter 8. and paying duties and to improving the business environment through online registration, e-taxation, e-procurement, and 13. The World Bank is currently assessing the feasibility of micro-work to promote socioeconomic development and enhance employment opportunities for youth and women in the West Bank and Gaza (Internal Background Report, 2012). 14. Crowdsourcing is a process that involves outsourcing tasks to a distributed group of people. This process can occur both online and offline. The difference between crowdsourcing and ordinary outsourcing is that a task or problem is outsourced to an undefined public rather than a specific body, such as paid employ- ees; http://en.wikipedia.org/wiki/Crowdsourcing. Transforming Arab Economies 103 Chapter 7: Moving toward an information society Figure 7.8 ­ actions to create employment  TABLE 7.1   ICT Youth and the degree of formality in ICT labor opportunities at various skill levels markets Skills ICT-focused action Degree of All skill levels Platforms to match labor supply and employment Employee of demand. formality IT company Electronic and mobile money transfer IT BPO employee services. Actions to strengthen competitiveness. Software Low skills Creating micro-tasking, crowdsourcing freelancer platforms. Developing rural BPO. IT entrepreneur Medium skills Developing IT-based industry, including Crowdsourcing BPO. High skills Developing top-end BPO. Microwork Monetary payout Promoting R&D networks between business and universities. Enhancing the ICT environment to attract Source: La Cava, Rossotto, and Paradi-Guilford 2011. FDI. Note: ICT = information and communication technology; BPO = business Entrepreneurship Creating platforms for entrepreneurship. process outsourcing; IT = information technology. and freelancing Increasing business incubation and introducing living labs. Developing open platforms for cocreation of applications and digital content. Developing IT skills ICT applications for entrepreneurs across sectors. for employment, Source: Authors. entrepreneurship, and Note: BPO = business process outsourcing; FDI = foreign direct investment; ICT = information and communication technology; IT = information technol- ogy; R&D = research and development. innovation  Medium- to high-skilled workers There is no doubt that ICTs can create new job opportunities for people with different degrees of skill, circumvent some of Skills used in IT-enabled services and BPO are fungible the rigidities of the labor market, and foster innovation. Table across sectors and can therefore have major cross-cutting 7.1 lists some ICT-focused actions that can be implemented impact in terms of employability. Job creation in BPO also to meet the needs of specific segments of the labor market, has a multiplier effect on employment and can be linked to starting with the action that can reach the most job seekers community development programs, in particular those target- and produce the quickest wins to ease unemployment. Some ing rural youth and women. of these actions are further explored below. Entrepreneurship and start-ups can be financed through prize competitions and crowdfunds. Through competitions in  Low-skilled workers business planning, application development, and other areas, young entrepreneurs and start-ups can rapidly increase their public exposure and improve their access to industry clients Platforms for micro-tasking and crowdsourcing can provide and sponsors, funding, and other support. Crowdfunding can marginal additional compensation disbursed via mobile increase young entrepreneurs’ access to capital beyond the phones and other ICT-enabled tools. Through a flexible work domestic and more traditional financial institutions. Taking environment, such platforms can accommodate disadvan- advantage of competitions and crowdfunds will require part- taged groups such as women (for example, stay-at-home nerships with the private sector that provide aspiring entrepre- mothers) and connect the labor force to local, regional, and neurs and start-ups with better-equipped business incubators global labor markets. This approach is virtually new to MENA, and mentoring networks. but it can have a transformational impact on the effectiveness of community development programs, in line with regional Skills development can be linked to entrepreneurship and priorities. business incubation through the creation of cooperative plat- form spaces, often within universities. These enable students and unemployed youth to put their skills to use by preparing dem- 104 Chapter 7: Moving toward an information society onstrations, prototypes, and improvements of existing public services, business processes, and commercial applications as Developing content agreed with clients. Such platform spaces create opportunities for PPPs at the local and national levels. A good example is the in Arabic Finnish platform for cocreation, Demola (http://www.demola .fi), which has been implemented in five cities. The promotion of Arabic-language content on the Internet Employment through freelancing and e-lancing platforms, holds great potential for the region. Arabic is the world’s fifth- as well as open platforms for cocreation of applications most widely spoken language but only the eighth-most commonly and digital content, is already a rapidly emerging trend in used language on the Internet. Increasing numbers of Arabic many countries where applications development is increasingly speakers use Twitter (40 percent of whom reside in the UAE). linked to the needs of users and consumers. For example, in But most Internet users in the region rely on English and French. Europe, the Living Labs and their cross-border networks are According to a survey by Ipsos, 96 percent of the social network becoming essential parts of application development, enabling sites used by Arabs are in foreign languages, with only 4 percent the cocreation of products and services through user-driven in Arabic, a situation that suggests the opportunity to develop research in real-life scenarios. more Arabic content (La Cava, Rossotto, and Paradi-Guilford 2011). The digital content industry in Jordan received a boost in 2009, when Intel announced plans to invest in two digital content Highly skilled workers companies: Jeeran and ShooFeeTV. The funding would be used to help both companies pursue regional growth and extend their Some MENA countries rank high as an attractive destina- product offerings. Jeeran is the largest user-generated content tion for high-end BPO. 15 For these countries, creating skill- site in the Arab world, reaching 1 million members and 7 million certification programs that are tailored to the needs of the unique visitors per month. ShooFeeTV provides online information BPO industry would be useful. Egypt has established a useful for more than 120 Arab satellite channels, including programming track record of developing foundational skills for BPO under its information, pictures, and video clips (Kelly and Rossotto 2012). EDUEgypt program (http://www.eduegypt.gov.eg), which offers Wikipedia has also launched an interesting initiative in this an opportunity for quick scale-up. Also needed are national regard. While the English version of Wikipedia has about 3.8 technology foresight exercises that can facilitate cross-sectoral million articles, the Arabic version has only 150,000, despite cooperation and break down silos in industry, academia, and the fact that there are 400 million Arabic speakers globally. government. Such strategies can make MENA stakeholders To increase its editor base, Wikipedia has launched a pilot attractive partners for global ICT players, identify opportuni- program in Cairo, where students will edit and write for the ties for PPPs, and pave the way to international cooperation. online encyclopedia as part of their class assignments under the guidance of their professors (Chaudhuri 2012). More such initiatives should be encouraged to strengthen inter-Arab link- All skill levels ages, where the Arabic language is the binding force. ICT applications that match young job seekers with employ- ment opportunities can build on readily available mobile tech- nology to increase access to local, regional, and even global opportunities for job seekers with a wide range of skills in rural Enhancing regional and urban areas. Through these applications, such as Souktel. org in Palestine, job seekers can submit basic information on cooperation their skill sets to a database through their mobile phones, where employers can select them for specific opportunities. Regional cooperation in ICT promotes regional integration Building enabling environments for private sector devel- more generally, as reflected in the regular meetings of the opment and for electronic and mobile money transfer can Arab ICT Council of Ministers. Regional cooperation can take stimulate growth of the local IT industry (especially labor- various forms, including cooperation on telecommunications intensive segments) and make use of ICTs to improve the infrastructure, policies, and finance. The sharing of expertise and business environment (affecting business registries, custom joint initiatives among the member countries of the UN Economic procedures, and so on). Mobile financial services and other and Social Council for Western Asia (ESCWA), for example, can forms of branchless banking can support micro-work and link them to each other as well as to other Arab countries outside crowdsourcing in areas where a more traditional banking the ESCWA region.16 The ESCWA has developed an information infrastructure is missing. society portal for the exchange of information. It is working on a regional framework for the deployment of broadband in the region 15. A.T. Kearney’s Global Services Location Index for 2011 for 50 countries features Egypt in the 4th and the UAE in the 15th spots, followed by Jordan (22nd), Tunisia (23rd), and Morocco (37th). 16. The ESCWA countries are Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Oman, Palestine, Qatar, Saudi Arabia, Sudan, Syria, the UAE, and Yemen (www.escwa .un.org). The ESCWA advocates for and supports member countries in: (i) incorporating ICT policies and strategies in national socioeconomic plans; (ii) building capacity on information-society measurement, public-private partnership for ICT initiatives, and development of cyber legislation; and (iii) providing tools for moni- toring progress, promoting digital Arabic content, and increasing access to information and knowledge-sharing in disadvantaged communities. On a regional level, it endeavors to establish cooperation and coordination mechanisms between regional players engaged in ICT development activities. See http://isper.escwa.un.org/ Default.aspx?TabId=65&item=28; www.unctad.info/upload/WSIS5/Contributions/UNGIS/ESCWA.pdf. Transforming Arab Economies 105 Chapter 7: Moving toward an information society and a legislative framework for e-government. From 2005 to 2010, Telecommunications and media are usually priority sectors the ESCWA provided regular advisory services on e-government for antitrust monitoring and action. applications to the governments of member countries. • S  tronger competition on backbone networks and in international connectivity. Market entry by competing operators should be In terms of cooperation with the EU, some programs deserve encouraged at the backbone level, by, among other means, mention. The Euro-Mediterranean Information Society Initiative leveraging the investments of utilities that have already laid (EUMEDIS) aims to help develop an information society by pro- down fiber-optic cables for domestic or international con- moting ICTs in participating countries. It has funded regional nectivity. Increased competition that decreases the govern- pilot information society projects in five priority sectors, ment’s control of the core network also reduces the chances namely health-care networks, electronic commerce, tourism of a catastrophic network shutdown. and cultural heritage, industry, research and innovation, and education. In 2009 EUMEDRegNet was started to further • P  rotecting users’ privacy, guaranteeing intellectual property improve the mutually beneficial cooperation on an informa- rights, and ensuring freedom of expression. This means shift- tion society between Europe and the Mediterranean partner ing from the old state-centric landscape to a new, more countries, building on the achievements of the EUMEDIS open one that appropriately balances security and privacy and other regional initiatives.17 The New Approaches to interests, supports transparency and user privacy, and Telecommunications Policy (NATP II) program assists regu- maintains a more resilient network infrastructure. latory authorities in Mediterranean partner countries in their Governments can promote this evolution by increasing ICT efforts to liberalize their telecommunications markets.18 spending, promoting e-government services, and subsidizing IT training within government as well as promoting ICT literacy in schools throughout the region. A broad approach to regulatory Conclusion reform in ICT should include legislation that ensures freedom of information and expression. The legislative approach should support media plurality and independence and promote open access to government data. The Arab region could also greatly benefit from increased A competitive ICT sector is known to be a prerequisite for trade in software and technology services across the region improving information infrastructures. Together, adequate and from technology-driven ICT convergence of the Internet, infrastructure (particularly a good ICT backbone) and a com- media, and communications. For instance, regional platforms petitive environment are factors that define a country’s ability to for transport management systems, e-health services, geo- embrace the knowledge economy. The MENA region has made spatial referencing applications, and many other vertical rapid strides in recent years in expanding access to telecom- software sectors are emerging as important elements in the munications services, but the advances are largely confined ICT landscape of the region. In this context, ICT liberalization to mobile telephony. Access to landlines has remained almost and harmonization on a regional scale could play a major role static in many countries, and Internet access remains costly in boosting the development of the ICT industry. This would and bandwidth limited. The region can learn from its success in involve (i) harmonizing regional telecommunications policy and mobile telephony by expanding the conducive business environ- regulation; (ii) developing ultra-fast broadband; (iii) develop- ment needed to foster competition and galvanize the private ing regional platforms for mobile applications; and (iv) sup- sector to provide high-quality services at a reasonable cost. porting regional integration in the trade of IT/ITES services (Chauffour 2011). Governments across the region thus need to focus on the unfinished reform agenda. Priority actions in the telecommunications and In summary, parts of the telecommunications sector have regis- Internet sectors can help to foster economic growth, interna- tered rapid growth in recent years in the Arab world, spurred by tional connectivity, and more open governance. Chief among reforms that have opened markets and introduced competition. those actions are the following: But much more can be done to raise competition in the sector, • F  ull liberalization of ICT networks, and proactive strengthening spread access to broadband, and ensure that ICTs are used of regulatory agencies and competition authorities. Medium- as a lever to raise productivity, growth, and employment. As term reforms include developing a more balanced legal the telecommunications sector moves to a more commercial and regulatory framework for ICT. To ensure that MENA and competitive environment, governments should implement countries can reap the benefits of fair competition, the inde- practical policies to enhance citizens’ ICT skills, which will pendence and capacity of regulators must be enhanced. help them become more employable, more entrepreneurial, Antitrust authorities, in particular, need to be consider- and more innovative. Encouraging the development of Web ably strengthened. Control of monopoly power and of content in Arabic is of particular importance in spreading the economic cartels should be considered as a top priority. benefits of ICTs among the population. 17. EuroMed: http://ec.europa.eu/europeaid/where/neighbourhood/regional-cooperation/documents/infonotes_enpisouth_regional_cooperation_en.pdf. 18. Countries such as Morocco, Tunisia, and Jordan have an interest in becoming fully integrated and compliant with EU telecommunications regulations through full liberalization (ensuring that their market structure is consistent with the EU Full Liberalisation Directive of 1998, as amended) and by adopting the acquis com- munautaire on telecommunications regulation, privacy, and data protection. 106 Chapter 7: Moving toward an information society References and bibliography e4e (Education for Employment), IsDB (Islamic Development Bank), and International Finance Corporation (IFC). 2011. Education for Employment (e4E): Realizing A.T. Kearney. 2011. Offshoring Opportunities Amid Economic Arab Youth Potential. Washington, DC, and Jeddah, Turbulence—The A.T. Kearney Global Services Saudi Arabia: e4e, IsDB, and IFC. http://e4ear Location Index. www.atkearney.com/index.php/ abyouth.com/downloads/IFCBook_A4_Online_ Publications/global-services-location-index-gsli Complete.pdf. .html. 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Unpublished February. background report, World Bank, Washington, DC. ———. 2012b. Background Report for the Trade and FDI Report. Unpublished background report, World Bank, Washington, DC. 108 Diversification initiatives In this part °± Chapter 8. Promoting growth sectors °± Chapter 9. Managing local and regional development 109 hapter 8 Promoting growth sectors There is a need to diversify Arab economies toward knowl- edge-based sectors. Over the past decades, various geopoliti- Established sectors: cal and demographic factors have shaped the growth model followed in the Arab world. In most countries, the identification Making the knowledge of priority sectors was based on considerations of compara- tive advantage that emphasized resource- or location-based economy leap factors rather than knowledge-based competitiveness. The weight placed on those factors has kept much of the region Knowledge and innovation strategies are needed to foster in a “pseudo-comfort zone” that has led it gradually toward growth in established industries. Higher rates of growth and joblessness, poor productivity, and slow growth.1 job creation can be attained by upgrading the value chain of Adding to the four policy pillars of knowledge and inno- these sectors; improving their competitiveness in the domestic, vation-based development strategies, there is a need to regional, and international markets; exploring the potential of pursue active policies to promote new sectors that can new niches; and providing the required policies, infrastructure, generate higher economic growth and create employment. and human capital. These sector policies encompass actions to improve the four policy pillars—economic and institutional regime, education, innovation, and information and communication technologies  Agribusiness: Moving up (ICTs). Achieving high and sustained growth will require effec- the value chain tive strategies to harness the growth potential of knowledge- based economic activities and to move up the value chains A sector of strategic importance, agribusiness is a subset of and enhance productivity. Yet few countries have identified the manufacturing that processes raw materials and intermedi- sectors that will drive their future growth. Fewer still have made ary products derived from agriculture, fisheries, and for- clear plans to encourage the development of those sectors. estry. Agriculture (without any industrial processing) accounts Morocco provides an example of what is needed. for 8.2 percent of total Arab gross domestic product (GDP) and This chapter identifies several promising knowledge-based about 25 percent of total employment. But the countries of sectors—activities related to ICT, medical and health tourism, the Middle East and North Africa (MENA) region have widely creative industries, and green energy. It discusses their major varying agricultural endowments (figure 8.1). The countries of constraints and proposes a road map for reforms that will be the Gulf Cooperation Council (GCC), for example, have limited necessary if those sectors are to fulfill their potential to gen- agricultural resources and import most of their agrifood prod- erate economic growth and employment. Of course, sectors ucts, although they have great potential for the development of that are already well established in the region have a major energy-based industries such as fertilizer production, refrig- role to play in enhancing economic growth in the medium eration, and manufacturing of tractors and other farm machin- term, and that role is the subject of the next section. These ery that occur upstream in the agro-industrial value chain. sectors—agribusiness, textiles, automotive manufacturing, and Because of complementary variations in agricultural endow- chemicals—are typically labor intensive and account for the ments, the sector can be a source of inter-Arab economic majority of industrial jobs in the region. Moving up the value integration. The GCC countries have little arable land (figure chain by absorbing knowledge from the world’s best practices 8.1) but a large capacity to produce fertilizer (figure 8.2). The could transform the existing comparative advantage in the countries of the Maghreb and Mashreq, by contrast, consume Arab world into a competitive one. more fertilizer than they can produce. 1. This chapter builds on background contributions by Radwan and Strauss (2012). 110 Chapter 8. Promoting growth sectors Figure 8.1 Arable land as percentage of total land area, select Arab countries, 2008 20 18 16 Arable land (% of land area) 14 12 10 8 6 4 2 0 co ia za ld q n ld ria p. an a r a s t an ti ai ta te bi by Ira da ou is Re or or Ga oc rd Om w ge Qa ra ira Li n Su ib W W Ku or Jo Tu ab iA Al d Dj Em ab an M Ar ud Ar ab k Sa t, an yp Ar tB Eg d ite es W Source: World Bank, World Development Indicators, 2012. Un Most Arab countries are net importers of food (mostly grain). Abur and El Amin 2009). Several GCC countries have allocated a In 2011 net imports of food varied from $11 billion in Saudi share of their sovereign wealth funds to be invested in agricul- Arabia to $280 million in Mauritania. Trade within the region ture or used to establish joint investment companies (such as to address the common challenges and to benefit from the Jannat in Saudi Arabia). Most of these investments are taking complementarities among Arab countries has grown in recent place in the Maghreb and Mashreq countries, and in Sudan. years. Intra-Arab trade and foreign direct investment (FDI) in agro-industries have experienced an important boost, notably But FDI projects in the agribusiness sector created no more in the aftermath of the global food crisis of 2007–08 (Tanyeri- than 38 direct jobs for every million euros invested between Figure 8.2 Fertilizer consumption as a percentage of fertilizer production, select Arab countries, 2009 250 200 (% of fertilizer production) Fertilizer consumption 150 100 50 0 ia . q p. co ld ya a a n s n t n an r p ta ai te bi isi no ai da Ira r Re Re or Lib oc Om ge w Qa ira hr ra n r w ba Ku Tu Jo or ab b iA Al Ba Em ra ab Le M Ar ud t, A Ar ab n Sa yp ria Ar Eg Sy d ite Un Source: World Bank, World Development Indicators, 2012. Transforming Arab Economies 111 Chapter 8. Promoting growth sectors 2003 and 2010 (ANIMA 2011). And the scale of investment flows summarizes the common bottlenecks in the agrifood value remains small. The sector represented only 1.5 percent of total chain in Egypt. FDI flows between 2003 and 2010 in the Mashreq region and 1.9 percent in the Maghreb, compared to 4 percent in Turkey A comprehensive strategy is needed for the agribusiness and Israel. The conclusion is that agribusiness still has not industries. To benefit from the region’s existing compara- reached its full potential in the region and that the value chain tive advantage in agribusiness and to overcome challenges, of the sector needs a significant upgrade. ANIMA (2011) sug- comprehensive and well-coordinated solutions and policies gests that substantial potential lies in the commercialization are required to cover all aspects of the value chain in the Arab of Mediterranean products (such as oils, fruits, and juices), agribusiness sector. In particular, there is a need to address food service (for example, airline catering, canteens, tourist the pronounced inequality of the sector, where only large com- restaurants), organic agriculture, horticulture, aromatic and mercial companies are able to afford advanced manufacturing medicinal plants, and cosmetics. technologies and to produce various types of products, while small and informal companies lack the quality control capac- The swings in food prices over the past four years highlight ity and skills needed to new develop products. Coexistence the importance of agriculture both for poverty alleviation between the informal and formal sector should be addressed and food security. The sector employs many people who are within an effective framework of knowledge exchange and often trapped in poverty because of low yields. Wheat yields transfer. in Morocco are 27 percent of those in Germany, for example; tomato yields in Egypt are 51 percent of those in the United States; and olive yields in Tunisia are 16 percent of those in The textile industry: Competing in Spain. Compounding the problem of yields are lack of market access, skill shortages, and insufficient research and develop- a challenging global environment ment (R&D) and extension services (Zeidane 2012). The MENA’s textile and apparel sector has experienced fierce Upgrading the value chain is an important catalyst for the competition, notably with China and Turkey, since the Multi knowledge economy. Any industry that receives sufficient Fibre Arrangement (and its import quota system) expired in political and economic endorsement (top-down support) and early 2005. The sector employs a significant portion of the continuous upgrades of inputs (bottom-up innovations) across manufacturing labor force in the region—about 50 percent its value chain can become competitive and integrated in the in Tunisia, 30 percent in Syria, 28 percent in Egypt, and 19 global market. In the absence of significant integration into percent in Jordan. the value chain, however, liberalization of manufacturing did not enable Egypt and Morocco to gain access to global markets The sector is a major source of exports. In 2010  (Taha 2012). Value-chain analysis makes it possible to under- the textile and clothing sector accounted for about stand the governance structure within the economy and the 25 percent of manufacturing exports from the Maghreb and interactions between the different market players. Box 8.1 Mashreq countries, ranging from 43 percent in Syria to 18.82 BOX 8.1 Egypt’s agribusiness value chain Product development Logistics • Insufficient mecha- • Storage system Although Egypt has several prominent agricultural research insti- nisms for promoting upgrading tutes that enjoy at least regional and continental recognition (UNEP research and • Lack of coordination 2006), the resources for innovation and product development are development (R&D) among actors who limited. In addition, existing agricultural extension mechanisms do • Knowledge transfer to promote development not provide adequate knowledge transfer from research centers to small farmers of platforms in small farmers. different locations The problem of processing harvested agricultural crops in Egypt is very serious, with an estimated 20 percent of crops lost each year Agrifood’s value-chain because of outdated storage techniques and a lack of coordination bottlenecks among the responsible governmental units within the supply chain (Mohamed 2010). In addition, a significant share of agribusiness Marketing Processing activity (for example, sweets and confectionary products, soft drinks) • Small and medium • Weak or incomplete relies on imported raw materials. enterprises (SMEs) vertical linkages, have difficulty notably between SMEs Egypt has made significant efforts to develop new ports and logistical marketing their • Low level of hubs, yet inland logistics and the cold-storage logistics chain are production innovation-based insufficient and limited to a few market segments. Poor market- competitiveness and ing capabilities are to blame for the 13 percent unused capacity in use of outdated agribusiness. methods Source: Authors. 112 Chapter 8. Promoting growth sectors Figure 8.3 Exports of textiles and clothing as a percentage of total manufacturing exports, select countries, 2010 Algeria Textiles Libya Kuwait Clothing Saudi Arabia Qatar Israel Oman Iraq Lebanon United Arab Emirates Yemen Bahrain, Kingdom of China Jordan Egypt Turkey Morocco Vietnam Tunisia Syria 0 5 10 15 20 25 30 35 40 45 50 Percent Source: WTO Statistics Database, http://www.unwto.org. percent in Jordan (figure 8.3). Egypt and Syria, among other Tunisia has successfully upgraded the quality of its production countries, are endowed with the resources to create a vertically through clothing design, finishing, and coproduction. The shift integrated industry, from fiber to end products, which explains to the knowledge economy has saved at least 204,000 jobs and the high ratio of textile to clothing exports in both countries. 40 percent of Tunisia’s industrial exports (MEDIBTIKAR and Conversely, Jordan, Morocco, and Tunisia tend to import raw EuroMed 2009). materials and focus their efforts on clothing. Both groups of countries need to target higher segments of the export markets The textile sector needs to tap new niches, notably technical with better products that demonstrate a better understanding of textiles, industrial textiles, geo textiles, and medical textiles. the tastes of foreign markets. This cannot be achieved, and jobs In addition, specialized tertiary education is a prerequisite for will not be saved, without a comprehensive knowledge-based higher value-added products. Governments should encourage strategy that will enable the sector to compete for higher- national firms, and even informal small and medium-sized value-added market segments. enterprises (SMEs), to develop strong relationships with brand- name merchandisers and to ensure the needed accumulation The example of Tunisia, which is the fifth-largest supplier of and upgrading of knowledge. The R&D centers that address the clothing to the European Union (EU), is a useful one. As the common challenges in the industry require greater support. textile sector is the nation’s largest labor-intensive industry, the Tunisian government has looked for ways to preserve its edge. To do so, it has turned to the knowledge economy. The Machinery and transport Tunisian textile sector has taken a qualitative leap by relying on nonconventional assets: creativity, innovation, marketing, equipment: Fostering linkages and investment in new technologies. On the local level, several with other sectors research laboratories and units have been involved in textile- related subjects, most located at the University of Monastir. Machinery and transport equipment is becoming one of the The university hosts three textile training institutions that offer region’s major drivers of growth and exports. The sector credentials in textile engineering (70 graduates a year),2 envi- represents a large and growing share of exports: 28.8 percent ronmental protection, fashion, and design. Further, at least 7 in Tunisia, 20.4 percent in Morocco (expected to grow with research teams and no fewer than 70 faculty researchers are Renault’s exports from Tangiers), and 10.5 percent in Jordan working on textile-related subjects. Advanced research themes in 2010.3 It is expected to benefit from high domestic demand, vary from studying natural materials to improving textile as households catch up in terms of household appliances and comfort and optimizing the production process. Consequently, car equipment. Currently, Tunisians are the best equipped in 2. École nationale d’Ingénierie de Monastir, http://www.enim.rnu.tn/fr/stats.php.htm. 3. Authors’ calculations based on World Trade Organization (WTO) data (accessed June 2012). Transforming Arab Economies 113 Chapter 8. Promoting growth sectors the region, with 125 cars per 1,000 inhabitants (but still well in productive capacity, 62 percent of the region’s chemical pro- behind Europe, with 586). duction in 2006 was concentrated in five products (Bloominvest Bank 2010): urea (16 percent), ammonia (13 percent), ethyl- It is expected that the region’s demand for new cars will ene (14 percent), methanol (11 percent), and polyethylene (8 grow faster than ever. According to the Economist Intelligence percent). Therefore, Arab countries are in a position to gain Unit (EIU 2011), high international oil prices have propelled more from the sector by developing more end products, since significant growth over the past decade in the new car market the price of such value-added products would be much less in the Gulf countries. For instance, Saudi Arabia’s market has sensitive to changes in raw materials prices. seen sales multiply fivefold, and car registrations are expected to increase 11 percent annually between 2011 and 2015. The manufacturing of chemical, rubber, and plastic products constitutes an industry that is one of the major employers The manufacture of equipment in specialized transport in several countries in the Arab world. Moreover, the indirect niches is very promising in terms of job creation and eco- effect of job creation from the chemical industry is significant. nomic growth. The niches include low-cost cars and automo- For each direct job created, up to 6.5 indirect jobs are created in tive components (such as wiring harnesses, gearboxes, and other industries (Bloominvest Bank 2010). The sector accounts brake systems). Although the sector is still in its early stages for 22 percent of manufacturing employment in Saudi Arabia in the region, these industries are expected to induce many and Iraq, 17 percent in the United Arab Emirates (UAE), and backward linkages with other sectors. For instance, aeronautics 16 percent in Bahrain and Oman (AIDMO 2010). In addition, the in Morocco, which provides about 8,000 jobs,4 relies on many sector absorbs a large share of the region’s skilled labor. For other industries, such as mechanical manufacturing (repre- example, in Tunisia, 20 percent of employees in the chemical senting 19 percent of inputs), maintenance (13 percent), and industry have at least a university degree, and 50 percent a electronics and electricity (11 percent). Nevertheless, nearly secondary education degree. Owing to the shortage of domes- all of the output of this sector is sold to parent companies tic skills in some countries, however, employers depend on (about half of the production is exported) (ODE 2008), choking foreign know-how. One-third of the 30,000 employees of SABIC, off forward links. The sector’s output is still concentrated in for example, which is the dominant player in the region and the early stages of the value chain despite the multiple oppor- based in Saudi Arabia, are estimated to be foreigners. The tunities in the market. fact is that the industry’s expansion in the region is highly tied to the availability of a sufficiently large pool of qualified The sector has a significant positive impact on job creation. labor. Several projects have been delayed because qualified In fact, it has the second-highest potential for net job creation workers could not be found. In the short term, it is expected that in Tunisia between 2011 and 2016, with more than 70,000 jobs development trends in the sector will be closely linked to the predicted by McKinsey & Company (e4e, IsDB, and IFC 2011). growth of demand in emerging markets, notably in the BRICS But harnessing the potential for growth will require, among countries (Brazil, Russia, India, China, and South Africa). In the other things, an adequately skilled and competitive workforce longer term, as the sector evolves, the comparative advantage (including highly qualified technicians). Finding skilled workers of the Arab world in the chemical industry will become even represents a major challenge for the machinery, electrical, greater, given the increase of the feedstock prices (notably oil transport, and electronics industries, which have witnessed and natural gas) in competitor countries, as shown in figure 8.4. rapid growth in production and exports but are still impeded by shortages of skilled workers, insufficient vertical linkages with domestic suppliers, and low (though increasing) clustering Figure 8.4 of businesses, training institutions, and research centers—all Gas costs and the cash cost of producing urea in operating in alignment with knowledge and innovation policies. 2012 (estimated) 400 Urea cash cost of production (US$/ton) The chemical industry: Maximizing a strong comparative advantage 300 W. Europe Ukraine China Chemical industries comprise a large number of products U.S. that are essentially converted from raw materials, notably 200 Global average the region’s abundant oil and natural gas resources. By lever- Russian Fed. aging those resources for expansion, the Arab world could become a key player in the global petrochemical market. Middle East 100 The chemical industry already accounts for a significant share of manufacturing in many Arab countries. For example, it represents 22 percent of manufacturing in Egypt (which has 0 a petrochemicals subsector that is competitive thanks to gas 0 2 4 6 8 10 12 exports to the GCC countries), 20 percent in Tunisia, 16 percent Gas cost US$/mmbtu in Jordan, and 14 percent in Morocco. Despite wide variations Source: Morgan Stanley, Bloominvest. 4. The number is expected to rise to 10,000 by the end of 2012, according to the GIMAS (Moroccan Group of Aerospace Industries). 114 Chapter 8. Promoting growth sectors Market competition in the sector is still in its early stages. Growth in the sector has benefited from a government policy Although the region has been able to attract multinational cor- of breaking down telecommunications monopolies. porations to cover a large share of domestic production needs and to diversify its regional markets with Africa (which present Another promising example of ICT-related employment a huge potential for growth), competition in the internal market opportunities comes from Tunisia, where offshoring—busi- is not yet fully developed, especially in the GCC countries. For ness process outsourcing (BPO) and information technology instance, Saudi Arabia is the only country in the GCC that has (IT) outsourcing—has been identified as a viable option for job opened up its petrochemical sector for private investment. creation in the short term (box 8.2). Tunisia’s goal is to become Historically, the sector was led by SABIC, 70 percent of which a regional offshoring hub by creating linkages to large-scale is still owned by the state. European projects in the fields of R&D, transport, and aero- nautics that involve considerable ICT skills. The country has The chemical industry is very promising in the MENA region. upgraded the physical infrastructure required for a successful If various constraints can be overcome, the chemical sector ICT industry—for example, by creating new competitive clus- could be a major driver of growth and job creation. The most ters such as the Tunis Financial Port, a project for an offshore challenging limitations are related to skills, quality manage- financial center that would potentially add about 16,000 jobs. ment, the R&D and other technological capabilities of domestic firms, market size, and funding (Zeidane 2012). Therefore, the The outsourcing and offshoring of services to less costly competitive advantage of the region’s chemical sector should locations has been made possible by the increasing penetra- be coupled with supportive measures to encourage firms to tion of broadband, falling telecommunications costs,5 critical innovate and to sustain their edge. The chemical industry masses of skilled labor, and greater openness to FDI.6 Many consumes a significant amount of nonrenewable materials. countries in the region have attracted ICT-related FDI, both Therefore, one of the niches in this sector should be to explore in telecommunications services (Vivendi in Morocco, Orange new biodegradable production lines through R&D activities, in Tunisia and Jordan, and Vodafone in Egypt, to name a few technology absorption, and other means, as well as new waste- examples) and in the IT industry, in which a significant number treatment facilities under the umbrella of long-term environ- of multinationals are active in the region. The region has also mental policies to minimize or at least control pollution costs. promoted the development of BPO to enlarge its ICT exports base, with positive achievements over the past decade in Tunisia (where the share of ICT in service exports increased from 1.2 to 4.7 percent, matching similar dynamism for ICT goods exports), ICT-related Morocco (3.7 percent to 7.5 percent), and Egypt (3.4 percent to 4.7 percent, earning Egypt 4th place among 50 countries in A.T. activities: Exploiting Kearney’s 2011 Global Services Location Index). Recent data have shown that call centers, IT R&D centers, and software opportunities, services are seen by foreign investors such as Cisco, Microsoft, IBM, and Yahoo as one of the most important niches for growth traditional and new and employment, with a job intensity per million euros invested of between 103 and 299 (ANIMA 2011). Nevertheless, a huge potential for growth and exports remains untapped, considering The emergence of ICT had an important impact on the struc- that, globally, the average share of ICT goods in overall exports ture of the global economy and labor markets, as discussed is 12 percent, much higher than the MENA rate of less than 1 in chapter 6. ICT may be the industry sector with the highest percent. potential for innovation in the Arab world (Moutamarat and PricewaterhouseCoopers 2006). Together with telecommunica- tions, the evolving ICT sector has already been an important source of growth and jobs in the region. Each Arab country has room to position itself in whatever branch of the sector it Tourism: In search of a chooses to emphasize. In Jordan, for example, adapting inter- national technologies for use in the nation’s ICT sector has niche and a long-term created jobs and built skills and competence. Today, ICT is the growth strategy fastest-growing sector in Jordan’s economy. Directly or indi- rectly it created more than 80,000 jobs between 1999 and 2009 (ICT Association of Jordan 2011), contributing 14 percent of the Tourism is one of the world’s largest industries, supporting nation’s GDP. It has proved successful in attracting international more than 258 million direct and indirect jobs and generat- investment and business operations to Jordan, including Cisco, ing 9.1 percent of the world’s GDP. From 1990 to 2005 the Microsoft, Oracle, HP, Yahoo, Intel, Motorola, and Ericsson. Middle East led the world’s regions in tourism growth. With 5. Despite the pressing demand for ICT, prices of ICT-based services have dropped by 35 percent in the Arab region between 2008 and 2010. 6. FDI related to telecommunications can be approached on two levels: (i) FDI in the telecom sector and (ii) FDI induced by improved telecom infrastructure. On the first point, liberalization of telecom markets has nearly always led to significant FDI inflows, either for the purchase of existing telecom assets, for their refurbish- ment, or for the development of new infrastructure. On the second point, ICTs, which make up telecom infrastructure, are expected to have a positive impact on FDI because they allow developing countries located far from technologically advanced countries to free themselves from geographical limitations and become more attractive to foreign investors. A World Bank study suggests that an improvement of 1 percentage point in telecommunications services indicators can increase FDI by 0.75 percentage point (Rossotto, Sekkat, and Varoudakis 2003). Transforming Arab Economies 115 Chapter 8. Promoting growth sectors BOX 8.2 Offshoring opportunities in Tunisia Tunisia has high and growing unemployment, estimated at 13 percent in 2010 for the general working-age population and 27 percent among those aged 15–29. Because the young constitute a majority of the Tunisian population, they bear the brunt of high unemploy- ment: of the 492,000 unemployed in 2010, 343,000 were young people. These numbers increased in 2011. Particularly hard hit are university graduates, women, and those in rural areas. The short-term economic fallout from the Jasmine Revolution—which arose in part from the frustrations engendered by the mismatch between skills, jobs, and opportunities—has only exacerbated the situation. Aware of the acute need for job creation, the transitional government of Tunisia, in its Economic and Social Development Strategy for 2012–16 (published in September 2011), outlined an approach to growth in the short and medium term. The plan identifies 10 strategic targets for the near term. Of these, four demonstrate the central role that the knowledge economy plays in promoting growth and creating jobs: (i) developing human capital, (ii) promoting science and technology, (iii) encouraging productivity and entrepreneurship, and (iv) increasing Tunisia’s integration into the world economy. Tunisia’s track record in offshoring. Tunisia’s drive to participate in the global economy was launched through explicit government measures initiated in the 1970s and strengthened in the 1990s. These policies have led to a rising tide of offshoring jobs—from 10,000 in the 1980s to 70,000 in the 1990s. At 300,000 today, these positions represent 55 percent of manufacturing jobs and 8 percent of the current workforce. A.T. Kearney’s 2011 Global Services Location Index places Tunisia at a respectable 23rd spot among 50 countries, clearly indicating that it is well suited to offshoring. Future opportunities in offshoring. Offshoring could account for much more employment in Tunisia (e4e, IsDB, and IFC 2011). The offshoring sector will require 50,000 trained people over the next five years (20,000 in information technology outsourcing and 30,000 in business process outsourcing, BPO). Behind that estimate are several facts: 25,000 jobs were created in the past four to five years, the Tunisian offshoring market is growing rapidly, and just 16 percent of the potential market has been captured. In IT outsourcing, the number of students completing education and training over the next five years will be roughly 45,000, of whom only 7,000 are offshore-ready (as explained below), revealing a gap of 13,000 (if 20,000 are indeed needed). Approximately 205,000 will complete BPO training over the next five years, of whom only about 10 percent, or 20,000, will be offshore-ready, a gap of 10,000. According to employers, prospective candidates are not ready because they lack one or more of three general skill sets: either (i) soft skills (criti- cal thinking, communication skills, professionalism, teamwork, general knowledge); (ii) up-to-date technical skills; or (iii) language skills (inadequate grasp of French, English, or Italian). Home-grown, industry-driven response. In the wake of the Jasmine Revolution, a Tunisian business association (Association tunisienne pour la communication et la technologie, or TACT) was formed to pursue three objectives: (i) to make Tunisia known for offshoring, (ii) to act as a think-thank on this issue for the government of Tunisia, and (iii) to help international companies establish their offshore departments in Tunisia. TACT has identified immediate challenges in terms of connectivity, infrastructure, and relevant skills. The question of connectivity is moving toward resolution, as it is now available at a reasonable rate in the country. Infrastructure—in the form of buildings of appropriate size and quality that meet international norms—remains problematic, though TACT has outlined ways to resolve this with government incentives and the creation of technology parks. As far as the necessary skills base is concerned, some initial responses have been put in place: ESPRIT, a private higher education provider, is retraining 200 unemployed youth, con- fident they will be successfully placed in jobs in the sector. The next step is to develop a clear, forward-looking program that helps the Tunisian government realize the potential of this sector in the short term. Framework for systematizing industry-driven responses. The World Bank is working with Tunisia’s Ministry of Vocational Training and Employment to set up a competitive fund that will encourage the kinds of initiatives that TACT has proposed in the area of skills development, both in offshoring and in other sectors where private industry employers have jobs available that currently cannot be filled for lack of the right skills. The competitive fund would offer a framework, with transparent and systematically applied criteria, for employers to partner with training providers on proposals that use “top-up” training to close the gap between the skills that unemployed youth possess and those they need to qualify for an unfilled job. Source: Thacker 2012. an average increase in arrivals of more than 10 percent a year does not exceed 3 percent. Thus there is still ample potential (figure 8.5), MENA was one of the fastest-growing regions for to attract more European tourists. tourist arrivals, outperforming East Asia and the Pacific (EAP). The region’s natural and cultural endowments represent Generally speaking, the demand for tourism in developing enormous opportunities. For centuries the Middle East was countries is increasing, and emerging economies in particular the strategic land bridge for the trade routes between Europe are expected to act as engines of growth, boosting international and the Orient. It is the spiritual center for three of the world’s travel. China alone is set to send almost 95 million visitors to major religions—Christianity, Islam, and Judaism. Given the other destinations by 2020. The MENA region is a neighbor to region’s concentration of religious and historic sites, the one of the most important sources of tourists. Indeed, Europe opportunities for expansion of cultural tourism can hardly be accounts for around 40 percent of total world tourism. European overestimated. But these endowments must be coupled with tourists constituted 64 percent, 83 percent, and 56 percent of a higher quality of human resources. In the 2011 Travel and Tunisia’s, Morocco’s, and Egypt’s arrivals in 1998. Despite the Tourism Competitiveness Report, Arab countries were ranked large share of Europeans in the main tourism destinations in 88th out of 139 countries, on average, in the subindex on human, the region, MENA’s share of Europe’s total outbound tourism cultural, and natural resources. 116 Chapter 8. Promoting growth sectors Figure 8.5 Figure 8.6 Annual arrivals in four MENA countries, 2001–11 Cost of rhinoplasty in select countries 16 Tunisia 5,000 Egypt, Arab Rep. 4,500 Jordan 4,500 14 Dubai 4,000 12 3,500 3,500 Millions of persons 10 3,000 U.S. dollars 2,500 8 2,000 6 1,500 1,500 4 1,000 850 500 2 0 0 India Croatia, United United Egypt, Kingdom States 01 02 03 04 05 06 07 08 09 10 11 Turkey 20 20 20 20 20 20 20 20 20 20 20 Source: CEIC. Source: Dawson and Pollard 2007; http://www.cosmeticplastic surgerystatistics.com. The contribution of tourism to GDP in the MENA region jumped from $80 billion in 1990 to $232 billion in 2010 The MENA region can benefit from the high variation in and currently represents about 13 percent of regional GDP. health-care costs around the world. For instance, an aortic By 2021 it could generate an additional 2 million jobs in the valve replacement may cost more than $100,000 in the United region. But recent political instability in popular tourist spots, States, about $38,000 in Latin America, but only $12,000 in Asia. including Egypt, Tunisia, and Syria, prompted a 13 percent But low-cost elective procedures offer the greatest potential drop in arrivals to North Africa and an 11 percent fall in the for growth, as only 9 percent of travelers seek lower costs Middle East, as shown in figure 8.5. According to the Arab for medically necessary procedures (Ehrbeck, Guevara, and Organization for Tourism, losses exceeded $7 billion in 2011. To Mango 2008). The most popular treatments sought abroad, accelerate the recovery, the region can look for hidden potential therefore, are not big-ticket procedures such as open-heart in niche tourism products, with medical tourism among the surgeries and hip replacements, but high-volume outpatient most promising. procedures (cosmetic, dental, orthopedic) and procedures that are not covered by health insurance. The latter are already competitively priced in developing countries (figure 8.6). As Medical tourism: patients are exposed to greater financial burdens, developed- What opportunities for MENA? country governments try to curb health spending, and health insurers increasingly encourage patients to be treated abroad,7 Medical tourism can be defined as the provision of cost- the medical tourism market is going to increase dramatically. effective private medical care to tourists visiting a country for leisure and medical reasons. Medical tourism emerged Jordan is a leading medical tourism destination in the region, in the 1990s, owing to several factors, such as Europe’s aging along with Dubai and Abu Dhabi (Hazaimeh 2008). In 2007 population, health-care shortages in Western and develop- more than 300,000 patients from 84 countries were treated in ing countries, the boom in cosmetic surgery, and gaps in the Jordan, generating revenues exceeding $1 billion and employ- European health insurance mechanisms. Worldwide, medical ing more than 40,000 employees, of whom half work in private tourism revenues have risen from $40 billion in 2004 to an health institutions. These countries, and eventually others in estimated $100 billion in 2012 owing to many of the same the region, could vie to accommodate more Arab patients who factors, coupled with rising income in developing countries. By are currently treated in Asia or America. In 2006 Singapore 2015, according to the latest estimates from various national received 410,000 foreign patients, nearly half of them from agencies, Thailand and Singapore expect 1 million patients, the Middle East,8 even though Jordan, Lebanon, Egypt, and and India expects around 800,000 patients; by that time, health Tunisia appear to offer competitive prices. The countries of tourism is expected to generate more than $2.3 billion in India the region can also explore new strategies to benefit from and $3 billion in Singapore. Benefiting from highly skilled the globalization of the health industry and their proximity to human capital, MENA countries could position themselves in this prosperous market—provided they are willing to undertake the European market. a rigorous knowledge-based strategy. 7. The health insurer of a major grocery chain based in New England, Hannaford, offers its 27,000 clients the option of having several medical procedures done in Singapore rather than the United States, saving the employee up to $3,000 in co-payments and deductibles. 8. University of Delaware, UDAILY, “Medical Tourism Growing Worldwide,” July 25, 2005. Transforming Arab Economies 117 Chapter 8. Promoting growth sectors Structural adjustments in the Western health sector repre- incentives, such as international health-insurance reimburse- sent opportunities for MENA. According to Ehrbeck, Guevara, ment agreements that allow the National Health Insurance and Mango (2008), up to 15 percent of health-care sector jobs Fund to contract with private providers. In the same context, in high-income countries could be outsourced. Most outsourc- the Malaysian government has increased the allowed stay ing would be done domestically, but some developing countries under a medical visa from 30 days to 6 months. could capture part of the market. In this sense, the case of the Philippines is interesting, where exports of medical transcrip- Export promotion strategies in the health sector have to be devel- tion services grew at a fast rate in the early 2000s. Further, the oped by the private and public sector. Trade promotion is neces- shortage of nurses in Europe forces countries to hire foreign sary to gain market share abroad. Although the development nurses and doctors. of trade strategy is foremost the responsibility of the private sector, government also has a major role to play. Indeed, it is The health sector can create more jobs. In Tunisia it is esti- critical that the ministries of health, trade, tourism, and foreign mated that export of medical services created more than affairs coordinate their actions. Experience shows that the 10,000 jobs—half of them in the health sector (Lautier 2008). best-performing countries, such as Thailand, have created In addition, job growth in the health sector outpaced overall job horizontal administrative structures to coordinate domestic growth, growing between 1998 and 2008 by 72 percent and 2.9 positions and strategies on health tourism. In the case of Cuba, percent, respectively. Although the proportion of workers in the a trade promotion agency for health tourism has proven to health sector increased from 1.5 percent in 1998 to 2.5 percent be very successful. In the Maghreb, by contrast, the current in 2008, opportunities for job creation remain, since medical dispersion of actors remains a technical challenge. and supporting functions employ on average 10 percent of the workforce in developed countries. Employment opportunities Bilateral and regional agreements are necessary to promote trade in in the health sector can be enhanced by accelerating trade and the health sector. Bilateral and regional agreements are critical private investment in medical tourism. to remove obstacles to trade and to harmonize domestic rules across the region. First, countries must establish conventions with health-insurance providers, as Cuba did with countries Promoting health tourism in MENA in Latin America. Second, bilateral labor agreements must be encouraged, as in the United Kingdom, where Indian and Philippine nurses are allowed to work. Moreover, conventions MENA countries that enjoy a comparative advantage in health on education and training of medical personnel that encourage services need to carefully assess their resources and strategies cross-border movement must be strengthened. in the face of the current critical deficit of health workers in European countries and elsewhere, coupled with skill short- ages (for example, in Africa), waiting lists for certain opera- tions, the continuing boom in cosmetic surgery, and gaps in health-insurance mechanisms and deterioration in the level Creative industries: of reimbursement (particularly for dentistry). Potential niches could include the dental and prosthesis market, the market Leveraging unexploited in comfort surgery and wellness for French speakers, and retirement and residential programs. Trade can be promoted opportunities by improving hospitality, with excellent medical treatment combined with cultural and tourist activities. The Creative Economy Report (UNCTAD 2008) defines creative Health facilities must be certified and meet international quality industries as being “the cycles of creation, production, and distri- standards. The absence of a world database on the safety and bution of goods and services that use creativity and intellectual quality of care has increased the importance of hospitals adopt- capital as primary inputs. They constitute a set of knowledge- ing international voluntary standards. The Joint International based activities, focused on but not limited to arts, potentially Commission has accredited more than 120 hospitals outside generating revenues from trade and intellectual property rights.” the United States, and several other organizations (for example, Creative industries comprise artwork, media (including books, the International Society for Quality in Health Care, the films, television, and radio), fashion, software, video games, National Committee for Quality Assurance, the International and creative services—architectural, advertising, cultural and Organization for Standardization, and the European Society for recreational, creative R&D, digital, and related services. Quality in Healthcare) have taken steps to ensure that medical travelers receive the highest-quality care. Yet, to date, only 5 From an economic perspective, exports of creative goods and ser- of 70 Tunisian clinics are ISO certified. vices increased from $227 billion in 1996 to $424 billion in 2005, accounting for 3.4 percent of overall world trade (UNCTAD 2008). To facilitate trade, countries should initiate a regulatory audit of For instance, Egypt’s exports of creative services increased the health sector. Governments need to reassess their health- six-fold between 1996 and 2005 to reach $102 million, while care regulatory regime in light of their domestic health goals imports did not exceed $22 million. Creative industries are a and their foreign trade objectives. The review should include labor- and skill-intensive sector offering job opportunities to rules pertaining to the legal form of health-care institutions, educated people. Creative industries employ 11 percent of the foreign investment, nationality and residency requirements, work force in the Philippines and Mexico, 8.5 percent in the movement of health personnel, and so on. To take one example, United States, 7.3 percent in Russia, and about 5.5 percent in Tunisia’s public and private health services have responded Canada and Singapore. to the increasing role of the private sector through targeted 118 Chapter 8. Promoting growth sectors In addition, creative industries contribute significantly to GDP, espe- creative economy owing to several factors, including lack of cially in developed countries. According to the World Intellectual investment, insufficient entrepreneurial skills, inadequate infra- Property Organization (WIPO 2012), the contribution to GDP of structure, and the absence of political will. Despite those short- industries that generate products subject to copyright is around comings, many opportunities for value creation, employment 11 percent in the United States, 8.6 percent in the Republic of expansion, technological upgrading, and market development Korea, and 5 percent in Latvia and Kenya. Compared to other could materialize if appropriate knowledge-based strategies countries at similar levels of development, creative industries were implemented. in MENA fail to contribute substantially to GDP. Lebanon is the best-performing country in the region (4.75 percent of total A sound legal framework is needed for the creative industry. Tax GDP); Jordan, Morocco, and Tunisia lag behind at less than 1 authorities should develop, in collaboration with stakeholders, percent (figure 8.7). Although data collection is problematic a framework suitable for creative industries, one that would in the region and does not allow a detailed analysis, it is rec- promote rather than discourage investment. For example, ognized that MENA countries could significantly increase the Lebanon offers tax exemptions of two to ten years for any contribution of creative industries to their GDP. investment larger than $200,000. Second, labor laws and regulations must be reviewed to facilitate employment in the One of the most dynamic segments of the creative economy in copyright-based industry, whose activity is characterized by a the MENA region, and one with substantial job-creation potential, high degree of seasonality. Finally, countries should endorse is media and entertainment. The region’s traditional print and international agreements and treaties on intellectual property broadcast media have a long tradition of producing high-quality rights and translate them into national laws. Strengthening Arabic language content, and the recent proliferation of pan- law enforcement and publicizing court decisions on infringe- Arab, free-to-air satellite TV stations confirms that there is no ment are important factors in enhancing public awareness. shortage of Arabic television news. With the emergence of new technologies (Internet, mobile television, music on demand), Qualifications need to be strengthened all along the value chain. MENA can move from traditional to digital media. The success of the creative industry rests on the qualifications of its workforce. Therefore, educational, administrative, and The media and entertainment market in MENA is one of technical qualifications should be improved to enhance pro- the fastest-growing sectors in the region. According to ductivity and increase the number of start-up companies. First, PricewaterhouseCoopers (2009), that sector is expected to educational curricula should be reformed to better suit market grow from $17 billion in 2010 to $36 billion by 2015, represent- needs. Second, vocational and technical education should be ing an impressive compound annual growth rate of 13 percent. better linked with the creative economy. Third, the participation High revenues in the sector are expected, as spending by end of women in the industry should be strengthened, as women in users increases from $3.8 billion in 2006 to $5.2 billion in 2015. the region represent a pool of untapped talents and resources. Internet access is growing by 25 percent a year, and advertising spending is going up by 7 percent annually. The very positive Investments in the media and entertainment sector are needed economic outlook for the media and entertainment sector helps to add value along the value chain. Technology represents an it attract new investments and create jobs in the region. enabling factor along the value chain; therefore, investments in physical technology assets (backbone networks, access But the MENA region risks being relegated to the lowest value- networks, and internet access) and soft technical skills are adding stage of the creative economy. For the past 10 years, the critical. For instance, to address capacity issues in the region, creative market has become more and more global, and access Abu Dhabi launched the region’s latest media zone, dubbed by MENA countries to the global creative economy has been “Twofour54,” which provides an international environment for limited. Indeed, MENA currently plays a marginal role in the media content in the Arab world. The 200,000 square meters (m2) media zone houses production facilities and provides train- Figure 8.7 ing and infrastructure for a variety of media sectors, including film, broadcast, digital, gaming, publishing, and music. The Contribution of copyright industries to GDP rapid change of technology through the provision of online ser- vices also requires sizable investments in electronic commerce. Morocco Tunisia Jordan Green growth: Building Jamaica on comparative Lebanon advantage Latvia Singapore The green economy in developing countries is no longer a matter of luxury. Any knowledge-based development strat- United States egy that misses this important pillar will eventually be “self- defeating, as environmental degradation reduces productivity 0 2 4 6 8 10 12 and welfare” (Bowen 2012). But the 2012 Med Report (CMI Percentage of GDP 2012) has shown the possibility of surmounting the trade-offs Source: WIPO 2003 and 2012. Transforming Arab Economies 119 Chapter 8. Promoting growth sectors between economic growth and environmental efficiency to The rest of this section provides suggestions on how the envi- achieve the more-efficient use of natural resources. ronmental threat might be transformed into an opportunity for job creation and sustainable growth for the Arab economies. The costs of skipping the green growth agenda are high. The World Bank (METAP 2008) estimates the costs of environ- mental degradation by quantifying the detrimental impacts on health of unsafe water and urban air pollution, the cost of natural  Green growth as a source of resource degradation (forest degradation, soil erosion), and the net job creation loss of tourism. These costs are equivalent to 2–5 percent of Arab countries’ annual GDP, compared with 1–2 percent of GDP in the In any new economic transformation, job destruction and Organisation for Economic Co-operation and Development (OECD) job creation occur simultaneously, generating a net loss or countries and 4.5 percent, 3.3 percent, and 8 percent of GDP in net gain of jobs within any given period. The net gain or loss India, Mexico, and China, respectively. In the Arab countries, envi- changes over time. Net job creation from green growth will ronmental affairs receive no more than 1 percent of the budget. occur when the demand for eco-friendly products expands at the expense of demand for preexisting goods and services. The Arab region is among those in which water is scarcest, Achieving a net gain means aligning environmental policy with and it is predicted that, with the exception of Egypt, Sudan, economic strategy, obliging policy makers and national leaders Iraq, Lebanon, and Syria, Arab countries will experience severe to make some tough decisions. Fortunately, in exchange for water stress by 2025 (AFED 2008). Indeed, Arab countries have making those tough decisions, long-term environmental, eco- the second-lowest rate of access to improved water (only 81.4 nomic, and employment gains can be expected. percent of the population), besting only Sub-Saharan Africa (59.7 percent), and the second-highest regional carbon dioxide Green growth can be a source of job creation. Evidence shows (CO2) emissions per capita (4.4 tons), following Europe and that, under an optimistic scenario, the net effect of carrying Central Asia (ECA) (7.7 tons). Advances in desalination will play out environmental reforms could generate at least 10 percent a key role in addressing the region’s water shortages (box 8.3). of the jobs needed to keep unemployment from rising in the BOX 8.3 Water stress and desalination The Middle East and North Africa Region (MENA) is the world’s most water-scarce region. Due to its burgeoning population and rapid economic growth, its per capita renewable water resources are among the world’s lowest. By 2030 lack of water will become a severe constraint to health and socioeconomic development in all 21 MENA countries. By 2050 two-thirds of these countries could have less than 200 cubic meters (m3) of renewable water resources per capita per year. In the future, water scarcity is projected to become even more severe because of global warming. MENA’s total renewable water resources are projected to decline by approximately 12 percent by 2050. Despite significant public resources invested in the water sector, water management remains a serious problem in most MENA countries, as shown by water service interruptions, droughts, and floods, and many MENA countries experience poor public health outcomes. Aquifers are overpumped, water quality is deteriorating, and water supply and irrigation services often are rationed—damaging human health, agricultural productivity, and the environment. Desalination can close the gap at a cost. By 2050 filling the water gap will cost approximately 6 percent of current regional GDP. But countries differ markedly based on the severity of their water shortages and projected GDP. In the future, Iraq, Jordan, Morocco, and Yemen must be prepared to spend a substantial amount of their GDP to overcome their water shortages. Advances in desalination technology have made it an economically viable alternative source of fresh water. Consequently, in response to shortages of naturally renewable water supplies, many MENA countries have developed desalination facilities. Desalination already plays a significant role in the region’s water supply portfolio, providing slightly more than 3 percent of total regional water demand. By 2005 nearly 75 percent of the world’s desalination potential was installed in MENA, mostly around the Gulf. With growing water demand, desalination will play an ever-larger role in MENA’s water supply. But despite its advantages, desalination is expensive and energy intensive and has environmental implications. If current technologies are used, desalination alone would cause a production of approximately 400 million tons of CO2 equivalent. The biggest challenges will be to reduce the cost of energy-intensive desalinated water, reduce its reliance on fossil fuels, and ensure that it becomes an environmentally acceptable solution. The cost of desalination is coming down rapidly, and alternative energy sources are being developed. The future of desalination rests on reverse osmosis (membrane technology), which does not depend on fossil fuels. Due to advances in membrane technology and pretreatment options, membrane prices have fallen; their performance has improved; pretreatment is better understood; and energy consumption has dropped dramatically. Source: World Bank 2012. 120 Chapter 8. Promoting growth sectors Maghreb and Mashreq countries between the present and 2030 sources. By 2030 the EU foresees that about 45 percent of total (CMI 2012). The 2012 Med Report estimates the employment energy demand will be met by renewable energy (EREC 2011). effect of encouraging the acquisition of new energy-efficient shells for new buildings by 2030 at around 1.3 million jobs, of Europe will import its first solar-generated electricity from which more than 431,400 would come from additional invest- North Africa within the next five years. One of the flagship ment in energy-efficient equipment (plumbing, electricity, and projects is the Desertec Industrial Initiative, launched in July heating installation and maintenance). Another study shows 2009 by 12 companies that agreed to establish financing plans that spending $100 billion to “green” just 20 percent of the to develop solar projects in the Sahara Desert, largely using existing building stock in the Arab countries over the next 10 concentrated solar power (CSP), as seen in figure 8.8. The €400 years––by investing an average of $10,000 per building for billion project aims eventually to provide 15 percent of Europe’s retrofitting––would create 4 million jobs. The payback period electricity needs with solar power imported over high-voltage for energy and water efficiency retrofits ranges between two cables. According to the European commission’s Institute for and seven years, based on the level of subsidy provided (AFED Energy, capturing 0.3 percent of the light that falls on the Sahara 2011). The productivity of the resources with which the Arab and Middle Eastern deserts would meet all of Europe’s energy world is endowed (notably energy and, in some countries, water) needs. Solar energy is central to the high-level political agree- could easily be increased through a package of reforms, notably ment between MENA and the EU to make trade in green energy targeting current energy subsidies that are regressive and a fundamental pillar of economic integration. counterproductive. In addition, adopting sound schemes to Capturing solar energy is one of the most-discussed, vision- encourage new green niche industries and green entrepreneurs ary options for scaling up renewable energy. CSP is a renew- will be essential for accelerating the creation of green jobs. able energy technology that, after a period of stagnation, has started to penetrate the energy market, particularly in Spain and the United States, but also in the MENA region. Several The solar energy example factors, such as decreasing costs and increasing electricity demand, suggest that CSP could provide a low-carbon alter- Demand for renewable energy is growing, notably from native to centralized power generation across the world. The MENA’s neighbor, Europe. In 2008 energy from renewable advantage of CSP power plants is that they provide the option sources was estimated to have contributed 16 percent of gross of storing energy. final energy consumption in the 27 EU member countries, compared with 13.1 percent in 1997. It is expected that by With its abundant solar energy resources, the MENA region could 2020 most of the demand for renewable energy will be met become home to a new high-potential industry. The region is char- from wind energy, hydropower, biomass, and solar photovoltaic acterized by abundant sunshine, low precipitation, and plenty Figure 8.8 Sketch of possible infrastructure for a sustainable supply of power from renewable sources to Europe, the Middle East, and North Africa Source: DESERTEC Foundation. Transforming Arab Economies 121 Chapter 8. Promoting growth sectors of unused flat land close to road networks and transmission Figure 8.9 grids. Under favorable conditions, such as the development Potential value of exports of CSP components, of a strong local manufacturing industry, MENA can expect to produce 5 gigawatts (GW) of CSP by 2020, as well as 2 GW 2012–25 worth of exported components. An investment of $1 million 12 in clean energy is estimated to produce 16.7 jobs, compared with only 5.3 jobs for the same amount spent on fossil fuel 10 industries (PERI and AAM 2009). Exports in US$ billions, cumulated Solar energy can foster employment. According to a study com- 8 missioned by the World Bank’s Energy Sector Management Assistance Program (ESMAP) (Ernst & Young and others 2011), 6 the development of a solar-energy economy can create a sig- nificant number of direct and indirect jobs along the value chain. For instance, if the CSP market grows to over 20 GW 4 by 2025, a cumulated total of 200,000 low-skilled jobs in con- struction and interconnection labor will be created in Algeria, 2 Egypt, Jordan, Morocco, and Tunisia. Jobs in operation and maintenance can be performed by local employees, adding 0 socioeconomic benefit to the region. In addition, an extra 50,000 2012 2015 2020 2025 new local jobs for components manufacturing could also be created by 2025. Finally, 8,000 high-skill jobs in construction- Source: Ernst & Young and others 2011. related services (project management and development) could Note: CSP = concentrated solar power. provide opportunities for young graduates. In addition, solar energy can increase productivity. Added value Cooperation with international energy operators will open from products locally manufactured for the solar-energy indus- new business opportunities. Several industrial sectors in try could represent as much as 56 percent of the value chain MENA have the potential to join the CSP value chain, produce (table 8.1). The cumulated direct impact related to construc- components locally, and export a share of their production. But tion of new power plants and the spillover along the value the research, development, and production of components to chain could reach $45 billion. According to the Ernst & Young be exported will require international cooperation and political study, the economic impact would be strongly related to the will. The success of these industries could be facilitated by size of the CSP market size in MENA, as well as the share the development of joint ventures between large international of local manufacturing in the overall production process. A companies and local firms, and also by the local actions of stable market and large market demand are therefore critical subsidiaries of international players. In addition, the sustain- to influence investment decisions on the local production of able development of the industry can be achieved within the CSP components. next two decades by beginning to enhance the skills of local The potential for exports of solar components is significant. MENA engineers and technicians today. countries can ultimately become major suppliers and consum- National strategies for industrial development are needed. ers of CSP-generated electricity. The same can be true of The private sector and governments should set clear strategies exports of CSP components if national decisions to promote to develop CSP plants and strengthen R&D efforts. First, to CSP technologies are made at an early stage (figure 8.9). The enhance the innovative capacity of industry, more technology key success factors in the move toward exports are a stable clusters and regional innovation platforms should be created. home market, a large and growing world market, price com- Second, technical curricula should be revised to ensure that petitiveness, international quality standards, a high level of education among sectoral workers, and the removal of trade graduates are well equipped with the core competences barriers within the region and between the region and Europe. required by high-tech employers. For instance, universities should be encouraged to teach CSP-technology-based courses, particularly to students in relevant technical and engineering  TABLE 8.1   ­Direct and indirect local economic fields. In addition, training programs for local manufacturing impact of CSP plants, 2012–25 firms need to be developed to help them overcome innovation barriers and to gain access to the latest technological advances. Local In $ million share Business models should follow comparative advantages. (cumulated) 2012 2015 2020 2025 by 2025 Joint ventures and licensing are the most relevant business Direct economic 56 model for strengthening international cooperation. Because 206 1,403 6,999 21,675 the production of high-quality mounting structures and the impact percent Indirect (supply adaption of techniques for coating and bending mirrors are 162 1,401 7,278 23,551 critical to further develop the industry, investments should be value chain) made in new production lines based on automated processes Source: Ernst & Young and others 2011. for the production of CSP components. Note: CSP = concentrated solar power. 122 Chapter 8. Promoting growth sectors CSP investment opportunities should be widely publicized. CMI (Center for Mediterranean Integration). 2012. 2012 MED Local firms need to know about the potential to invest in the pro- Report: Toward Green Growth in Mediterranean duction of solar components and will need technical feasibility Countries. Marseille: CMI. studies on production lines. A new regional association special- izing in CSP or renewable energy association could be useful Dawson, Sarah, and Keith Pollard. 2007. “Guide to Medical in informing potential producers and investors about issues Tourism.” http://www.treatmentabroad.net. such as CSP market development, manufacturing options, Djeflat, A. 2012. “Morocco’s Effort on the Knowledge Economy.” and the latest technological advances in this growing market. Unpublished background note, CMI, Marseille. e4e (Education for Employment), IsDB (Islamic Development Bank), and IFC (International Finance Corporation). Conclusion 2011. Education for Employment (e4E): Realizing Arab Youth Potential. Washington, DC, and Jeddah, Saudi Arabia. Ehrbeck, Tilman, Ceani Guevara, and Paul D. Mango. 2008. Various factors determine the growth path that the sectors “Mapping the Market for Medical Travel.” McKinsey discussed in this chapter should undertake to make the Quarterly, May. most of existing and foreseeable niches. The region needs EIU (Economist Intelligence Unit). 2011. Middle East and Africa: to leverage efforts to expand niches and capitalize on com- Automotive outlook. London: EIU. parative advantages. It has clear opportunities to benefit from the restructuring of the global production chain, notably in EREC (European Renewable Energy Council). 2011. 45% by the Maghreb and Mashreq regions. Niche opportunities are 2030: Towards a Truly Sustainable Energy System available in many segments of the value chain. The best way in the EU. Brussels. to implement the necessary changes may be to start with a number of pilot programs (on a local, national, or even Ernst & Young, Fraunhofer Institute for Solar Energy Systems regional level) to act as catalysts and to gain quick wins that ISE, and Fraunhofer Institute for Systems and could attract more investment, more demand for change, Innovation Research ISI. 2011. “Middle East and and other positive side effects. North Africa Region Assessment of the Local Manufacturing Potential for Concentrated Solar Power (CSP) Projects.” Washington, DC: World References and bibliography Bank and ESMAP. Fawzy, Samiha. 2002. Globalization and Firm Competitiveness AIDMO (Arab Industrial Development and Mining Organization). in the Middle East and North Africa Region. 2010. Bulletin of Industrial Statistics for the Arab Washington, DC: World Bank. Countries, 2001–2007. United Nations Economic and Social Commission for Western Asia, Beirut. Hazaimeh, Hani. 2008. “Jordan Tops Region as Medical Tourism Hub.” Jordan Times, September 8. ANIMA. 2011. “Mediterranean Niches and Sectors with High Potential of Job Creation and Growth.” Center ICT Association of Jordan. “Jordan’s ICT Industry,” July 2011. for Mediterranean Integration and World Bank, http://rbiproject.com/event2_files/Jordan percent Marseille. June. 20ICT percent20Sector_Jul_2011_Sector percent 20Presentation.pdf. 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Arab Media Outlook 2008– 2012: Collaborating for Growth. 2d edition. Dubai: ———. 2012. Copyright + Creativity = Jobs and Economic Dubai Press Club. Growth. Geneva. Radwan, Ismail and Pierre Strauss. 2012. Knowledge-Based World Bank. 2012. Renewable Energy Desalination: An Sectors for Growth in MENA. Unpublished back- Emerging Solution to Close the Water Gap in the ground report, World Bank, Washington, DC. Middle East and North Africa. Washington, DC. Zeidane, Zeine. 2012. “Institutional Reforms for a Knowledge Economy Model in the Arab World.” Unpublished background report, World Bank, Washington, DC. 124 hapter 9 Managing local and regional development Spatial diversification complements sector diversification. In fact, within cities or localities, (ii) cities, and (iii) regions. The issues to be the two often go hand in hand. Innovation germinates and considered are not the same from level to level. At the site level, grows where there is an accumulation of talent, knowledge, the question is how to build innovative places from scratch; and entrepreneurship: hence those emblematic sites such as at the city level, the question is how to make cities—new or Silicon Valley in California or Cambridge in the United Kingdom. existing—drivers of innovation for the country as a whole; at Governments in many countries have identified the importance the regional level, the question is how to reduce economic and of such places for innovation and job creation, and their promo- social disparities from one region to another and among the tion has become an essential piece of innovation policies. Arab localities within a given region. In all cases, however, there is countries have followed the trend, and since the early 2000s a need for a holistic approach, in which issues related to each technology parks have spread throughout the region, comple- of the four knowledge economy pillars should be addressed. mented by the development of brand new cities in resource-rich Creating and maintaining a hospitable climate for innovation countries. There has been a proliferation of special economic and development depends on systemic action. zones (SEZs) as well, established to attract foreign industries and build export capabilities. In recent years, and notably in the wake of the Arab Spring, governments are also concerned with reducing regional disparities within their borders. Building industrial Regional development policies in the Arab world have been centrally driven, since there is a poor tradition of decentralization in the and technology sites region (see chapter 4). The failure to engage local communities in development planning has negatively affected their design and implementation. A proliferation of special and The situation has been evolving in some countries. Among the free economic zones resource-poor countries, Morocco has developed the most articulated policy to date. A strong regional planning policy The desire to diversify the economy and to create job opportunities adopted in the mid-2000s has included a well-coordinated has already pushed many Arab countries to create special zones to approach to planning and implementation through regional encourage exports and attract foreign direct investment (FDI). SEZs investment centers (centres régionaux d’investissement) and are ring-fenced customs-free areas with a regulatory environ- special export zones and technology parks. Investments are ment of their own. Most are backed by legislation establishing keyed to sector plans designed to boost a set of industries in a governing council for each SEZ and mandating that council to which Morocco aims to become a global player. These measures enact rules that apply to investors within the zone. Free zones, are complemented by a major national initiative for human by contrast, include free ports, export-processing zones, and development launched in the mid-2000s to mobilize communi- industry zones that are designed to encourage exports and ties in marginalized urban and rural areas. In 2011 the king, attract FDI but do not have their own regulatory environment. in response to aspirations for democratization and participa- tion expressed in the wake of the Arab Spring, launched an There are currently some 50 such zones in Arab countries, par- important regionalization reform. Elsewhere in the region, ticularly Egypt and the United Arab Emirates (UAE) (table 9.1). Dubai and Qatar have undertaken spectacular initiatives to Exports from such zones may account for more than 50 percent become global innovation hot spots, while Saudi Arabia has of total national exports (as in Algeria, Egypt, and Tunisia). begun building entirely new cities devoted to specific purposes, On the other hand, the zones generally have only a moderate as described in box 9.1. impact on employment, representing only a small percentage of total jobs in the country.1 The cost of the jobs created in the In this chapter, local and regional development issues and policies zones depends on the nature of the activities and the incen- in the Arab world are analyzed at three levels: (i) innovative sites tives offered to investors.2 1. In 2006 the number of jobs in all economic zones amounted to some 1.6 million (ILO 2007), about 1.7 percent of all jobs in the countries hosting the zones (Arab Monetary Fund 2009). 2. For instance, ILO data for the year 2007 indicated 85 jobs created per million U.S. dollars invested in SEZs in Morocco (with investments made mostly in light industries such as textiles), against 11 jobs created per million U.S. dollars invested in Algeria (where investments concerned huge oil engineering projects). Transforming Arab Economies 125 Chapter 9. Managing local and regional development BOX 9.1 Knowledge and innovation cities in Saudi Arabia As part of its new strategy for a knowledge-based economy, Saudi Arabia is embarking on the creation of new cities. The current projects are the al-Madina Knowledge Economy City, King Abdullah Economic City (KAEC) in Jeddah, Jazan Economic City in Jazan, and Prince Abdul Aziz bin Mousaed Economic City in Hail. The first two are the most advanced. Cities are also planned in Tabuk and the Eastern Province. The al-Madina Knowledge Economy City, launched in 2010 with an investment of $7 billion, covers 4.8 million square meters and plans to create 20,000 job positions for a population of 150,000 inhabitants. Its development will complement the work of the King Abdullah Foundation, creating an alternative central business district for al-Madina with improved facilities and infrastructure. As well as being a religious and cultural destination (with a mosque hosting 10,000 worshippers), it will be a draw for tourists, thanks to a theme park and other hospitality facilities. The city will benefit from the recent upgrade to international status of the Prince Mohammed Bin Abdul-Aziz Airport and the expansion of the Medina Central Zone. Its key features will include a number of complementary ele- ments—chief among them the Taiba Complex for technology and the knowledge-based economy, technological and administrative colleges, an Islamic civilization studies center, a business center, and an academic and clinical complex devoted to medical education, the biological sciences, and health services. King Abdullah Economic City (KAEC). With an investment of $27 billion, KAEC covers 168 million square meters and plans to create a million jobs for a population of 2 million. Numerous incentives and measures have been designed to promote private sector par- ticipation. The KAEC will be funded entirely by private capital, the largest private sector project in the region and is being built by a consortium headed by global real estate giant Emaar Properties and a group of Saudi investors. One major manufacturing focus is a Plastics Valley devoted to food packaging and storage, medical devices and products, sports safety, home construction, and auto- mobile parts, among other things. Another emphasis is downstream processing of petrochemical products and crude oil derivatives sourced from the country’s oil industry. Facilities will be provided for high-tech industries such as computer-chip manufacturing, as well as industries that process raw materials such as steel, wood, and paper. The KAEC will host a pilot smart city built for “intel- ligent” living, featuring cutting-edge services such as e-government, home automation, efficient health care, and transportation infrastructure. The vision of the smart city is to create new jobs and businesses, boost the performance of industries, and attract residents by providing attractive living environments. The government agency responsible for developing the city is also in charge of all investments coming into Saudi Arabia (SAGIA). It will offer some debt and equity funding to cofinance projects to encourage private investment in the economic cities. Source: http://www.sagia.gov.sa. S  pecial economic zones and free  TABLE 9.1   ­ The jobs that SEZs and free zones do create come at rela- zones in the Arab World tively low cost, thanks to FDI, but in most cases there is little or no technology transfer and few spin-offs to the sur- Special rounding areas. For these reasons, it is important to encourage economic collaborative and linkage projects between investment projects Country zones Free zones in the zones and firms, research bodies, and educational institu- Algeria 0 1 tions in the local economy. Location is crucial, as the zone must Bahrain 0 2 be close to good infrastructure (such as roads, railways, and Egypt 1 11 ports) to minimize costs that otherwise might have to be borne by public authorities. The need for proximity to infrastructure Jordan 1 6 may have to be balanced against the equally important goal of Kuwait 0 1 avoiding greater pressure on already congested urban areas. Lebanon 0 2 Morocco 0 2 Oman 0 0  A growing number of technoparks Qatar 0 0 Technoparks, developed by governments with large invest- Saudi Arabia 0 0 ments of public funds, are considered to be the quintes- Syria 0 7 sential innovation sites. About 50 technoparks operate in the Tunisia 0 2 Arab region (appendix 1). Some are clear successes, in terms of United Arab Emirates 0 16 their contribution to the innovative dynamism of their country or the number of jobs they have created. Global experience Yemen 0 1 suggests that it takes about a decade for a technopark to reach Source: Author’s compilation based on latest available OECD data (http:// a significant size (1,000 employees at minimum). Examples are www.oecd.org/dataoecd/56/22/36086747.pdf). 126 Chapter 9. Managing local and regional development the El Gazala Technopole in Tunisia, launched in 2003, which authorities, whether they are national or subnational, focuses on information and communication technology (ICT), are doomed to fail. Other key actors, including the hosts about 100 firms, and employs about 2,000 people—70 business sector, foreign investors, and academic circles percent of whom have a master’s-level engineering degree or must be involved, and all must operate under transpar- the equivalent (figure 9.1). The Casa Technopark, in Morocco, ent and clear rules of the game, especially with respect has a similar profile. The Tunisian government has laid plans to resource allocations (EIB, Medibtikar, and Ville de to build some 10 so-called technopoles throughout the country, Marseille 2010). each focused on a specific sector or area of technology and linked to identified strengths and advantages of the locali- Berytech, located in Beirut, Lebanon, combines these elements ties where they will be situated.3 Supported by the European to produce an interesting success story (box 9.2). Investment Bank (EIB), the program has suffered some delays Few industrial clusters have formed in the Arab world. owing to slow bureaucratic decision making and battles among They coalesce more gradually than do technoparks, which the responsible ministries. Morocco also plans to expand its are directly structured and supported by governments. One of technopark program to include a series of agripoles that will the most successful clusters is located in Agadir in southern exploit opportunities for agro-industrial clusters such as Agadir, Morocco, which is built around agrifood industries and fish- discussed further on. eries.4 Key factors for success include: a continuous process The success of a technopark depends on a few key factors: of upgrading and modernizing equipment; comprehensive • T  he presence within the park of solid educational infra- quality control; an industrial organization that favors informal structure, such as technological universities and manage- and social relations that build trust and cooperation (notably ment institutes. through cooperatives that have tackled joint issues such as insurance and EU quotas); and an active role for intermediate  fficient incubating structures linked to active financial • E associations, local authorities, and chambers of commerce. networks and business angels to support would-be inno- These “soft” organizational elements can be stimulated by vators and entrepreneurs. governments (usually indirectly, through appropriate incen- • A  dequate transport and logistics infrastructure, including, tives), but they take time to form and, more fundamentally, ideally, the proximity of an international airport. require strong local participation. The evolution in several Arab  bove all, good governance conditions. From this viewpoint, • A countries toward granting more power to local and regional technoparks that are managed exclusively by government authorities should facilitate the process of clustering. Figure 9.1 El Gazala technopole, Tunisia a. Number of employees in El Gazala, 2002–10 b. Distribution of employees in El Gazala, 2010 1,800 1,754 Others 5% 1,500 Managers 10% 1,318 1,200 850 Technicians Engineers 750 13% 72% 700 517 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: El Gazala Technopark, CMI Survey 2012. 3. El Gazala, Tunis (ICT), Sidi Thabet (biotechnology), Bizerte (agrifood), Sousse (electronics, mechanics, and ICT), Monastir El Fejja (textiles), Sfax (multimedia and communication), Borj Cedria (environment and plant biotechnology), Mednine and Jendouba (exploitation and commercialization of the natural resources of the Sahara), and Gafsa (phosphate mining). 4. The high potential of the Agadir cluster is demonstrated by its large share of the country’s agricultural production: 48 percent of citrus fruits, 21 percent of truck farming, 43 percent of dates, 70 percent of argan, 95 percent of saffron, 55 percent of almonds, and 100 percent of roses. Transforming Arab Economies 127 Chapter 9. Managing local and regional development BOX 9.2 The Berytech technology park and fund In Lebanon the Berytech technology park, initiated by the private University of Saint Joseph, is a multisector park focusing on services: advertising, business coaching, accounting, management consulting, computer hardware and peripherals, and clinical research. In exchange for equity ownership, Berytech’s seed capital fund stimulates high-tech growth by investing in early-stage Lebanese technol- ogy companies, providing both equity capital and the guidance needed to succeed. The fund invests from $100,000 to $1.2 million in any single operation, a range not generally considered by formal venture capital funds, and helps to secure additional financing if and when needed. Focus sectors include ICT, energy, food processing, environment, health care and medicine, and media and communications. Similar in spirit is the Beirut Emerging Technology Zone (BETZ) currently under development by the Investment Development Authority of Lebanon in cooperation with the Municipality of Damour. It is expected that BETZ will include among its facilities an incubator for start-ups in ICT and other new technologies. Finally, the LIRA program aims at building effective cooperation among industry, academia, and research centers to address the research and development needs of Lebanese industry. Source: http://www.berytech.org/component/option,com_wrapper/Itemid,392/lang,en/; http://www.medibtikar.eu/. Agripoles as sources of rural development. Except in Tunisia, companies to its hospitable business environment. Dubai began technoparks and clusters remain largely concentrated around by developing a world-class port and airport, before investing in large cities. If successful, the development of agripoles in those a series of dedicated free zones and technoparks specializing regions with agrifood potential would help promote regional in information technology (IT), media, health, biotechnology, diversification, thereby reducing the pressure on already and, more recently, financial services (table 9.2). overcrowded cities. The development of agripoles depends, however, on the existence of a receptive milieu of farmers and After a brilliant take-off, the ambitious Dubai operation has trade and business partners, as well as of a broader national been only moderately successful, to the extent that it has not plan that integrates trade, training, research and develop- led, so far, to a full-fledged, sustainable, and indigenous inno- ment (R&D), infrastructure development (roads), and policies vation process. The reasons seem to lie in the lack of social to develop farmers’ cooperatives. Morocco’s Plan Vert is an capital and the failure of people and organizations operating example of such a plan.5 in the newly developed areas to coalesce into dynamic clus- ters (Ewers 2007). At the same time, speculative real estate Developing ­  TABLE 9.2   Knowledge in Dubai and technology sites competitive and Year Area sustainable cities Name Jebell Ali founded 1985 (km2) 100 Trade Activities Dubai Airport Free 1996 12 Trade Zone  lobal innovation hot spots  G Dubai Internet City 2000 4 Information technology and new cities in the Gulf Dubai Technology 2003 3 Petrochemicals Park Having observed the success of technoparks and clusters, Knowledge Village 2003 21 Healthcare some countries with abundant resources have launched Dubai Industrial City 2004 52 Manufacturing large-scale programs to build new cities devoted to knowl- Dubai Financial City 2004 44 Finance edge and innovation as showcases for the entire region, if not the world. Dubai pioneered the approach. It was inspired by the Dubai Tech 2006 2.3 Biotech example of Singapore, which evolved in a few decades from a Dubai Silicon Oasis 2007 7 Information poor warehouse island to a hub for manufacturing and then for technology global trade, finance, and education by attracting multinational Source: Ewers 2012. 5. Morocco has one fully operational agripole in Meknes and two partially operational ones in Berkane and Agadir. The plan is to create at least four more in the coming years. These poles are expected to generate additional sales of €361 million and create 16,000 new jobs (Ciheam 2009). 128 Chapter 9. Managing local and regional development investments led to major problems, which were amplified by growing importance in recent decades. For example, the the global financial and economic crisis that began in 2008. global ART GOLD (Governance and Local Development) program of the United Nations Development Programme (UNDP), and In the late 1970s Saudi Arabia embarked on an ambitious its subregional components, is based on instruments for local program to build two industrial cities dedicated to the oil indus- development and “decentralized cooperation,” a term coined try. Jubail and Yambu failed to create the expected employment, to describe cooperation between subnational entities. Key although a competitive petrochemical industry developed in goals are to enhance the participation of local authorities and the country. A major issue was the transfer of knowledge and engage social actors from both the South and the North. The technology to national enterprises and the labor force. Saudi program offers technical assistance to stakeholders working Arabia has now launched an even more ambitious program to on local development and governance issues, harmonizing the build four new cities, including a so-called knowledge city in the efforts of international, national, and local actors. town of al-Madina (see box 9.1). The success of such initiatives depends on a series of factors, including good leadership, the This overall movement has spread to the Mediterranean and existence of a comprehensive policy framework with actionable materialized in the form of initiatives led by nongovernmental steps and clear indicators to monitor progress, world-class organizations (NGOs) working with local authorities. These universities and research centers, and efficient networking organizations provide expertise and technical assistance for institutions capable of bringing different actors together.6 capacity building, but rarely financial aid. Among the many domains covered by such cooperative projects are those related to the knowledge economy: governance (through mechanisms  odernization of  M for the empowerment of local authorities), innovation (through Mediterranean cities support to help small- and medium-sized enterprises [SMEs] develop new activities), education (through the provision of teaching materials and even teachers’ exchanges), and ICT Long before the establishment of nation-states, cities flour- (Djeflat 2012). ished all around the Mediterranean. In the modern era they continue to be the dynamo of the economic and political life of T h e u r b a n d e v e l o p m e n t p r o g ra m s o f t h e C e n t e r f o r the region. A variety of pressures and new dynamics—increased Mediterranean Integration (CMI) are supporting and comple- population, environmental degradation, economic restructur- menting these efforts and initiatives by involving various ing—have led governments in the Maghreb and Mashreq to CMI partners. Some examples are given below.7 launch sizeable operations to modernize cities and their sur-  rban development strategies are implemented in coopera- • U roundings, with the cooperation of local authorities. Among tion with the Med Cities network, notably for the city of Sfax. numerous examples, one may cite the renovation of traditional city centers (medinas, as in Essaouira and Meknes, Morocco),  and management reviews are being conducted in Tunisia • L the modernization of urban transport systems (as in Rabat and and Lebanon. Tunis), the building of ports (Tangiers), the construction of large  ollowing a World Bank study of four North African coastal • F waste-management facilities (Alexandria), and the rehabilita- cities (Alexandria, Tunis, Casablanca, and the Bouregreg tion of slums (Beirut and Damascus), in addition to the building Valley in Morocco), a similar study is being launched in of technopoles and industrial zones, as described previously. Algiers. The possibility of replicating the study in Amman is under discussion with the municipality of Greater Amman. These operations have benefited from the financial and  n the topic of urban transport, three conference reports • O technical support of the international community (World are being finalized: (i) a best practices guidebook; (ii) a study Bank, European Investment Bank [EIB], Agence Française of urban transport in medinas and historic city centers; and de Développement [AFD], the Deutsche Gesellschaft für (iii) a distillation of lessons learned in the Mediterranean Internationale Zusammenarbeit [GIZ], and others). On occa- about the suitability of various modes of mass transport. sion, they have led to a rethinking of entire agglomerations, through the development of structured urban strategies, as in • I n the field of ICT, a UNDP-led program that provides for Sfax (Tunisia) and Amman (Jordan), following the pattern pro- exchanges of experience between Mediterranean cities posed by international bodies such as Cities Alliance and other has produced a guide to ICT use for local authorities (CMI transnational city networks, as discussed further on. The key and UNDP 2012). The program has also undertaken pilot issue is to integrate knowledge and innovation squarely into the projects, including a geoinformation system for street design and implementation of such strategies, through careful addressing tested in the city of Tripoli (Lebanon). attention to education, ICT, and the promotion of innovation, • T  he CoMun Network led by Germany’s GIZ aims at strength- together with appropriate industrial and economic specializa- ening municipal structures through a learning network tion. The strategy should be conceived within a governance that shares cross-border experience on key municipal framework that allows effective participation of citizens. and urban development issues among cities in Morocco, Tunisia, and Algeria. The program is active in the areas Throughout the world, cooperation between subnational of waste and transport management, rehabilitation of entities—city to city or province to province—has taken on medinas, and energy efficiency. 6. As noted in the report of the conference on Knowledge Cities held in al-Madina, Saudi Arabia, March 2011. 7. For more details on CMI urban development programs, see http://www.cmimarseille.org/Urban-Spatial-Development.php. Transforming Arab Economies 129 Chapter 9. Managing local and regional development  n urban finance initiative sponsored by the Union for the • A Mediterranean and co-led by the EIB and the AFD aims to  egional disparities in select  TABLE 9.3   R identify and implement about 15 sustainable and innovative Arab countries urban development projects. The initiative provides grants Population growth and percentage of population with access in for technical assistance to accelerate the implementation 2010, except as noted of the projects. The World Bank, Germany’s KfW Group, and the European Bank for Reconstruction and Development Country Indicator Rural Urban (EBRD) may join the initiative. Algeria Population growth –0.42 2.43  MI and Cities Alliance members active in the Middle East • C Water source 79 85 and North Africa (MENA) region have decided to form a Sanitation 88 98 partnership that will include cities and governments in the Egypt Population growth 1.67 1.84 region. The partnership will offer support for the develop- ment of urban development strategies through the MENA Water source 99 100 Joint Work Program, which is collectively managed and Sanitation 93 97 administered by Cities Alliance and the CMI. Jordan Population growth 2.02 2.25 Water source 92 98 Sanitation 98 98 Reducing regional Morocco Population growth Water source 0.21 61 1.60 98 disparities Sanitation 52 83 Tunisia Population growth –0.17 1.64 Water source (2009) 84 99 Living standards differ markedly between rural and urban areas in the MENA region, as revealed by indicators of access Sanitation (2009) 64 96 to water and sanitation (table 9.3). Location has a greater effect Lebanon Population growth -0.20 0.86 on household welfare in some countries than in others. The Water source 100 100 spatial component of inequality is greatest in Morocco, fol- Sanitation 87 a 100 lowed, in order, by Egypt, Yemen, and Syria. It is much less marked in Jordan (World Bank 2010). Nevertheless, in no MENA Source: Authors’ compilation based on most recent data from WDI. country does rural-urban inequality account for more than Note: a. 2005 data. a fifth of total inequality of household expenditure. Overall, MENA’s urban-rural and interprovincial divides are no greater than those in other developing regions of the world. A World Bank study on spatial disparities in the MENA region The dynamics of regional disparities are complex, as illus- (World Bank 2010) recommends policy in three areas: trated by Egypt. Variations in gross domestic product (GDP) per capita are not directly linked to population increases or First, level the playing field and invest in people. This must decreases. For example, the South Sinai and Red Sea governor- be a cornerstone of any policy response. MENA’s political and ates had the two steepest population increases between 2003 colonial history—characterized by strong central bureau- and 2009 (probably owing to the boom in tourism); however, cracies, centralized economic and fiscal policies, and weak they had higher growth in GDP per capita than other governor- accountability relationships—has resulted in a general neglect ates where population growth was lower. The cause appears of some regions. To create a level playing field for develop- to be agricultural trends: increases in cultivated area explain ment, the challenge is to address the historical disadvantages more than 22 percent of the increase in the GDP per capita. of populations on the periphery. Improving living standards in lagging regions is therefore as much a question of develop- The recent growth in GDP per capita in Upper Egypt pushed ing people as it is of developing places. Developing people the region’s Human Development Index 8 (HDI) up by 0.247 means actions that promote education, empowerment, and between 2008 and 2010, exceeding the increase that occurred participation. in the governorates of Lower Egypt (0.206). Nevertheless, the HDI remains low in Upper Egypt, and poverty remains highly Second, strengthen connectivity and build linkages between concentrated, notably in rural areas. For every 10 poor persons wealthier areas and those that are economically disadvan- in Egypt, 8 live in a rural area, 7 live in Upper Egypt, 3 work taged. MENA’s lagging areas have an advantage: 61 percent in agriculture, 3 are illiterate, and 3 have basic or secondary of their population lives within three hours of a major city. education; most important, 4 live in households with more MENA can connect its lagging areas to agglomerating hubs than 3 children (UNICEF 2010). by investing in transport, trade facilitation, and ICT. 8. The HDI is a comparative measure of life expectancy, literacy, education, and standards of living of a country. 130 Chapter 9. Managing local and regional development Third, facilitate cluster development in areas with unreal- An interesting program that exemplifies many of the prin- ized potential, not by throwing large amounts of money and ciples articulated here is Morocco’s Initiative Nationale pour infrastructure at the problem, but by supporting local actors le Développement Humain (INDH). Launched in 2005 as a royal and helping to coordinate their initiatives (see the previous initiative, it has mobilized some $300 million, much of it from discussion of the Agadir cluster). This includes making space the international community, including the World Bank. More for public-private partnerships (PPPs), investing in human than 20,000 micro-projects submitted by local communities capital and related infrastructure, and understanding what in response to nationwide calls for proposals have been sup- initiatives the regions can support rather than trying to force ported. Coming mostly from poor urban and rural areas, the investment with subsidies and tax breaks. projects have renovated schools, built new roads, improved sanitation equipment, established health centers, and devel- There are, in more than one country, considerable opportuni- oped new income-generating activities. Evaluations conducted ties in agriculture that could be exploited through fined-tuned by the National Observatory of Human Development, which was policies to promote the use of new technologies, the develop- established as part of the initiative, have shown a satisfactory ment of trade and commercial channels, and, above all, the rate of project completion, except in the category of income- establishment of training programs, especially for women. generating activities, which have proved rather disappointing. The case of argan oil in southern Morocco (box 9.3) illustrates the challenges to be faced, as well as the crucial importance The INDH has encountered obstacles in its effort to assist of rural development for staunching poverty and slowing the poor communities in Morocco, notably because the capabilities exodus toward urban areas. of administrative and political authorities involved at various levels, from the central government to villages, have not been The right policies trump geography. To sum up the key up to the task, and because of difficulties in coordinating the message of this report, one may simply say that although the different administrative sectors (education, health, infrastruc- concentration of economic activity in certain areas may be ture, and so on). But it initiated a new mindset and prepared an inevitable consequence of growth, governments have it the ground for the broader decentralization and regionalization in their power to mitigate spatial disparities through careful measures taken in recent years. analysis and appropriate policies, carefully adapted to local circumstances. BOX 9.3 Exploiting argan oil in Morocco Argan oil is pressed from nuts in the fruit of argan trees. It has long been used by the Berbers for cooking and cosmetics. Although still used for these purposes, it is now one of the most expensive oils in the world—a valuable crop indeed, especially for the manufacture of cosmetics. The argan forest region of Morocco, declared a United Nations Educational, Scientific and Cultural Organization (UNESCO) Biosphere Reserve in 1998, represents 14.25 percent of the country’s forest land. Argan exploitation has saved some 3 million jobs, including 2.2 million in rural areas (Charouf 2006). This means that the argan oil industry ensures jobs for about half of the labor force in Morocco’s rural areas and has the potential to shrink rural-urban migration in Morocco, eradicating extreme poverty in the process and creating job opportunities for women (who generally require training to make them comfortable with the administrative and financial responsibilities they assume when they participate in argan cultivation). The argan tree also has an ecological role. It is the second-most-important cover for Moroccan land, and its deep roots are an important barrier to desertification. Although argan oil has enjoyed a boom since the late 1990s, argan cultivation is facing major challenges, owing to shrinkages in the area covered and in the density of coverage. In 50 years density has fallen from 100 trees per hectare to 30 because of increases in population and livestock grazing. Decision makers are confronted with tough choices between traditional and modern production methods, which have crucial consequences for the concerned populations. There are two methods of extraction: traditional hand pressing and modern mechanical pressing. Both methods generate income and thus incentives to conserve existing trees and to establish new plantations. But the production of mechanically pressed oil transfers jobs and profit to urban areas, leaving rural regions with nut production alone. Measures to promote hand-pressed oil production contribute more directly to reducing poverty and stemming the rural exodus. But producing argan oil the traditional way takes longer, and the production process is less hygienic, reducing the value of the product for cosmetic purposes. Moreover, commercialization strategies and logistics of rural women’s cooperatives are poor. A liter of traditionally produced argan oil costs about 120 Dhs, 85 of which go directly to the women. With mechanical extraction, the price of a liter can exceed 300 Dhs (FAO 2006), and rural women who gather the argan tree’s fruit actually receive less than they do from traditional production. The best way to resolve the dilemma between the traditional and modern production methods is to maximize profits and long-term social benefits simultaneously. This could be done by offering better training for women in the use of basic machines and in the bottling of the oil, and through a program to preserve the argan biosphere. The branding and commercialization of traditional argan oil is an essential step toward deriving higher and fairer profits in international markets. Such “semi-technological” production mechanisms would help empower women in rural Morocco, eradicate poverty, and reduce urbanization. Source: Taha 2010. Transforming Arab Economies 131 Chapter 9. Managing local and regional development Conclusion CMI (Center for Mediterranean Integration) and UNDP (United Nations Development Programme). 2012. “Harnessing the Power and the Potential of ICT for Local Development: A Practical Handbook for Local Mediterranean Policy Makers.” ART-ISI@MED Innovative sites are an important component of the knowl- program, CMI, Marseille, and UNDP, New York. edge economy in all countries. But they are even more crucial Djeflat, A. 2012. “Morocco’s Effort on the Knowledge Economy.” in the Arab world in view of its unique geography, where large Unpublished background note, CMI, Marseille. desert spaces promote urban concentration. Whatever the size of the sites considered in a local or regional develop- EIB (European Investment Bank), World Bank, Medibtikar, ment initiative—technoparks, cities, or broader localities—it and Ville de Marseille. 2010. Plan and Manage a is essential to coordinate investment in the four knowledge Science Park in the Mediterranean: Guidebook economy pillars, particularly in the rural regions that need for Decision Makers. Luxembourg: EIB. further development and have a great potential to reduce pres- sure on urban areas. It is equally important to engage local Ewers, Michael C. 2007. “Deploying Oil for Knowledge: A populations and authorities, an imperative that is particularly Framework for Examining Diversification and challenging for Arab societies that have experienced many Human Capital Acquisition in the Gulf States.” years of strongly centralized governance. But the promising Unpublished paper prepared for the World Bank, initiatives undertaken here and there show the way ahead and Washington, DC. merit close attention. Support from the international com- munity—including through city-to-city cooperation—will be FAO (UN Food and Agricultural Organization). 2006. “Etude sur important for capacity building and economic development. le tourisme rural et les filières agricoles dans la Province de Taroudant: huile d’argan, huile d’olive et safran.” Rome. References and bibliography Migrations et Développement. 2006. Etude sur le tourisme rural et les filières agricoles dans la Province de ANIMA. 2012. “Medmaps 2012.” http://www.medmaps.eu/ Taroudant: huile d’argan, huile d’olive et safran. mapview/ANIMA/. Report prepared for the UN Food and Agriculture Organization. Marseille. Arab Monetary Fund. 2009. Joint Arab Economic Report. Kuwait City. ILO (International Labour Organization). 2007. “Database on Export Processing Zones.” http://www.ilo.org/ Belarbi, Latifa. 2012. “Urban and Spatial Development in public/libdoc/ilo/2007/107B09_80_engl.pdf. MENA (CMI Survey).” Internal background paper, CMI, Marseille. Taha, Tamer. 2010. “Knowledge Economy, Economic Growth, and Job Creation in the Arab World.” Unpublished Böhmer, Alexander 2011. Key Lessons from Selected background note, CMI, Marseille. Economic Zones in the MENA region. Amman: OECD. UNDP (United Nations Development Programme). 2011. Human Development Report. New York: UNDP. Charouf, Zobaida. 2006. “Plante du mois.” Maroc-PAM 6 (USAID), September–October. UNICEF (United Nations Children’s Fund). 2010. Child Poverty and Disparities in Egypt: Building the Social International Centre for Advanced Mediterranean Agronomic Infrastructure for Egypt’s Future. Cairo: UNICEF. Studies (CIHEAM). 2009. “Perspectives des poli- tiques agricoles en Afrique du Nord.” Options médi- World Bank. 2010. Poor Places, Thriving People: How the terranéennes, Série B: Études et Recherches 64, Middle East and North Africa Can Rise Above Montpellier. Spatial Disparities. Washington, DC: World Bank. ———. 2011. World Development Indicators. Washington, DC: World Bank. 132 Chapter 9. Managing local and regional development Appendix 9.1 Technopoles in the Arab world Size (hectares, except as Name of the otherwise Country Type structure Sector Status noted) Jobs ALGERIA Science park Sidi Abdallah ICT Operational 1,870 (including 4 technology parks) ALGERIA Technology park Technopark El ICT, electronics, Under development 45 Boustène biotechnology (pharmaceutics). ALGERIA Technology park Technopark Biotechnology Under development 54 Ibnou-Sina (pharmaceutics), health care and medicine, ICT, tourism, engineering. ALGERIA Technology park Cyber Park ICT, media, and Under development 94 400 (already communications. created) with the objective of creating 2,400. ALGERIA Technology park Park of Sidi Agrifood 51 Bennour BAHRAIN Technology park Bahrain ICT, health care, and Under development Technology medicine. Park BAHRAIN Technology park iTeknoCity ICT, biotechnology. EGYPT Science park City for Biotechnology, Operational 250 acres 30,000 (upon Scientific information technology completion). Research and (informatics research), Technology advanced engineering Application (new materials), nanotechnology (solar cells). EGYPT Technology park Egypt’s Smart ICT Operational 300 acres 35,000 (by end of Village 2010); 100,000 (expected in 2014). EGYPT Science park Sinai ICTs, microelectronics Under development 72 km2 Technology , biotechnology, new Valley materials, fine tools, renewable energy. EGYPT Science park Northern New technologies. Under development, Coast still at the study Technology stage (Alexandria) Valley EGYPT Contact- centre Cairo Contacts Call centers and Operational 31.08 40,000 direct and Centres Park outsourcing. 60,00 indirect. JORDAN Technology park The ICT Operational 1.5 km2 Hashemite University Technology Park JORDAN Science park Al Hassan city A platform including the Operational Royal Scientific Society, The Higher Council for Science and Technology, and The Princess Sumaya University for Technology. Transforming Arab Economies 133 Chapter 9. Managing local and regional development Size (hectares, except as Name of the otherwise Country Type structure Sector Status noted) Jobs JORDAN Technology Ipark ICT Operational Incubator JORDAN Technology park CyberCity Special Free Economic Operational 4.5 km2 Zone (real estate development and industrial projects), ICT. KUWAIT Technology park Kuwait ICT Technology Park LEBANON Technology park Berytech ICT, media and Operational 500 (since creation communications, health in 2001). care and medicine, environment, agrifood (food processing), energy. LEBANON Business BIAT ICT, others Operational 45 jobs (215 Incubator expected in 2016). LEBANON Science park Beirut Electronics, ICT, Under construction Emerging biotechnology, media, and Technology communications. Zone LEBANON Technology park Edde Global ICT Under construction Village (Jbeil) LEBANON Technology park Makse Park ICT Under construction (Bekaa Valley) MOROCCO Technology park Casablanca ICT Operational 29,400 m2 Technopark MOROCCO Technology park Bouznika ICT Operational 116 Technology Park MOROCCO Technology park Rabat ICT Operational Technopolis MOROCCO Technopole Oujda Renewable energies Partially operational 167 Technopole (first phase at commercialization stage) MOROCCO Agripole Meknès Agrifood Partially 130 11,000 (expected). Agropolis operational. MOROCCO Agripole Oriental Agrifood Operational 102 5,000–7,000 Agropolis, (expected). Berkane MOROCCO Agripole Agripole Agrifood Operational 400 d’Agadir MOROCCO Agripole Tadla Agrifood Operational 244 Agropolis, Tadla azilal MOROCCO Agripole Gharb Agrifood Operational Agropolis, Kénitra MOROCCO Agripole Haouz Agrifood Operational Agropolis MOROCCO Technopole Tan Tan Agrifood (sea products Operational processing). (ambiguity about its status as it is considered as cluster) 134 Chapter 9. Managing local and regional development Size (hectares, except as Name of the otherwise Country Type structure Sector Status noted) Jobs MOROCCO Agripole Haliopolis, Agrifood (sea products Partially operational 150 Agadir processing). MOROCCO Incubator Fez Innovation ICT Partially operational City MOROCCO Incubator Marrakech ICT Under construction Innovation City MOROCCO Incubator Rabat Planned Innovation City MOROCCO Incubator Casablanca Planned Innovation City SAUDI Technology park Prince ICT and oil Operational 300,000 m2 ARABIA Abdullah Bin Abdulaziz Science Park SAUDI Science park Jeddah BioCity Biotechnology Under construction ARABIA Science Park QATAR Technology park Qatar Aircraft operations, Operational Science and environment, gas Technology and petrochemicals, Park health care, ICT, water technologies. OMAN Technology park Knowledge ICT, tourism. Operational 68 Oasis Muscat TUNISIA Technology park El Gazala ICT Operational 65 Technopark TUNISIA Technopole Sidi Thabet Biotechnology 115 (pharmaceutics) TUNISIA Technology park Bizerte Agrifood Operational 150 TUNISIA Technology park Sousse Electronics, mechanics, Operational 60 and ICT TUNISIA Competitiveness Monastir El- Textiles Under development 100 center Fejja TUNISIA Technopole Sfax Multimedia and Operational 60 communication. TUNISIA Technopole Borj Cedria Renewable energy, water, Under development 90 environment, and plant biotechnology. TUNISIA Agripole Medenine Exploitation and Under development commercialization of natural resources of Sahara, TUNISIA Agripole Jendouba Exploitation and Under development commercialization of natural resources of Sahara. TUNISIA Competitiveness Gafsa Mining (phosphate) Under development center Source: Authors’ compilation, CMI Survey 2012. Note: ICT = information and communication technology. Transforming Arab Economies 135 last word Knowledge has always been central to development.1 A thousand years ago the Arab world led the world in knowledge, prosperity, and development. Arab science and technology, as well as free trade and tolerance for all religions, were key to this development. It is time to restore these knowledge-based traditions to the Middle East and North Africa. Thanks to the development of the Internet and a variety of new information and commu- nication technologies, knowledge is now truly global, accessible, and utterly democratic. With this dramatic technological change has come a globalization of economies, spark- ing intensified competition and the emergence of more-sophisticated value chains in production processes. The impact of this paradigm shift is felt all around us. We witness economies—relatively small ones such as Finland and Singapore, medium-sized ones such as the Republic of Korea, and large ones such as China and India—that are able to harness the power of technical change, compete in the global economy, and nurture their knowledge workers. Others fail to acquire, adapt, and use new technologies; to upgrade their knowledge capabilities; or to express their creative talents, dooming them to decline or, at best, to dependence on their finite endowments of natural resources. Across the globe, far-sighted leaders are searching for new ideas and strategies to deal with a changed reality. The Arab Spring has shown that countries can no longer rely on narrow, statist paradigms of growth. In the southern Mediterranean, years of autocratic rule characterized by crony capitalism, growing inequality, and harsh suppression of political freedoms have been rejected by popular movements. The challenge now facing these countries is to put in place a system that is free, just, inclusive, creative, and dynamic. Restoring confidence and improving governance are the needs of the hour, but new governments in the region will also have to deliver growth and jobs—quickly, before disillusioned populations are driven to revolt once again. Although the oil exporters of the region seem to have weathered the storm a little better, their regimes, too, must act quickly to diversify their economies so that they can continue to prosper as their oil wealth dwindles. Given these immense challenges and opportunities, where should the region’s policy makers focus their attention? What should they do to stimulate growth, create jobs, restore trust, and provide a measure of hope and prosperity for their populations? In this report we have sought to answer some of these questions in an integrative frame- work. But it is only the beginning of a process. Putting the new model to work in any country requires a vision, a strategy to articulate that vision, the coordination of multiple government actors around that strategy, the engagement of stakeholders in the private sector and civil society, and, in many countries, the involvement of various development partners. The proposed strategy must be adapted to each country’s features, building on their strengths and reducing weaknesses. The key is leadership. Will Arab leaders take up the challenge? 1. This section draws on an unpublished background report prepared for this project in 2011 by Ismail Radwan, Pierre Strauss, and Simon Bell. 136 Annexes °± Econometric model and literature analysis: Annex 1.  The knowledge economy, growth, and employment °± Annex 2. Some inspiring country experiences °± A country application of the knowledge economy model: Annex 3.  A bird’s-eye view of the Arab world Transforming Arab Economies 137 nnex 1 Econometric model and literature analysis: The knowledge economy, growth, and employment The growth models pursued in the Middle East and North firm growth, and, all other things being equal, job creation. Africa (MENA) have not delivered enough jobs. Unemployment Furthermore, technology adoption is less destructive to jobs remains high, especially among young people and women, than is often feared, provided one adopts an economywide making it an acute social problem. Many of the unemployed perspective. Finally, because investments in knowledge produce hold a university diploma. Their unemployment reduces the direct benefits for skilled labor (versus unskilled, which benefits return on education for themselves and the incentive of others indirectly), policy remedies, such as facilitating links between to invest in education. The urgency of tackling the unemploy- skill-intensive and non-skill-intensive sectors, are crucial, in ment problem in MENA cannot be overstated.1 part to avoid or minimize wage inequality across the skills spectrum. These theoretical insights are corroborated by the With the advent of the Arab Spring, the countries of the region empirical literature. are revisiting their growth and development strategies, with reducing unemployment a key objective. In this context, there is strong interest in moving to a knowledge-based, productivity- driven growth model. Knowledge, growth, MENA is well placed to follow such a strategy. The region is close to one of the world’s major sources of innovation, Europe. and employment: Although more progress is needed, the region is now much more open to trade and investment than in the past. Historic Conceptual links and investments in education have significantly increased the region’s capacity to absorb new technologies and know-how. empirical evidence And oil wealth provides many countries the means to invest massively in building knowledge-based economies, including Historically, technical change has gone hand in hand with growth information and communication technology (ICT), special- in employment and wages. Experiences of the Organisation for ized schools and research centers, and the backbone logistics Economic Co-operation and Development (OECD) economies needed to connect to the global economy. show that knowledge-intensive and high-technology sectors The effects of investment in knowledge on long-term growth are tend to be the most dynamic in terms of output and employ- undisputedly positive, but it remains an open question whether ment growth. Some countries, however, have been experiencing a knowledge-based, productivity-driven growth model can high unemployment and sluggish job growth in periods of rapid create jobs on the scale required in the MENA region. That technical advance. This raises questions about the adequacy question is the focus of this annex, which explores the con- of existing mechanisms for translating innovation and higher ceptual links between knowledge and employment, reviews productivity growth into more and better jobs. the related empirical literature, and tests econometrically the At the conceptual level, the links between knowledge and relationship of knowledge, growth, and employment using a employment are often examined at two levels. At the macro- sample of MENA countries. economic level, the focus is on how investment in knowledge At the conceptual level, this annex shows that investment in affects long-term growth and, through it, employment. At the knowledge always pays off in the long run by fueling productiv- micro level, the focus is on how investments in knowledge ity-driven growth, increasing welfare, and raising the employ- affect firms’ productivity and technology adoption and, through ment of skilled labor. Whether those effects are enough to these channels, their demand for labor.2 reduce unemployment, however, depends on a host of factors, The links between knowledge and growth have been studied chief among them the skill profile of job seekers. At the micro- by authors such as Romer (1993) and Grossman and Helpman economic level, productivity growth enhances competitiveness, 1. This annex was prepared from Chen, Diop, and Muller (2012). The original paper, available from the authors, contains an extensive review of the literature on the interactions of knowledge, growth, and employment. 2. This section builds on Diop (2010). 138 Annex 1. Econometric model and literature analysis (2011), who undertook to explicitly incorporate knowledge itions. Studies show a strong positive relationship between the into growth models. In the new growth models, investment introduction of knowledge-intensive means of production, such in knowledge helps generate new ideas and processes that as those based on information technologies, and demand for result, sooner or later, in new products and processes. Since highly skilled workers (see OECD [2004] for a summary). But the pioneering work of Schumpeter (1912/1961), this has been if the pool of unemployed workers is dominated by unskilled called innovation.3 workers, overall unemployment may not decline. Even if some of the rewards of innovation are appropriated A tendency for the labor market to polarize and for the wage through patents or copyrights, new ideas always generate gap to widen has been noted in studies conducted for developed positive externalities that can be captured by individuals, firms, countries (OECD 2004). In the United States, relative wages and industries capable of absorbing them.4 In other words, for less-skilled workers declined, while the overall unemploy- innovation’s benefits for society exceed the private benefit cap- ment rate remained low. The United Kingdom was marked tured by innovators. This means that when entrepreneurs by a similar growing wage gap between skilled and unskilled innovate, countries can grow in spite of diminishing returns workers. In the other major European countries, there was no to capital and labor. 5 In today’s global market, innovation is polarization in terms of wages, but the employment situation a condition for increasing market shares for many products. worsened for unskilled workers. Knowledge and technological About 60 percent of export growth now takes place through new change are not the only driver of these outcomes, however. product varieties, rather than through additional exports of the The pressure of globalization has often been seen to exert a same goods (see, for example, Hummels and Klenow [2005]). distinct impact on wage differentials, regardless of changes in technologies. Finally, openness to trade is a major intermediating factor in the relationship between knowledge and growth. In an era Variations in the impact of knowledge on employment diverge of globalization, innovation is quasi-impossible in a closed even more at the firm level. A rise in productivity (resulting from economy. Trade integration, by contrast, is a powerful way of investments in knowledge) can reduce or increase employ- tapping into global knowledge through a rising tide of trade, ment in the short to medium term depending on context: more foreign direct investment (FDI), technology purchases, and productive firms need fewer workers to produce the same licensing. Abundant empirical evidence demonstrates that amount of output because they are more efficient. Thus, if cheap access to equipment and machinery has a positive impact investment in knowledge significantly increases efficiency, on total factor productivity, and thus growth. For instance, Coe jobs may be destroyed. and Helpman (1995) and Coe, Helpman, and Hoffmaister (1997) find that foreign knowledge embodied in trade in goods has a But more productive firms improve their cost competitiveness statistically significant positive impact on aggregate total factor if growth in labor productivity is higher than wage growth— productivity in importing countries. Schiff and Wang (2007) domestically and in competing countries with a similar wage show that the impact increases the more trade occurs with rate—and this is good for employment. Further, higher pro- industrialized countries. The latter evidence simply reflects ductivity can lead to lower prices and higher demand, further the fact that about 80 percent of the world’s research and favoring employment. And higher productivity in one sector development (R&D) occurs in the developed world. can generate demand for goods and labor in related sectors if links exist, which is also good for employment. Other empirical evidence of the strong positive relationship between the knowledge economy and economic growth in both Recent empirical studies have shown no significant long-run developed and developing countries is provided by Chen and association between productivity growth and employment Dahlman (2004) and by Poorfaraj, Samimi, and Keshvarz (2011). (Blanchard, Solow, and Wilson [2007] for France and the United States).6 But there is evidence of a clear, positive impact of The link between knowledge, growth, and employment is less agricultural productivity growth on employment, including in clear-cut. On the one hand, the positive impact of higher growth the nonfarm rural economy. The effect of productivity growth is, on demand for labor is undisputed. On the other, it is not clear however, mediated by access to land. The employment effects whether this uptick in labor demand will reduce unemployment. are larger where access to land is more equally distributed Much depends on the sectoral basis of growth, the propensity of (Thirtle and others 2001). sectors to hire labor as they grow, and profiles of job seekers. Clearly, moving to a knowledge-based economy leads to an But productivity growth is an imperfect measure of investment increase in demand for highly skilled workers and, under most in knowledge, as it can be driven by a host of factors (such as circumstances, to higher wages for this category of labor. But the business cycle and privatization). A more precise measure the impact on the unemployment rate and wage differentials of (and channel for) growing knowledge at the firm level is depends on the skill profiles of job seekers in the economy. technological adoption. Here, too, the impact on employment The empirical literature corroborates these theoretical intu- depends on whether technology is embodied or disembodied in new jobs or new capital. 3. Schumpeter defines innovation as consisting of (i) new products and services, (ii) new processes, (iii) new ways to penetrate new markets, (iv) new supply sources or distribution methods, and (v) new industries (Schumpeter 1912/1961). 4. Economic theory emphasizes education and human capital as preconditions for absorbing new ideas and building a knowledge economy. Indeed, the availability of high-quality and abundant human capital makes it possible to absorb new ideas and to avoid diminishing returns to capital and labor (Lucas 1988). 5. The traditional models postulated that the growth rate of technology (or technological development) was exogenous. 6. According to Nordhaus (2005), the key lies in the evolution of demand for aggregate output (at least in the United States). Transforming Arab Economies 139 Annex 1. Econometric model and literature analysis If technology is disembodied (as in the Solow model), existing Last, we take the product of the coefficients representing the jobs can take full advantage of new technology, in which case regional knowledge-growth effects and the country-specific existing jobs become more valuable and more productive. No employment intensities to derive country-specific knowledge- job destruction occurs and employment tends to increase at a employment effects. This three-stage process is illustrated fast rate. But if technology is embodied (as in the Schumpeter in figure A1.1. model), firms cannot increase their productivity without destroying jobs. The results of our estimates may be summarized as follows. Econometric analysis for MENA indicates that knowledge accu- The reality no doubt lies somewhere between these two mulation, as measured by the KEI (see box A1.1), tends to extremes. Most technologies can be adopted by existing produce sustained positive effects on future economic growth. workers with training (for example, those workers learning Specifically, a unit increase in the KEI for 1995 increases the how to use new software) even if a more powerful computer is average growth rate of real gross domestic product (GDP) per required (an example of technology embodied in new capital). worker for the period 1996–2000 by 0.28 percentage point, Indeed, some sectors in the economy linked to the produc- while a unit increase in the KEI for 2000 increases the average tion or importation of the technology always create jobs when growth rate of real GDP per worker for 2001–05 by 0.89 per- substantial new adoption of technology or knowledge occurs centage point. in the economy. We estimated the employment elasticities with respect to Empirically, technology adoption leading to product innovation growth for 16 MENA countries over two time periods: 1991–99 has been shown to have a positive impact on employment at the and 2000–09. The average for the 16 MENA countries is 0.82 for firm level (for the Brazilian and British manufacturing sectors, the former period, and 0.78 for the latter period, implying that see Fioravante and Maldonado [2007] and Van Reenen [1997]). for the average MENA country a 1 percentage point increase in Developed and developing economies follow the same pattern, GDP is associated with an average increase of 0.78 percentage but the magnitude of the impact is more modest in developing point in employment over the following three years. countries (Fioravante and Maldonado 2007). Finally, employment elasticities with respect to the KEI are In MENA the fastest-growing small and medium-sized enter- much larger for the latter time period (2001–09). This is due prises (SMEs) are those that innovate (Stone and Badawy 2011). primarily to the much larger estimated coefficient for the These enterprises also invest in training, quality systems, tele- knowledge-growth effect for 2001–05 than for 1996–2000. communications systems, and computer literacy. In the same Estimates of the elasticity of employment to the KEI range vein, Dutz and others (2011) find that the business environment, from 0.2 for Kuwait to 1.3 in Qatar, both for the 2000–09 period. access to finance, and competition are necessary if innovation The coefficient value of 1.3 for Qatar implies that a unit increase is to lead to job creation. in the KEI for the year 2000 raises the average employment growth for Qatar by 1.3 percentage points. The evidence on the link between knowledge clusters and jobs is mixed. Some cluster policies seem to have a positive impact on employment. An interesting example is the proactive inclu-  stimating the effects of knowledge  E sion policies implemented in North Carolina (United States) to connect low-skill-intensive sectors to the dynamic life science on economic growth cluster (Lowe 2007)—an example of how links between a cluster and a local economy can boost employment for both skilled In this section, we demonstrate the strong positive relationship and unskilled job seekers. between knowledge accumulation and future rates of economic growth. In doing so we are also able to estimate for the MENA countries the magnitude of the increase in economic growth ascribable to knowledge. New evidence of the links between Figure A1.1 knowledge, economic Estimating the employment effects of growth, and knowledge employment Knowledge Economic growth Employment growth New estimates of the employment effects of knowledge among MENA countries are provided here. Using the Knowledge Employment e ects due to knowledge Economy Index (KEI) as a measure of knowledge accumula- (via economic growth) tion (box A1.1), we first estimate the knowledge-growth effects for MENA at the regional level. Next, we estimate for each MENA country the employment intensity of economic growth (as Source: Authors. expressed by the elasticity of employment to economic growth). 140 Annex 1. Econometric model and literature analysis BOX A1.1 The Knowledge Economy Index (KEI) and the Knowledge Assessment Methodology (KAM) The KEI is an aggregate index that represents the overall level of development of a country or region in the knowledge economy. It is constructed as the simple average of the normalized values of 12 knowledge indicators with three variables representing each of the four pillars of the knowledge economy: Economic and institutional regime • Tariff and nontariff barriers (Heritage Foundation) • Regulatory quality (Worldwide Governance Indicators, World Bank Institute) • Rule of law (Worldwide Governance Indicators, World Bank Institute) Education and human resources • Educational attainment (average years of schooling completed) • Secondary enrollment rate (percent) • Tertiary enrollment rate (percent) Innovation system • Patent applications granted by the U.S. Patent and Trademark Office (per million population) • Scientific and technical journal articles (per million population) • Royalty payments and receipts ($/ population) Information infrastructure • Telephones (per 1,000 persons) • Computers (per 1,000 persons) • Internet users (per 10,000 persons) The KEI is just one of the indexes derived from the KAM, an Internet-based tool (www.worldbank.org/kam) that provides a basic assessment of countries’ and regions’ readiness for the knowledge economy. Comparisons in the KAM are made on the basis of 148 structural and qualitative variables that serve as proxies for the four knowledge economy pillars. Currently, assessments of 146 countries are available. The data on which the KAM is based are continuously updated and country coverage expanded whenever possible. Because the 148 KAM variables span different ranges of values, all variables are normalized from 0 (weakest) to 10 (strongest) for the 146 countries. Because it is constructed using variables obtained from the KAM, the KEI also takes values from 0 to 10, with 10 being the most favorable in terms of progress toward the knowledge economy. Source: Knowledge Assessment Methodology (http://www.worldbank.org/kam). As noted above, traditional macroeconomic theory has shown that productivity growth is an important source of sustained  Theoretical framework economic growth. Assuming that the key driver for productivity growth is knowledge accumulation, we can empirically estimate Assume that there exists an aggregate economic production the effects of knowledge accumulation on economic growth in function Y = AF (K ,L ) a straightforward manner by using the KEI as an indicator of  (1) knowledge accumulation and the growth of output per worker where as a measure of economic growth. To improve the precision Y is the level of aggregate output or real GDP of the estimates, it is necessary to account for other factors K is the level of the capital stock that are known to affect economic growth, namely, the effects L is the size of the labor force of initial GDP per capita and the growth of capital per worker. Ais total factor productivity (a measure of the current level Also, to avoid the possibility of reverse causality, we perform of technology) the estimation in a noncontemporaneous manner. More specifi- cally, we empirically estimate the effects of the KEI in 1995 and A typical example of an explicit form of equation (1) is that of 2000 on the economic growth rates of countries for the future the Cobb-Douglas specification, periods of 1996–2000, and 2001–05, respectively.  Y = AK αk LαL (2) To fully understand the structure and variables in the estimating where equations, a brief discussion of the various sources of economic growth in a simple neoclassical growth model is necessary. aK is the elasticity of output to capital aL is the elasticity of output to labor. Transforming Arab Economies 141 Annex 1. Econometric model and literature analysis By assuming constant returns to scale,  Empirical methodology  αL = 1− αK (3) Equation (5) was used as the basis for the specification of equation (2) therefore becomes the estimating equation. Assuming that the key driver for the α growth of TFP is knowledge accumulation, we replaced the  Y K  K (4) = A  growth rate of TFP with the KEI. In addition, as will be seen L L  below, to avoid reverse causality, we regressed past values of the KEI against average future growth rates of output per By logging both sides and taking total differentials, it can be worker. This reduces the possibility of economic growth rates shown that equation (4) becomes affecting the KEI,7 thereby minimizing endogeneity problems.  Y L =α K L + A ( ) ( ) (5) Next, the literature has shown that it is necessary to include a term that captures the initial income of a country, since one of K Y K A L L the key implications of the neoclassical growth model is that, all else being equal, poorer countries should grow faster than The term of the left-hand side of equation (5) is the rate of richer countries.8 To control for initial income, we used real growth of aggregate output per worker, which is simply eco- GDP per capita in the initial years of the regression periods, nomic growth in a “per worker” form. The equation therefore 1996 and 2001. To capture the knowledge-growth effects for implies that there are two sources of growth for output per MENA countries, we also include a dummy variable for MENA worker: growth in the amount of capital per worker and growth countries interacting with the KEI regressor. in total factor productivity (TFP). In light of the above, the resulting estimating equations are therefore:  ( )  Y  L  average (1996 – 2000 ) = α + β real GDP per capita  + β   K  L  ( ) +  Y  1  1996  2  K  (6)  L   L  average (1996 – 2000)  ( )  Y  L  average ( 2001– 2005) = α + β real GDP per capita  + β     K  L  ( ) + (7)  Y  1 2001 2  K   L   L  average (2001– 2005) Data for real GDP (in constant local currency units), real GDP growth of output per worker by 0.69 percentage point, holding per capita for 1996 and 2000 (in constant PPP terms), and all other factors unchanged. As noted in box A1.1, the KEI labor force figures were taken from the World Development ranges from 0 to 10, and a unit increase is equivalent to an Indicators (WDI) database of the World Bank. The capital stock improvement of one decile or about 15 positions among the was constructed using gross capital formation (in constant ordinal ranking of the 146 countries included in the KAM. The local currency units), also obtained from the WDI database. results from Regression 1b are qualitative and quantitatively The perpetual inventory method was used, with an assumed similar to those from Regression 1a. In particular, the esti- depreciation rate of 5 percent. To calculate the initial value of mated coefficient of KEI 2000 is positive and highly statistically the capital stock, we used the average growth rate of gross significant. The estimated value of 0.6398 implies that a unit capital formation for the first five years and applied the formula increase in the KEI for 2000 tends to increase average annual for the sum of an infinite geometric progressive series.9 growth of output per worker for the period 2001–05 by 0.64 percentage point. The regression results are presented in table A1.1. Regressions 1a and 1b estimate the effects of the KEI on economic growth The noncontemporaneous nature of the above analysis negates without accounting for differences exhibited by the MENA the possibility of reverse causality, whereby a positive relation- countries. In Regression 1a, the KEI 1995 variable exhibits an ship might result because higher rates of economic growth estimated coefficient that is positive and highly statistically allow countries to invest more in knowledge. The noncontem- significant. The estimated value of 0.6947 implies that a unit poraneity thus provides additional support for the underlying increase in the KEI for 1995 tends to increase average annual result, which has important policy implications. It shows that 7. This will especially be the case if we assume adaptive, and not rational, expectations. 8. For example, if two countries have the same long-run potential level of income, the country with lower current income should grow faster than the richer country. Poor countries tend to have a smaller capital stock (fewer machines, factories, and roads) than rich countries. Since capital is relatively scarce, the rate of return on new investments tends to be higher, leading to faster growth. Poor countries also have the advantage of being able to borrow new technologies and best management practices from richer countries without paying the costs of research and development. Many studies on economic growth have shown that once differences in other important structural and policy variables are taken into account, poor countries do indeed tend to grow faster than rich countries (for example, Barro 1991; Sachs and Warner 1995). This outcome is known as conditional convergence, because the income levels of countries converge over time, conditional on having similar policies, resource endowments, and so on. 9. For further details, see appendix A of Chen and Dahlman (2004). 142 Annex 1. Econometric model and literature analysis  TABLE A1.1   ­Knowledge and economic growth in MENA: Cross-section regressions Dependent variable: Growth rate of real GDP per worker Estimated coefficients Estimated coefficients 1996–2000 Reg 1a Reg 2a 2001–2005 Reg 1b Reg 2b (Log) Initial GDP per capita –1.1136*** –0.8058* (Log) Initial GDP per capita –1.3888*** –1.5619*** (1996) (2001) Growth of capital per worker 0.2938*** 0.2892*** Growth of capital per worker 0.4121*** 0.4166*** KEI 1995 0.6947*** 0.5252** KEI 2000 0.6398*** 0.7297*** MENA * KEI 1995 –0.2493* MENA * KEI 2000 0.1606* Constant 6.6777*** 5.1097** Constant 9.9169*** 10.8696*** R squared 0.5351 0.5480 R squared 0.4895 0.4944 Number of countries 122 122 Number of countries 121 121 Source: Chen, Diop, and Muller 2012. Note: GDP = gross domestic product; KEI = Knowledge Economy Index; MENA = Middle East and North Africa. Cross-section regressions - variables were averaged over respective time periods. *, **, *** denote significance at the 90, 95, amd 99 percent confidence levels, respectively. Robust standard errors obtained using White’s correction for heteroscedasticity. knowledge accumulation or, equivalently, investment in knowl- The regression results in table A1.1 show that MENA countries edge, tends to increase economic growth over a sustained are similar to the rest of world in that increases in knowledge period of time. Therefore, developmental strategies that are as measured by the KEI tend to lead to higher rates of eco- geared toward enhancing the quantity and quality of knowl- nomic growth. But the evidence indicates that the KEI-growth edge acquisition, adaptation, generation, and use for economic effects of MENA countries differ in magnitude from those of activity are likely to increase long-term economic growth.10 non-MENA countries. In particular, for the period 1995–2000, the KEI-growth effects for the average MENA country appear to be lesser than those for the average non-MENA country. For the period 2000–05, however, the reverse appears to be true, Regressions 2a and 2b are knowledge-growth regressions with the KEI-growth effects for the average MENA country that include dummy variables for 17 MENA countries available being greater than those of the average non-MENA country. in the KAM. Those countries are Algeria, Bahrain, Djibouti, Egypt, Iran, Jordan, Kuwait, Lebanon, Malta, Morocco, Oman, To recap, our regression results indicate that knowledge accu- Qatar, Saudi Arabia, Syria, Tunisia, the United Arab Emirates mulation or investment, as measured by the KEI, tends to lead (UAE), and Yemen. to sustained positive effects on future economic growth. More specifically, our estimates for the MENA countries indicate Regression 2a examines the effect of the KEI in 1995 on that a unit increase in the KEI for 1995 tends to increase the growth between 1996 and 2000, allowing for differences in average growth rate of real GDP per worker for 1996–2000 the KEI-growth effect for MENA countries. We see that the by 0.28 percentage point, while a unit increase in the KEI for estimated coefficient of the “MENA * KEI 1995” interaction term 2000 tends to increase the average growth rate of real GDP is negative and statistically significant. This implies that the per worker for 2001–05 by 0.89 percentage point. KEI growth effect for MENA countries is less than that for non- MENA countries for the period 1996−2000. More specifically, based on the results of Regression 2a, the KEI-growth effect for MENA countries is 0.2759 percentage point (= 0.5252 – 0.2493),  mployment intensity of growth in  E whereas that for the average non-MENA country is 0.5252. MENA countries Regression 2b reestimates the specification in Regression 2a This section explores how employment in the MENA econo- with the second time period, where the effect of the KEI for mies has increased with economic growth. Before we are able 2000 on average economic growth between 2001 and 2005 is to empirically assess the effects of knowledge accumulation assessed. We see that the estimated coefficient of the “MENA on employment creation, however, we must first determine * KEI 2000” interaction term is now positive and statistically the employment effects of economic growth, more commonly significant. This indicates that the KEI-growth effect for MENA known as the employment intensity of growth or the elasticity countries is 0.8903 percentage point (= 0.7297 + 0.1606) greater of employment with respect to output. Employment intensity than that of the average non-MENA country (0.7297 percent- (or the employment elasticity of growth) is defined as how age point). much employment growth is associated with 1 percentage point of economic growth. 10. The above analysis does not reveal the precise channels through which knowledge accumulation can enhance economic growth. Transforming Arab Economies 143 Annex 1. Econometric model and literature analysis estimating equation would lead to biased estimates owing  Methodology to reverse causality. Therefore, we stagger the time periods of employment and GDP in an effort to reduce the reverse To derive the estimation equation, we utilize a multivariate causality effect. More specifically, we relate GDP at time t to log-linear regression model with country dummy variables, the moving average of aggregate employment at times t+1, D i, interacted with log GDP: t+2, and t+3.  (8) This implies that the estimating equation will be: where ma ( lnEit ) = α i Di + β i ( lnYit Di ) + uit E it represents employment in country i at time t where Y it represents output or GDP in country i at time t  ln ( Ei ,t +1 ) + ln ( Ei ,t +2 ) + ln ( Ei ,t +3 )  maln ( Ei ,t + ) =  /3 D i represents a country dummy variable for country i Using this econometric method, ϐi represents the average change in employment for the three future years associated Note that: with a differential change in the current year’s output. For ∂Eit ∂Y example, an elasticity of 0.5 implies that every 1 percentage point = β i it of GDP growth in year t is associated with an average employment Eit Yit growth of 0.5 percentage points for the years t+1, t+2, and t+3. ∂Eit Figure A1.2 presents the estimated employment elasticities Eit = βi with respect to growth for 16 MENA countries for two time ∂Yit periods: 1991-99 and 2000−09. While there is large variation, Yit ranging from 0.3 for Kuwait for 2000–09, to 1.6 for Algeria in 1991–99, most of the elasticities are less than 1. The average Therefore, the elasticity of employment with respect to GDP for the 16 MENA countries is 0.82 for the former period, and for country i is given as ϐi. 0.78 for the latter period, implying that for the average MENA country a 1 percentage point increase in GDP is associated with But because changes in aggregate employment are likely to an average increase of 0.78 percentage point in employment lead to changes in GDP, attempts to use equation (8) as the for the next three years. Figure A1.2 Employment elasticity to economic growth in MENA countries 1.8 1.6 1995–99 1.6 2000–08 1.4 1.4 1.4 1.3 1.2 1.2 1.1 1.1 1* 1 0.9* 0.9 0.9 0.82 0.8 0.78 0.8 0.70.7 0.7 0.7 0.7 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.5 0.5 0.4 0.4 0.4 0.4 0.3 0.2 0 0 0 p. an n co a e r ia Em an Ba s n t en a . p. p. ta ep ai ta te si ri ag no ai ab Re Re Re al oc rd Om w ge ni Qa hr ,R ira er ba M Ku Ar or Jo Tu ab ic ab Al av Le M m i Ar Ar ud m A la EN ab Sa Ye t, n Is ria yp Ar M n, Eg Sy Ira d ite Un Oil exporting developed Oil exporting developing Oil importing developing * coefficient is not statistically significant Source: Authors. Note: MENA = Middle East and North Africa. 144 Annex 1. Econometric model and literature analysis Chen, Derek H. C., and Carl J. Dahlman. 2004. “Knowledge and  eriving the employment effects of  D Development: A Cross-Section Approach.” Policy knowledge in MENA countries Research Working Paper Series 3366. World Bank, Washington, DC. As mentioned above, to determine the employment genera- tion effects of knowledge, we take the product of the coef- Chen, Derek H.C., Ndiamé Diop, and Sophie Muller. 2012. ficient representing regional knowledge-growth effects and Knowledge, Economic Growth and Employment the country-specific employment intensities, the results of Creation: The MENA Experience. Unpublished which are presented in figure A1.3. background report, World Bank, Washington, DC. As can be seen, the employment elasticities with respect to the Coe, David T., and Elhanan Helpman. 1995. “International R&D KEI are much larger for the later time period, 2000–08. This Spillovers.” European Economic Review 39 (5): is primarily due to the much larger estimated coefficient for 859-87. the knowledge-growth effect for 2001–05 than for 1996–2000 Coe, David T., Elhanan Helpman, and Alexander W. Hoffmaister. (see table A1.1). Estimates range from 0.2 for Kuwait to 1.3 in 1997. “North-South R&D Spillovers.” Economic Qatar, both in the 2000–09 period. The coefficient value of 1.3 Journal 107 (440): 134–49. for Qatar implies that a unit increase in the KEI for the year 2000 tends to an increase of 1.3 percentage points in Qatar’s Diop, Ndiamé. 2010. “Knowledge and Innovation for Growth average employment growth. and Job Creation in Tunisia.” MENA Knowledge and Learning Fast Brief 71, World Bank, Washington, DC. References Dutz, M., I. Kessides, S. O’Connell, and R. Willig. 2011. “Inclusive Barro, Robert J. 1991. “Economic Growth in a Cross Section of Growth from Competition and Innovation.” OECD- Countries.” NBER Working Papers 3120, National World Bank Conference on Challenges and Policies Bureau of Economic Research, Cambridge, MA. for Promoting Inclusive Growth, Paris, March 2–25. Blanchard, O., R. Solow, and B. A. Wilson. 2007. “Productivity Fioravante, D. G., and W. F. L. Maldonado. 2009. “Impacts and Unemployment.” Available at http://econ-www of Technological Innovation on Employment: The .mit.edu/files/1909 Brazilian Manufacturing Case.” http://www.merit .unu.edu/MEIDE/papers/2009/1236670812_GF.pdf Figure A1.3 Employment elasticity to KEI in MENA countries 1.4 1.3 1995–99 1.2 2000–08 1.1 1 0.9 0.9 0.8 0.8 0.8 0.8 0.69 0.6 0.6 0.6 0.6 0.5 0.5 0.5 0.4 0.4 0.4 0.4 0.3 0.3 0.3 0.23 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0 0 0 r a an s n t ia Ira Ara p. am p. p. ra a p. an n co sia ge ta ai te bi t, A alt ai no Ye ger e Re Re Re oc Om rd w a ni Qa ira hr ria n, R ra M er ba Ku Tu Jo or b ic b iA Al Ba Em av Le e M ud m A ab Isl EN n Sa yp Ar n, M Eg Sy d ite Un Oil exporting developed Oil exporting developing Oil importing developing Source: Authors. Note: KEI = knowledge economy index; MENA = Middle East and North Africa. Transforming Arab Economies 145 Annex 1. Econometric model and literature analysis Grossman, G., and E. Helpman. 1993. Innovation and Growth Sachs, Jeffrey D., and Andrew M. Warner. 1995. “Economic in the Global Economy. Cambridge, MA: MIT Press. Convergence and Economic Policies.” Harvard Institute of Economic Research Working Paper Hummels, David, and Peter J. Klenow. 2005. “The Variety and 1715, Harvard University Institute of Economic Quality of a Nation’s Exports.” American Economic Research, Cambridge, MA. Review 95 (3): 704–23. Schiff, M., and Y. Wang. 2007. “North-South Technology Lowe, N. J. 2007. “Job Creation and the Knowledge Economy: Diffusion, Regional Integration, and the Dynamics Lessons from North Carolina’s Life Science Of The ‘Natural Trading Partners’ Hypothesis.” Manufacturing Initiative.” Economic Development Revue d’économie du développement (De Boeck Quarterly 21: 339-53. University) 21 (5): 69–84. Lucas, Robert E., Jr. 1988. “On the Mechanics of Economic Schumpeter, Joseph. 1912/1961. The Theory of Economic Development.” Journal of Monetary Economics Development: An Inquiry into Profits, Capital, 22: 3–42. Credit, Interest, and the Business Cycle. Translated from the German by Redvers Opie. New York: OUP. Nordhaus, W. 2005. “The Sources of the Productivity Rebound and the Manufacturing Employment Puzzle.” Stone, A., and L. T. Badawy. 2011. “SME Innovators and Gazelles Working Paper 11354, National Bureau of Economic in MENA—Educate, Train, Certify, Compete!” MENA Research, Cambridge, MA. Knowledge and Learning Quick Notes Series 43. World Bank, Washington, DC. OECD (Organisation for Economic Co-operation and Development). 2004. Innovation in the Knowledge Thirtle, C., X. Irz, L. Lin, V. McKenzie-Hill, and S. Wiggins. 2001. Economy: Implications for Education and “Relationship between Changes in Agricultural Learning. Paris: OECD. Productivity and the Incidence of Poverty in Developing Countries.” DFID Report 7946, U.K. Poorfaraj, A., A. J. Samimi, and H. Kesavarz. 2011. “Knowledge Department for International Development, London. and Economic Growth: Evidence from Some Developing Countries.” Journal of Education and Van Reenen, J. 1997. “Employment and Technological Vocational Research 1 (1): 21–25. Innovation: Evidence from U.K. Manufacturing Firms.” Journal of Labor Economics 15 (2): 255–84. Romer, P. M. 1993. “Implementing a National Technology Strategy with Self-Organizing Industry Investment Boards.” Brookings Papers on Economic Activity: Microeconomics 2: 345. 146 nnex 2 Some inspiring country experiences To illustrate the role of vision, leadership, and governance in The resource-poor, labor-poor category consists of Hong Kong creating a knowledge economy, a set of comparator countries SAR, Ireland, and Singapore. Hong Kong SAR and Singapore has been chosen that match at least some of the structural are famous for having developed rapidly in the 1970s through characteristics of the Middle East and North Africa (MENA).1 the 1990s to reach the ranks of developed economies.2 Both Table A2.1 categorizes the chosen comparator countries. While are still hybrid states, whereas Ireland is a democracy. All three not being as oil- and gas-rich as the MENA countries, these have had impressive development, although Ireland crashed countries were chosen for their large natural-resource-based in the aftermath of the 2008 global financial crisis. sectors, of similar importance to oil and gas in the MENA countries. All these countries are already relatively wealthy The resource-poor, labor-rich category consists of China, India, or have had rapid rates of economic growth (China and India). Korea, and Turkey. China and India are extreme examples of Within this sample of countries there is a range of administra- these characteristics.3 Although they are still poor countries tions, from full democracies to authoritarian regimes. While they have had spectacular growth, particularly China. They seven are democracies, three of them—Malaysia, the Republic are also fascinating because of their very different governance of Korea, and Turkey—evolved from authoritarian states, and systems. Korea is relevant because it also has had impressive only Korea has made it to full democracy. Only two, Finland growth and has transitioned from an authoritarian regime to and Norway, have been full democracies for some time. Two a full-fledged democracy. Turkey is included because it is a still have hybrid administrations—Hong Kong SAR, China; and large country that has been performing very well in the past Singapore. China is an authoritarian state with very impressive five years, and, as it has a majority Muslim population, is seen economic performance. But the key to China’s success, as will by many as a relevant model for other countries in MENA. be explained below, is not so much that it is authoritarian, as The resource-rich, labor-poor category consists of Finland that it is a development-oriented state. and Norway. Finland is rich in natural resources in the forestry and mining sectors, and Norway in the fisheries sector and  TABLE A2.1   ­Parallel typologies only more recently in the oil and gas sector. Although they are for comparator countries very different from the MENA countries since they are both very strong democracies, they are relevant because they show Labor-poor how democratic regimes can successfully provide vision and (All have high educa- coordinate different interest groups. Norway is also relevant tional attainment) Labor-rich for the oil-rich Gulf States because it has created special funds Hong Kong SAR, from its oil wealth, which it is managing successfully. Resource-poor China*+ China@ (All but China, India, Ireland+ The natural-resource-rich, labor-rich category consists of India and Turkey have Singapore*+ Malaysia. Other countries such as the United States, Canada, Korea, Rep. of+ high educational (All service economies or Australia could have been added, but they have different attainment) Turkey*+ characteristics. Malaysia, on the other hand, is relevant both based on relatively high education) because it is a relatively large Muslim country, and also because Resource-rich Finland+ Malaysia+ it has transitioned successfully from an authoritarian regime Norway + to a democracy, even if not completely. Source: Authors’ compilation. The rest of this annex will summarize the development strate- Note: * Hybrid; @ authoritarian; + high education > 5 years educational attain- gies of these countries, including the extent to which they have ment for adult population; bold = high income (>$5,000 per capita in 2010). developed strategies for the use of their natural resources, and how they have created consensus or other mechanisms to implement and adjust those strategies. 1. This annex is based on Dahlman (2012). 2. Along with Korea and Taiwan (China), they have been variously called the Asian newly industrialized economies, the “Gang of Four,” and the East Asian “Tigers.” 3. For the history, challenges, and prospects of these two giants, see Dahlman (2012). Transforming Arab Economies 147 Annex 2. Some inspiring country experiences Although the comparator countries are different, all present The most rapidly growing comparator countries have had several relevant lessons that are worth keeping in mind in strong leadership and effective governance, although to varying developing strategies for the MENA countries.4 degrees. China, Malaysia, and Korea had strong leadership in their early years and articulated a continued vision in their five-year-development plans. In Singapore it was the vision of Lee Kwan Yew, who ruled the country from 1959 to 1990 Differences and institutionalized a very capable government. At the other extreme, Hong Kong SAR’s vision was to be a laissez-faire economy, and it was very successful until it fell back techno- logically. Then it articulated a stronger vision based on strong functional intervention, particularly in funding higher education There are many different paths to sustained growth and devel- and research and development (R&D). In Turkey the initial opment. No two paths are identical, even for countries with vision was provided by Ataturk, who secularized the former similar characteristics. Take, for example, Finland and Norway. caliphate and created the nation-state of Turkey. Both are small Scandinavian countries, but Norway’s develop- In Finland the vision was provided by the Ministry of Finance ment path is quite different because of its oil wealth. Or take and central bank after the 1991 crisis, institutionalized through China and India, the two most populous countries in the world. the creation of the Committee of the Future in Parliament China has taken the traditional East Asian labor-intensive, (table A2.3). In Ireland during the difficult years of the 1980s, manufacturing-export route while India has not. political parties, labor, and business leaders developed the Not only is every path different, but no strategy is successful Tripartite Agreement (to be renewed every three years) as a forever. Challenges change over time and any growth process guide. Norway succeeds by being a mature democracy, whose necessarily involves responding to these challenges. As domes- political parties have been mindful to look out for the long- tic and international conditions change, it is necessary to adjust term interests of citizens. This is made evident by the way and even sometimes radically restructure strategies. they have managed the country’s oil and gas windfalls for the benefit of future generations, while investing in education for the present generation. India has created five-year plans, but the government has not been very successful in implementing Commonalities them because of a fragmented party system. The second is accountability for performance. In the case of top-down countries, which have had authoritarian regimes or single-party governments that stay in power for a long time, there has been an explicit or implicit social contract to Nevertheless, there are some generic commonalities across improve social welfare. In China, Korea, and Malaysia, which these successful countries.5 have been the most authoritarian of states, there has been a more explicit social contract that leads to strong accountability The first is vision and leadership within the framework of a for performance. According to the contract, citizens give up the strong, development-oriented state. The role of leadership right to elect their government in return for strong economic and effective government in explaining the performance of performance—and the governments have delivered on this rapidly growing economies is noted in the 2008 report of the contract. In Turkey there was no strong social contract after Commission on Growth, a high-level panel chaired by Nobel Ataturk. Weak and ineffective governments mismanaged the laureate Michael Spence. The commission examined 13 of the economy, and the military had to intervene every decade or world’s economies that had achieved average annual growth so to stabilize it. It was only after Turgut Ozal’s liberalization rates of at least 7 percent for 25 years or more in the post– reforms of the 1980s, and the growing maturity of the political World War II period. system in the past decade, that a government has survived Policy makers have to choose a growth strategy, commu- elections and been able to perform. nicate their goals to the public, and convince people that In Singapore, a hybrid state, the bargain has not been so explicit the future rewards are worth the effort, thrift, and eco- since there are elections, but the government is very develop- nomic upheaval. They will succeed only if the promises ment oriented and manages the economy to induce growth. are credible, and inclusive, reassuring people that they In Hong Kong SAR, there have been no free elections, and or their children will enjoy the full shares of the fruits the implicit social contract with the government has been to of growth (Commission on Growth and Development produce results in terms of economic growth. 2008, 3). 4. For a rich and insightful book on the lessons of the experiences of Singapore, Finland, and Ireland, see Yusuf and Nabeshima (2012). 5. Tables A2.2 and A2.3, which appear at the end of this annex, compare countries that took a top-down approach with those that adopted a more bottom-up approach in eight key areas. For a useful summary and guide of some of the key elements of successful developing economies focusing on the role of government, public-private interactions, and consensus building, see Devlin and Moguillansky (2011). 148 Annex 2. Some inspiring country experiences In the democracies, accountability is, in theory, assured by friendly, export-oriented economy after its poor economic the ability to change the government if it is not performing. performance in the 1980s. Finland also moved more toward This has worked in Finland, Ireland, and Norway, which are the market after its 1991 economic crisis and entered into the mature and multiparty democracies that have found ways to European Union (EU). Most of the countries, however, have seen provide some continuity to their longer-term strategies. In some retreat from the market since the global financial crisis Ireland this was done through the mechanism of the Tripartite revealed the downside of unregulated markets, and the need Agreement, and in Norway the agreement on the Oil Fund was for more government support to industry and the shoring up part of this longer-term vision and accountability. In India the of social safety nets. federal and provincial governments can be changed through elections, but there has been little accountability. This is The fifth is an outward orientation. The report of the Commission because politics are based on personalities and local issues, on Growth (2008) concluded that the most important character- and government cannot implement policies because of the istic of fast-growing economies was their outward orientation, extremely fragmented nature of the Indian political system. which they benefited from in two ways: At the federal level, since the late 1970s there have been very One, they imported ideas, technology, and knowhow weak coalition governments. from the rest of the world. Two, they exploited global The third is the capability of the government. This includes the demand, which provided a deep, elastic market for their quality of government officials, macro stability, and effective goods. The inflow of knowledge dramatically increased institutions and mechanisms for implementation. A corollary the economies productive potential; the global market is coordination across government ministries and the ability provided the demand necessary to fulfill it. To put it very to react quickly to changing conditions (that is, the ability to simply, they imported what the rest of the world knew, restructure). In the five Asian economies, government service is and exported what it wante d (Commission on Growth highly regarded and the government and civil services are able and Development 2008, 22). to attract high-quality staff. They enhance the capability of the The hallmark of the development strategy of the East Asian government by having many think tanks to provide input into economies has been their outward orientation. For the two policy, and have specialized high-level units that help coordinate island economies of Hong Kong SAR and Singapore, this started and implement these policies. In the five Asian economies, this with their roles as entrepots of regional trade. Even as early as capability was seen in how rapidly these countries responded 1970 the share of exports of goods and services in gross domes- to the 1997 Asian financial crisis. Malaysia’s prime minister, tic product (GDP) was already over 100 percent for Singapore Mahathir Mohamad, even defied the International Monetary and nearly 100 percent for Hong Kong SAR. It was the key plank Fund (IMF) by refusing its advice and financial assistance, and of their development strategy, driven by the limited domestic was vindicated. In the other countries, the capability has been market and the realization that there was much to profit from more variable. In the two Nordic countries, there is also a interacting with the rest of the world. Initially both countries high regard for government service and the governments have focused on attracting foreign direct investment (FDI) to produce been quite capable, as is seen in Finland’s quick response to labor-intensive manufacturing, given low costs and disciplined its 1991 trade and financial crisis. In India top government labor. As wages rose they moved to higher-value activities and officials are very capable, but the government has difficulties eventually into high-value services, mostly finance- and trade- in coordinating and implementing policies, even though there related services. Malaysia learned from its neighbor, Singapore, is a high degree of planning. and followed a similar export-oriented strategy. By 1970 its A fourth is a move toward the market. All the economies have exports of goods and services were already over 40 percent moved more toward the market in the past 40 years (except of its GDP, and by 2000 they were over 100 percent. Korea Hong Kong SAR, which has been the poster child of the lais- also embarked on an export-oriented development strategy sez-faire market since the British period). Singapore and, to in the 1970s, and by 1980 the share of exports of goods and a lesser extent, Malaysia have been also quite open to market services in its GDP was over 30 percent, eventually growing to freedom, although as noted Malaysia has intervened in the 52 percent by 2010. China arrived at this strategy more slowly market through its affirmative Bumiputera action policies. and gradually. It set up its first export-processing zone in the Korea has also moved more toward the market, particularly late 1970s. By 1990 exports of goods and services were 16 after the defects of excessive government support of its large percent of its GDP and by 2005 they were 37 percent, which is chaebols6 were revealed during the 1997 financial crises. very high for a large economy such as China. China’s rapid growth since the end of the 1970s, as well as Finland had a thriving barter trade with the Soviet Union, and India’s acceleration in growth, which started in the early 1990s, by 1980 the share of exports of goods and services in its GDP have been due to domestic-market-oriented reforms, as well as was already over 30 percent. But when the Soviet Union fell the opening up of their markets to the global economy. Ireland’s apart in 1991, Finland had to restructure its economy and find transformation into the Celtic tiger also occurred as it moved other export markets. It focused on telephones, and by 2000 from being an overly regulated economy to a more investor- the share of exports of goods and services in its GDP had 6. The term chaebol refers to a South Korean form of business conglomerate. Most chaebols are global multinationals that own numerous international enter- prises (http://en.wikipedia.org/wiki/Chaebol). Transforming Arab Economies 149 Annex 2. Some inspiring country experiences increased to nearly 44 percent. Ireland’s development strategy foreign investment. Hong Kong SAR has had a higher average was focused on attracting foreign investment as an entry point educational attainment than Singapore or Malaysia since the to the European Common market. By 1990 its exports of goods 1970s and has maintained that lead, but has been relatively and services were nearly 57 percent of its GDP, and this share late in focusing on higher education. But in the 1990s, as the increased to nearly 100 percent by 2000 (as in Hong Kong government realized it was falling behind in higher education SAR and Korea, this share was composed largely of manufac- and losing competitiveness relative to its East Asian neigh- tured products). In Norway exports of goods and services as a bors, it expanded higher education. It created the Science and share of GDP were already 36 percent in 1970, and until 1975 Technology University of Hong Kong and built this up to become manufactured products made up 60 percent of exports. But one of the premier universities of Asia. Korea also invested very once oil exports picked up in the late 1970s, the share of oil heavily in education as part of its overall development strategy. in merchandise exports increased to over 60 percent by 1985. It had to increase its investments in education to assimilate and India was the slowest to focus on exports. It was not until the use foreign technology. Since initially it did not want to rely on 1991 financial crises that it liberalized its economy, as part of FDI, it had to rapidly ramp up its higher education to increase the conditionality for getting loans from the IMF and World its investments in R&D. By the late 1990s it had increased its Bank, but its exports of goods and services as a share of GDP tertiary enrollment rate to almost 80 percent, and by 2010 this did not go above 10 percent until the late 1990s. Even in 2010 had increased to more than 100 percent. this share was barely above 20 percent. Norway has had a high average educational level since 1970 A sixth is tapping global knowledge. This is part of the outward and increased this to 12.3 years by 2010, which is the highest orientation already noted above but deserves special empha- among the comparators. But it has not been able to increase sis. Hong Kong SAR, Malaysia, and Singapore have been very its tertiary enrollment rates as much as Korea or Finland. effective at tapping into global knowledge through trade and Finland has one of the world’s best education systems; pro- FDI. Korea tapped into global knowledge through trade, tech- viding access to quality education has been considered a key nology licensing, and foreign education, but it followed the responsibility of the government (Dahlman, Routti, and Antilla Japanese model of restricting FDI. Malaysia also tapped into 2007), and higher education is virtually free. When the gov- global knowledge through trade and made more use of FDI ernment and the private sector decided to switch strategies than Korea. China, however, is the best example of the suc- during the 1991 crisis to focus on the budding information cessful use of all channels to tap into foreign knowledge: trade, technology (IT) industry, the higher education sector ramped FDI, technology licensing, sending students abroad for tertiary up training of the specialized manpower that was required education, exploiting its diaspora, and copying and reverse for it. It increased its tertiary enrollment rate from 45 percent engineering.7 in 1990 to 67 percent in 2005 and 92 percent by 2009. Ireland had the highest average educational level in 1970 among the Ireland has also tapped very effectively into global knowledge, comparator countries, although its tertiary enrollment rate was particularly through trade and FDI, like Hong Kong SAR and lower than that of Finland or Norway. But as part of its strategy Singapore. Finland has tapped into global knowledge through to attract high-technology FDI in the 1990s, it increased its trade, technology transfer, and foreign education. Like Korea it tertiary enrollment rate from 28 percent in 1990 to 50 percent has not made effective use of FDI, but has instead developed in 2000 and 61 percent by 2009. strong local companies—Nokia, in particular. China and India offer an interesting contrast. As the poorest India has been the least effective at tapping global knowledge economies in the group they have had, and still have, the lowest through all means. It has been a much more closed economy average educational level and tertiary enrollment rates. India than the others to trade, to technology licensing, and, to a lesser initially focused on training an elite cadre of engineers to run extent, to FDI. Since the 1990s it has opened up more to FDI, its large state enterprises that controlled the commanding but is probably still the most restrictive of the comparators. heights of the economy. In the 1950s it set up the famous Indian Also, since the late 1990s it has been more open to tapping Institutes of Technology and in the 1960s the Indian Institutes its diaspora, which has been critical for the development of of Management. But it neglected basic education while China its information-enabled service exports. invested heavily in primary education. In 1970 the average edu- cational attainment of the Chinese population was 3.4 years, A seventh is investment in education. Singapore began to invest twice that in India. But as a result of the Cultural Revolution, heavily in technical education to increase the skill of its labor which basically shut out higher education from 1965 to 1975, force, as wages rose and its labor costs became uncompeti- even by 1980 China’s tertiary enrollment rate was just one- tive. Its higher education focused mostly on engineering sci- fourth that of India, which was low at just 5 percent. By the ences and technical areas, not liberal arts. It also developed a 1980s China realized the importance of higher education and program of subsidizing multinational companies to train more started expanding enrollments. In the mid-1990s, as it was workers than were needed for their own operations, as a way moving up the technology ladder and implementing its indus- to expand the skill base of the economy to attract other firms. trial and export strategy, it began to expand enrollment entry Like Singapore, Malaysia began to invest heavily in education rates into higher education by 50 percent per year (Dahlman, and skills development, as a strategy to attract higher-value Zheng, and Wang 2007). By 2010 China’s average educational 7. See Dahlman (2008) for the innovation strategies of the BRICS (Brazil, Russia, India, China, and South Africa) and Korea. 150 Annex 2. Some inspiring country experiences level as well as its tertiary enrollment rate were more than 60 percent higher than India’s. Thus even while China’s tertiary References enrollment rate was just 26 percent in 2010, there was a large Commission on Growth and Development. 2008. The Growth critical mass of tertiary-level graduates. Report: Strategies for Sustained Growth The 2012 Arab Knowledge Report rightly focuses on the criti- and Inclusive Development. Washington, DC: cal need to improve education in the Arab world to transform World Bank. http://cgd.s3.amazonaws.com/ these countries into knowledge economies. Although the 2012 GrowthReportComplete.pdf. report focuses mostly on basic education, it notes that tertiary Dahlman, Carl. 2008. “Innovation Strategies of Three of the education is the most critical and will have to be improved BRICS: Brazil, India, and China—What Can We Learn considerably to leverage the potential of the Arab countries from Three Different Approaches?” Department of (Maktoum Foundation and UNDP 2012). International Development, University of Oxford. An eighth is investment and the use of information and com- ———. 2012. “Lessons from Development Strategies of Other munication technology (ICT). Nearly all the 10 comparators have Developing Countries: Implication for MENA taken advantage of the ICT revolution in one way or another. Countries.” Unpublished background paper, Center Finland and Korea have become large producers of hardware— for Mediterranean Integration, Marseille. Finland specialized in digital phones and Korea became a much more diversified producer of electronic hardware, from digital Dahlman, Carl, Douglas Zheng, and Shuilin Wang. 2007. chips to phones, computers, and LCD televisions. Ireland and Enhancing China’s Competitiveness through Singapore attracted FDI to produce ICT hardware and ICT- Lifelong Learning. Washington, DC: World Bank. related services and also used ICT to reduce transactions costs throughout the economy. In Singapore ICT was part of Dahlman, Carl J., Jorma Routti, and Ylä-Pekka Antilla. 2007. an explicit development strategy of the government to lead Finland as a Knowledge Economy: Elements of the transformation of the economy. Malaysia also focused on Success and Lessons Learned. Washington, DC: the ICT sector as a key element of its development strategy. World Bank. Like Ireland, it attracted FDI to produce ICT hardware and software. Its plans included the creation of a multimedia super Devlin, Robert, and Graciela Moguillansky. 2011. Breeding corridor in the 1990s, which was partly thwarted by the 1997 Latin American Tigers: Operational Principles Asian financial crisis. for Rehabilitating Industrial Policies. Washington, DC: World Bank. China attracted FDI to produce ICT hardware but also devel- oped a strong ICT services sector, and uses ICT throughout the Mohammed Bin Rashid Al Maktoum Foundation and UNDP economy to reduce transactions costs. India is not a producer (United Nations Development Programme). 2012. of ICT hardware, but it has developed a strong capability in The Arab Knowledge Report. Dubai: UNDP. ICT-related export services and, as noted before, that sector Yusuf, Shalid, and Kaoru Nabeshima. 2012. Some Small has been leading its economic growth. Countries Do It Better: Rapid Growth and Its Hong Kong and Norway are exceptions in that they did not Causes in Singapore, Finland, and Ireland. become major producers of ICT hardware or software or ICT- Washington, DC: World Bank. enabled services. But both economies have used ICT to reduce transactions costs in their economies. Transforming Arab Economies 151 Annex 2. Some inspiring country experiences  TABLE A2.2   ­Summary of comparators using a top-down approach China Hong Kong SAR Korea Malaysia Singapore Turkey Vision, long- Five-year plans, Relatively late Plans, strong Plans, social Plans, social After Ataturk, lack of term strategy, development- horizontal poli- industrial policy engineering, engineering, vision and long-term with mechanism oriented state, cies. combined with strong industrial horizontal poli- planning plus poor for adjustment strong industrial horizontal policy. policy combined cies but within control of economy policy combined with horizontal detailed plan. led to decennial with horizontal policy. economic crisis. Development policy. oriented Accountability Social contract. Social contract. Social contract, Social contract, Social contract. Multiparty demo- for performance democracy. democracy. cracy since 1950 but through demo- lack of accountability cracy or social led to military inter- contract ventions until 1980s. Capability of State council; Moved toward Economic plan- Economic plan- Economic deve- Lack of capability and government, government more govern- ning board; ning unit. lopment board; economic misma- coordination, service highly ment coordina- government very highly paid nagement led to ability to react valued. tion. service highly civil servants. recurrent crisis until includes macro valued. late 2000s. stability, invest- ment climate Move toward the Move toward Very market Move toward Move toward Very mar- Move toward market market the market and oriented from the market and the market and ket oriented; since Ozal liberaliza- improvement beginning, improvement improvement excellent invest- tion in 1980. of investment excellent invest- of investment of investment ment climate. climate. ment climate. climate. climate. Integration into Increasingly ou- Very outward Very outward Very outward Very outward Ozal reforms of world eco- tward oriented. oriented from oriented. oriented. oriented from 1980s started nomy and export beginning. beginning. integration but pro- diversification ceeded slowly, and exports still low as percentage of GDP. Tapping into glo- Used all chan- FDI and trade. Trade and tech- FDI and trade. FDI and trade. FDI more important bal knowledge nels. nology licensing than trade until and foreign recently. education. Investment in Rapid ramp up Relatively late- Rapid build-up Heavy focus on Focus on techni- Investment in educa- education of education as comer, but has of education education. cal education as tion, especially ter- part of upgra- an upgrading capability. part of integra- tiary has increased in ding strategy. strategy. tion strategy. past two decades. Investment and Key element Not so much Key element Key element of Key element of Not much produc- use of ICT of strategy inclu- in production, of strategy inclu- strategy, inclu- strategy, inclu- tion of ICT inputs ding production but in use for ding production. ding production ding production or software, more of hardware and coordination of of hardware, but also heavy consumer electro- in use to reduce global supply multimedia emphasis on nics. transactions chains. corridor. use. costs. Source: Authors’ compilation. Note: FDI = foreign direct investment; ICT = information and communication technology. 152 Annex 2. Some inspiring country experiences  TABLE A2.3   ­Summary of comparators using a bottom-up approach Finland Ireland India Norway Vision/long-term stra- Committee for the Future; Tripartite Agreement in Five-year plans through Mature institutions. tegy/ with mechanism strong vertical and hori- 1980s. Strong vertical Planning Commission, but Some vertical and for adjustment/deve- zontal industrial policy. and horizontal industrial difficulty in implementing. horizontal industrial lopment-oriented policy. Propoor industrial policy policies. industrial policy handicap, not enough hori- zontal policies. Accountability for Very consensus-based and Democracy but also Fractious democracy with Democracy with political performance through accountable democracy. explicit social contract. little capacity to imple- party agreement on use democracy or social ment. of oil wealth. contract Capability of govern- Working for government Tripartite agreement. Capable individuals in Capable government, ment to react held in high regard. Industrial Development federal government, but creation of oil-reserve Economic policy course to Authority and Forfas coordination and ability to fund. create capability and foster (Ireland’s policy advisory implement has been weak. Includes macro coordination. board for enterprise and stability science). Move toward the Has moved toward market Has moved toward mar- Has moved toward market Has moved toward mar- market since 1991 crisis, good ket since 1980s, strong since 1991, but still has ket since 1990s, good investment climate since investment climate. poor investment climate. investment climate. then. Integration into world Doubled share of trade in Very integrated through Not so integrated, has Integrated through economy and export GDP over past 30 years and FDI; oriented to use missed out on labor-inten- petroleum-related diversification moved into higher-techno- Ireland as base for entry sive exports but exploited exports, some attempt logy products and services. into EU market in ICT information-enabled at diversification. and pharmaceuticals. service exports. Tapping into global Trade, technology licen- FDI, trade, and diaspora. Still limited in FDI, trade, Trade, FDI. knowledge sing, education. and licensing, though higher in foreign educa- tion. Investment in edu- Very strong investments in Explicit focus as part of Early investments in elite Very strong investments cation tertiary education, particu- industrial strategy. Used engineering education, but in tertiary education. larly after 1991 crisis. EU structural funds to poor overall educational invest in higher educa- attainment. tion and training. Investment and use Focus on this sector after Focus ICT sector as key Software and ICT-enabled Strong focus not on of ICT 1991 crisis as strategic element of attracting FDI sector have been core of production but on use sector, particularly tele- for exports to EC market. growth and competitive- of ICT. communications equip- ness. ment and use of ICT. Source: Authors’ compilation. Note: EU = European Union; FDI = foreign direct investment; ICT = information and communication technology. Transforming Arab Economies 153 nnex 3 A country application of the knowledge economy model: A bird’s-eye view of the Arab world Arab countries, like many others around the world, are con- Needless to say, the Weberian and Schumpeterian dimensions fronted with the double challenge of carrying out institutional in a given country are not entirely independent, as they share reforms while simultaneously attempting to diversify their many underlying factors. For that reason, positive dynam- economies. In this book, chapter 4 focused on institutional ics can be generated by making salutary changes on either reforms, chapters 5–7 dealt with a mix of institutional reforms dimension. Institutional reforms, even if limited in scope, can and diversification policies, and chapters 8 and 9 focused on facilitate economic diversification; concomitantly, successful diversification. diversification creates a climate that favors reform (chapter 3). This annex delves into this challenge, touching on specific Countries from all over the world can be situated within the issues facing both the resource-poor and resource-rich coun- matrix of institutional endowments and economic diversifica- tries of the region. Strategic approaches for implementing tion. In the cell corresponding to low institutional endowments change are highlighted in light of the need for ambition, prag- and a small degree of diversity (dark blue cell), instability matism, and a new social contract.1 impedes learning and frustrates the search for diversity. Countries in this situation are caught in a vicious circle or “infernal trap.” Somewhat better off are countries that have benefited from growth and diversification opportunities for Thinking in terms various reasons, geographic or climatic (gray cell). They have a real opportunity to leverage their position to reform their of institutional economic and institutional regimes. But, some countries— in particular, the resource-rich ones in which vested inter- endowments ests jealously guard their privileges—have not been able to pursue a knowledge-based path in an efficient and sustainable and economic manner. They have experienced a sort of “frustrated promise.” diversification Other countries with relatively weak institutions but unusually dynamic sectors or cities have been able to reach a higher stage of economic and industrial diversity, such as China and India. But they both also remain confronted with the challenge of Economic development can be understood through a two- moving from “good enough” to “good” institutions (green cell). dimensional analytical and policy matrix that is closely linked to the knowledge- and innovation-driven development approach Among the countries with strong institutional endowments, advocated in this report. The first dimension (the horizontal axis some face serious difficulties in diversifying their economies, in table A3.1) consists of top-down creation of good governance especially when the entrepreneurial class does not have critical institutions that ensure the rule of law and efficient regulations. mass or is not vigorous enough (yellow cell). Others—notably The process of creating those institutions may be referred to as the social welfare/market economies of the developed world— a “Weberian process,” after Max Weber, the theoretician of the have been able to renew their economic and industrial base modern state. The second dimension (vertical axis) relates to the through sustained innovation efforts, allowing them to avoid expansion of dynamic segments of the economy, whose growth institutional sclerosis (violet cell). Finally, there are those coun- helps alleviate development constraints. These bottom-up solu- tries that have been able to constantly adjust their institutional tions result in innovation, both institutional and technological. framework and to generate innovative ventures (light blue cell). They may be dubbed a “Schumpeterian process,” after Joseph The issue here is to manage diversity, notably in liaison with Schumpeter, the theoretician of innovation. migration trends that bring new perspectives and opportuni- ties for change, but also potential instability. The desired outcome of the interplay of institutional improve- ments and greater economic diversity is dynamic economic Most of the countries of the Arab world fall into the category enclaves coexisting with more or less functional institutions. of low institutional endowments and medium internal diversity 1. This annex builds on various studies, including CMI (forthcoming 2013), Djeflat (2012), Kuznetsov (2012), Uppenberg (2012), and van der Meer (2012). It provides a synthetic analysis of how different Arab countries can make the move to a knowledge- and innovation-based economy. The objective is not to treat the country situ- ation and related policy issues in an exhaustive manner, but to provide suggestions on key trends and policy directions for implementing change. 154 Annex 3. A country application of the knowledge economy model  TABLE A3.1   ­Development profiles: The Weberian and Schumpeterian logics combined Institutional endowments Low High Infernal trap Odd role models Learning and the quest for diversity are frustrated by The public sector is more dynamic than the private sector. Low pervasive instability. Chile. Zimbabwe, Democratic Republic of Congo. Agenda: To stimulate heterogeneity to maintain growth. Internal diversity and heterogeneity (size of Schumpeterian segments) Agenda: Regime change. Frustrated promise Social welfare / market economies Diversity of dynamic segments. Western Europe, Canada, Singapore, Rep. of Korea. Intermediate Mexico, Argentina, Russia, South Africa, and most Arab Agenda: To amplify heterogeneity to avoid institutional countries. sclerosis. Key issue: Dealing with vested interests. Agenda: To break the hold of vested interests and to improve institutions by opening up the system. Good institutions as a by-product Start-up nations that embrace “creative destruction” Dynamic segments create their own rules and reach a United States, Israel, Taiwan (and certain other countries critical mass. that face systemic threats). High China, Brazil, India, and, increasingly, Vietnam. Agenda: To manage heterogeneity (managing migration is Agenda: To move from institutions that are “good a litmus test of adaptability). enough” to good institutions. Source: Kuznetzov 2012. and heterogeneity (grey cell). The question is whether they will popular participation in economic life. Across the region, evolve toward higher internal diversity (yellow cell) or to better countries have embarked in one way or another in a process institutional endowments (violet cell)—or both. The long-term of transformation in response to calls for greater inclusion sustainability of economies with low institutional endowments and democratization. In Morocco and Jordan, that process has been the subject of growing scrutiny, as weak institutions has unfolded under monarchies that have taken steps to are becoming increasingly problematic in the era of globalized open up their societies. In Tunisia and Egypt, the process has and open societies.2 resulted in rejection of an authoritarian regime. Leaders in all four countries know that they must respond to the demand As discussed elsewhere in this report, Arab economies can for greater participation in political life and for an economy be divided into two basic types—the resource-rich and the capable of creating jobs. Satisfaction of those demands would resource-poor—each with a set of contrasting features. Their constitute the basis for a new social contract between govern- approach to the knowledge economy has differed in the past ment—one that should promise transparency and efficiency and very likely will continue to differ. This annex examines and support innovative undertakings of all sorts—and civil those approaches, beginning with the resource-poor countries. society, in its various incarnations, which all should find a way to support the reforms required for greater democracy and economic efficiency. The sooner such a new social contract can be struck and consolidated, the better it will be for the Resource-poor people of the region. countries in the The region’s resource-poor countries have common prospects for diversification, with a relatively large span of possibilities, southern and eastern as surveyed in chapter 8. These range from information and communication technology (ICT)-related sectors to green- Mediterranean growth-induced activities, with opportunities in high-profile tourism and creative industries, as well as established sectors such as food processing, which are important in much of the Resource-poor countries—located in the southern and eastern region. These opportunities for diversification can be seen as Mediterranean area—have the common imperative of creating low-hanging fruit that can be gathered through fine-tuned jobs in large numbers, particularly for youth. Only efficient efforts that combine, among other things, training programs, economies can generate jobs in the necessary quantity, and quality certification, and trade promotion. Efficient exploitation the best way to build an efficient economy is by widening of these niches is key to creating, strengthening, and sustain- 2. Acemoglu and Robinson (2012) question the sustainability of the Chinese model in the absence of an opening toward more political and economical freedom. Transforming Arab Economies 155 Annex 3. A country application of the knowledge economy model ing a nationwide climate of self-confidence and trust. Early capacity for government action, and the urgency of the need success will help to facilitate a virtuous cycle of further reform. for results, especially in terms of job creation. Current events provide what is perhaps a unique window of opportunity for Regarding the spatial diversification of their economies, these strong and determined actions. Those actions may be painful countries start from a common baseline, that is, technoparks in the short term but promise substantial gains in the medium and industrial zones. But the tradition of centralization in Arab to long term. In all cases, the political economy for change, countries and the concomitant deficit of local administrative shaped by context-specific factors, will be a major determinant capabilities constitute hurdles to local development. For that in the choice of policy actions and instruments. reason, technoparks and industrial zones are developing unevenly throughout the region and are dependent on the availability of certain assets—chiefly entrepreneurial and academic talent—and on the governance structures in which  Morocco those assets operate. Innovation sites should be strengthened, expanded, and replicated, as appropriate, through the provi- Morocco has experienced sustained economic and social devel- sion of adequate incentives, notably for attracting foreign firms opment over the past decade. Between 2000 and 2010, the that are the major sources of technological and management growth rate averaged 5 percent, and unemployment dropped upgrading. from 14 to 9 percent, in part thanks to the new knowledge- economy-based regime. But further progress is necessary, as The region’s resource-poor countries share a need to make the overall competitiveness of the economy has deteriorated. institutional reforms, although some have a much longer way to Exports cover only about 50 percent of imports, and 25 percent go than others, as discussed below. The reform agenda includes of export income comes from phosphates alone (Morocco is (i) completing or adjusting reforms to the business environ- the world’s leading producer). ment, which in all of the countries considered still presents weaknesses despite significant progress in recent years; (ii) The reforms undertaken over the past decade have improved cutting prices for telecommunications and expanding access to the investment climate and governance. Reforms and initia- the Internet (and particularly to broadband); (iii) strengthening tives related to the knowledge economy began in the early their innovation systems and expanding innovation policies to 2000s with the liberalization of mobile-telephone markets. embrace more than science and technology policies, consistent More recently, important plans were launched to diversify with a more dynamic view of the process of innovation; and (iv) the economy through the establishment of highly competi- improving the education system at all levels. tive industrial platforms in several sectors (Plan Emergence), the revamping of agriculture (Plan Vert) and fisheries (Plan Finally, several countries in the region can benefit from a Halieutis), and the digitization of the economy (Plan Maroc wide range of support from the international community. The Numéric) (box A3.1). Plans have been launched to upgrade so-called Deauville Partnership will bring new and expanded the education system (Morocco still suffers from a high rate agreements on trade and foreign direct investment (FDI) (chap- of illiteracy) and to forge a more effective innovation policy. ters 3 and 4). Recent commitments from the European Bank for Reconstruction and Development (EBRD) and support from Broader and deeper reforms are necessary to cope with the the European Union (EU) for research and development (R&D), country’s challenges. The king has advanced the democratiza- innovation, and education are the most prominent examples tion process, and a new government has come into power, but of assistance from the international community. the most pressing challenge is to accelerate the application of the new economic model, which promises to be a source of Alongside common issues and perspectives one finds important productivity, competitiveness, and employment. Hastening the differences. Three of the region’s resource-poor countries— application of the new model will require not only introduc- Jordan, Morocco, and Tunisia, have relatively advanced policies ing new policies, but also overcoming impediments such as related to the knowledge economy, policies that have begun to protection from competition in some industries (which allows stimulate economic activity, create jobs, and produce wealth. Of incumbents to collect rents), corporatist or guild-like behaviors the three, Morocco and Tunisia seem to be better equipped to in the school and university system, and bureaucratic rigidities plan and execute strategies, being endowed with government in the administrative system. institutions that have demonstrated the capacity for action and delivery. They are also more advanced in their efforts at The first task is to improve coordination of the various plans economic diversification. By contrast, Jordan and Lebanon and reforms that have been launched by the government. The seem to exhibit a somewhat more entrepreneurial climate necessary coordination should take place at the highest level and are better able to convert rapidly innovative potential into of the government, bringing in all affected ministers as well as concrete activities, markets, and jobs. top officials of the sector agencies involved in the shift to the knowledge economy. Better coordination is necessary to cut Considering these similarities and differences, some strategies government spending in the face of the yawning budget deficit. and policies that seem appropriate for advancing the countries At the same time, there is a need to mobilize the society as a of the southern and eastern Mediterranean along the road to whole, in all its richness and diversity, around the new devel- the knowledge economy are sketched out below. The specific opment model and a clear vision for the country articulated cases of Morocco and Jordan are discussed in detail. Viewed around knowledge and innovation. Government and business through the lens of the policy principles laid out in chapter 3, leaders who have led the development of the sector plans the proposed approaches differ depending on each country’s and key policy reforms could act as core change agents to degree of advancement toward the knowledge economy, the articulate the vision. 156 Annex 3. A country application of the knowledge economy model BOX A3.1 Engineering the knowledge economy: The Moroccan example New plans and programs to boost economic growth are central to Morocco’s new national vision. These plans can be divided into three categories: (i) functional plans that directly address one or more of the pillars of the knowledge economy (the Morocco Innovation Initiative, the Emergency Plan for Education: 2009–12, and Maroc Numeric 2013), (ii) sectoral plans with embedded knowledge economy components (Plan Emergence, Plan Vert, Plan Halieutis, and Plan Azur), and (iii) regional plans that represent the extension of a previous plan to a specific area of the country (Plan Vert and Plan Halieutis for the Agadir region). Of these, Plan Azur is the only one for which results are available—the rest are too new to have generated reportable results. Morocco’s plans constitute a framework for implementation of the knowledge-based economy that is original and so far unique in the region. The framework could be improved by making its knowledge economy dimension more explicit. The achievement of the framework will be its ultimate test. By defining the vision and mission of knowledge-producing systems, Plan Emergence translates into concrete terms Morocco’s policy on innovation and entrepreneurial leadership. Six major sectors are covered: offshoring, automobiles, aeronautics and space, elec- tronics, textiles and leather, and agrifood. This 10-year industrial strategy is designed to boost the country’s gross domestic product (GDP) by 91 billion Moroccan dinars, create up to 440,000 jobs, reduce the trade deficit by 50 percent, and increase the country’s growth rate by an increment of 1.6 percent. It is also expected to help the country’s ailing export sector and encourage additional private investment of 50 billion dinars in manufacturing. Plan Vert reorganizes agriculture producers within integrated structures to facilitate commercialization and exports. The program reflects the importance of agriculture in the Moroccan economy and to social stability. The plan includes a new land policy, improved management of water resources, and a package of fiscal incentives. The plan targets a sector that contributes 19 percent of Morocco’s gross national product (GNP)—15 percent from agriculture and 4 percent from agro-industry. The sector employs more than 4 million rural inhabitants and has created approximately 100,000 agro-industrial jobs, while providing food security for 30 million consumers. It is expected that this plan would create from 1 to 1.5 million jobs by 2020. Plan Halieutis creates hubs for the transformation of regional fisheries transformation through the development of pelagic fisheries and high-value-added frozen products. The ultimate goal is to convert the fishing industry into a true economic growth factor by 2020 by doubling the sector’s value as a share of GDP and increasing employment from 61,650 currently to 115,000 direct jobs and 510,200 indirect jobs. Plan Azur is an investment project part of the Vision 2010 that aimed to create six coastal resorts to attract 10 million tourists by 2010. But the plan was readjusted in 2007 due to the defect in reaching this goal. The new Plan Azure 2020 aims to capitalize on the lessons learnt from the previous plan and to create 470,000 new jobs, to double the number of tourists, and increase by 2 percentage points tourism’s share in the GDP by 2020. The Maroc Innovation Initiative sets ambitious targets for patents and innovative startups, enhancing Morocco’s place as a site for research and development (R&D), particularly in biotechnology, information and communication technology, materials, nanosciences, and nanotechnologies. Policy priorities include innovation-based competitiveness, production of technology, exploitation of the R&D capacity of universities, and attracting talent to establish a culture of innovation and entrepreneurship. Other steps include creating innovation cities, collaborating with EU innovation programs, and raising R&D funding to as much as 2 percent of GDP by 2020, with 25 percent from private sources. Source: Moroccan Ministry of Economy and Finance 2011. The people’s enthusiasm for that vision will rise or fall with the back by high prices for telecommunications services, includ- extent of their engagement in projects that they help to design ing Internet access, because of privileges enjoyed by the three and carry out. Its credibility will depend to a great degree on incumbent operators. the success of the measures taken so far and of the plans now being implemented to diversify the economy. These must be Morocco needs to intensify the revamping of its education closely monitored, particularly for their contributions to eco- system by significantly improving the conditions of basic learn- nomic growth and job creation. In a similar vein, it is impor- ing. Considerable efforts should be made at the primary and tant to monitor the numerous initiatives undertaken around secondary levels through teacher training on a massive scale, the country to create technoparks, competitiveness clusters, improved pedagogy, better governance, and more rigorous evalu- and so on. ation. At the postsecondary level, some institutions of higher education have been granted limited autonomy, but they continue Realizing the vision will be easier to the extent that decentral- to suffer from overregulation. For example, the requirement that ization is effectively implemented and further progress is made spending decisions be approved in advance makes it difficult on governance. Of particular importance in this regard are the for institutions to offer contracted research services, continuing intensified campaign against corruption promised by the new education, and other services (as mentioned in chapter 6). Other government, an improved competitive climate (with better obstacles block the development of private universities. access to financing for small and medium-sized enterprises), greater transparency in public procurement, and advances in The research system, which presently is made up of various the digitization of Moroccan society, which presently is held institutions (universities, public research centers, and the like) Transforming Arab Economies 157 Annex 3. A country application of the knowledge economy model working in silos, would require a more articulated policy. It public activities. As a consequence, large budget deficits have would also benefit from improvements in the working condi- appeared, while exchange reserves have plummeted. In this tions of researchers. Creating a new employment category for context, while knowledge and innovation remain in Tunisia’s researchers would facilitate the recruitment of young scientists development plans, they have not been high priorities. and rejuvenate the university system. Job creation, particularly for educated youth, remains the The shift to a knowledge-economy-based regime also requires single most important challenge. In a population of 10.5 million, actions to improve macroeconomic management of the 800,000 people are seeking employment, among them 180,000 economy. Greater fiscal space could be opened up by reduc- recent graduates. ing subsidies for basic consumer goods (such subsidies now represent about 6 percent of Morocco’s gross national product, An urgent task is to improve the business environment by GNP), and loosening the convertibility of the dirham, which is amending the regulatory and legal framework inherited from closely pegged to the euro and the dollar (discouraging the the past regime, which includes policies and practices that are competitive adjustment of the economy). Morocco should also not conducive to a thriving knowledge economy, such as toler- pursue its efforts to create a larger trade union within the Arab ance for monopolies, cumbersome authorization processes, Maghreb region, at a time when positive signs are emanating and unnecessarily centralized procedures, among others. from several countries in the region. The situation calls for a nationwide audit of administrative and legal procedures and the early implementation of needed reforms with the participation of the business community and  Tunisia civil society. Another series of measures concerns the education and train- Tunisia experienced rapid economic growth in the 1990s and ing system. To meet the needs of the economy it is imperative 2000s. The annual growth rate for the two decades averaged to improve and adjust curricula, notably in postsecondary tech- almost 5 percent, placing Tunisia among the fastest-growing nical education and in the vocational system. The involvement countries in the region, thanks to an efficient diversification of of the business sector, including foreign firms, is a necessary the economy (away from extractive industries and toward the part of this effort. Technical and other training linked directly textile, mechanical, and electrical industries), sound macro- to measures to support job creation in the public or social economic management, and trade openness toward Europe sector—and in the informal sector—would also be useful. and other areas. Strong revenues enabled the government to invest heavily in social programs, infrastructure, and education. The digitization of the economy should be accelerated. The development of e-services could create jobs for technically Tunisia embraced the knowledge economy early on, incorpo- educated youth. Offshoring provides a promising avenue for rating it into its five-year plans and other planning processes.3 job creation, as do creative industries (see chapter 8). This has led to an important series of initiatives over the past decade, including the development of the tertiary education A major effort for to create physical, manufacturing, and educa- system (notably through the creation of postsecondary tech- tion infrastructure is needed in depleted areas in the center of nological institutes known as ISETs), the modernization of the country, where unemployment is rampant. The benefits of industry (through the “Mise à niveau ” program supported by such investments will be felt only in the long term; therefore, the EU), the launch of numerous technoparks, and active, much they must be well calibrated. publicized investment in ICTs and the Internet. (Tunis hosted the World Information Society Summit in 2005.) The commitment of Tunisian society to this development path depends largely on the capacity of the new government to seize While these are positive trends, the reality is that a distorted the opportunity to carry out needed reforms without bowing to business environment and suboptimal governance conditions short-term demands, client requests, or conservative ideologi- designed to benefit the ruling power and its networks curtailed cal biases (which may create a climate of fear or distrust in a growth and frustrated the population. Rising unemployment, society that had been in many respects the most open in the particularly among recent graduates, led to the explosion that Arab world, notably with regard to the status of women). The sparked the Arab Spring. To a certain extent, Tunisia fell victim role played by the international community—particularly mul- to an incomplete shift to the knowledge economy, since the tilateral organizations and donors—in sustaining the change political unrest was ignited by educated but unemployed young process, including actions related to the knowledge economy, people and propagated by the Internet and social media. will be crucial.4 Since the fall of the administration of Zine El Abidine Ben Ali To sum up, significant adjustment is needed in a society in early 2011, Tunisia has embarked on an orderly and demo- that is experiencing dramatic change, even if it has been so cratic transition. But it has been painful, with the economy far remarkably controlled. The key is to find a way for actions experiencing slower growth because of decreased tourism, related to the knowledge economy to receive the attention for example. The government has also had to increase welfare they need in the face of competing demands from a young and spending and introduce schemes to create jobs in social and frustrated population that expects quick change, with a new 3. See, for example, the reports on Tunisia’s knowledge economy issued by the Institut d’Economie Quantitative in Tunis (IEQ 2007, 2009, and 2011). 4. For the support provided by the World Bank, and information on other donors’ support, see World Bank (2012c). 158 Annex 3. A country application of the knowledge economy model BOX A3.2 The Tunisian media in transition The change brought about by the Jasmine revolution has created a new situation for the media, which now enjoy freedom of expression to an extent not experienced for decades. But making use of that freedom has not been simple or straightforward. The system of media control enforced by the Ben Ali regime transformed the country’s journalists into mere communicators of government policy. Since the revolution, Tunisians have witnessed a flowering of new media operating as platforms for personal and political expression and of investigative journalism, while the established newspapers and TV and radio channels have searched for new, open forms of information. The government, for its part, established a National Authority for the Reform of Information and Communication (INRIC). But political and ideological maneuvering has affected the transition process. The Tunisian mainstream media have become embroiled in the political struggle between the new government, led by moderate Islamists, and the secular opposition. The opportunity for local journalists to become more professional may be sacrificed yet again to ideology, especially since working conditions remain poor. The liberalization process has been delayed, as actions of repression and intimidation, including jail sentences, continue to affect journalists, particularly when they broach sensitive issues such as religion and the status of women. Journalists and their editors must still make calculations about the limits of freedom of expression. The situation probably will not be settled soon, but it is a litmus test of the maturity of Tunisian democracy. Source: El-Issawi 2012. government at the helm that has only moderate experience and years is still awaiting implementation. The global economic a civil service accustomed to centralized administration. Once crisis has, not surprisingly, slowed the country’s economy. again well-run knowledge economy initiatives that produce quick and visible wins will be crucial. The media can support On the education front, Jordan benefits from a high literacy rate this change by publicizing successes large and small. To fill (more than 85 percent of the population are literate). But, as in that role, the country’s media will have to learn new roles and other Arab countries, the system fails to equip students with practices and to shed some of the habits of passivity acquired the skills demanded in the market, including soft skills such as under the previous regime (box A3.2). problem solving, teamwork, and leadership. The government has introduced wide-ranging reforms to build skills for the knowledge economy. The Education Reform for the Knowledge  Jordan Economy project, for example (see chapter 5), was launched almost 10 years ago at the primary and secondary levels to prepare students for the knowledge economy, in line with the Jordan took its first steps toward the knowledge economy nearly long-term plan evoked above. This project and related reforms a decade ago. 5 A national agenda prepared in 2004 charted a should soon begin to bear fruit, making Jordan’s workforce three-step path: (i) from 2004 to 2009, actions on fundamentals more attuned to the needs of the productive economy. in education, the business environment, and other areas; (ii) from 2009 to 2015, development of a competitive manufac- Compared with other countries in the region, a sizeable chunk turing base; and (iii) after 2015, the take-off into knowledge- of Jordan’s labor force works in science and technology (S&T). economy-based development. Various factors interfered with The country’s R&D infrastructure is solid and its scientific the achievement of those plans, the foremost being the difficult production relatively high. But these S&T capabilities are geopolitical environment in which the country has found itself. not closely linked to the needs of the economy and society, The relative instability of the government is another compli- which is all the more regrettable because the country has cating factor. There have been frequent changes of ministers, a significant entrepreneurial class with excellent innovative including the prime minister, in a context of demands for more potential. The perpetuation of traditional S&T policy structures rapid democratization and greater popular participation. The and approaches, the conflation of innovation policy with S&T institutional landscape features a puzzling accumulation of policy, and the reduction of innovation to the application of overlapping agencies and departments, some of which may be research are all part of the problem. likened to fiefdoms that duplicate effort and impede reform. In this context, the business environment suffers from signifi- Exploiting the potential for innovation can give a significant cant drawbacks, including high taxes, selective application of boost to development. To create a more dynamic innovation the law, inefficient regulatory measures, and so on. This has system and to begin to change the mind-set of Jordan’s policy affected inflows of FDI, which remains modest with respect makers, a recent World Bank mission proposed a series of to local investments and as a share of GDP. A law to attract actions, beginning with the establishment of an interminis- foreign investment that has been in preparation for several terial innovation body, as in Finland. Accordingly, a National 5. This section also draws on World Bank (2012a). Transforming Arab Economies 159 Annex 3. A country application of the knowledge economy model Innovation and Competitiveness Council has been established have an immediate effect in terms of new activities and jobs, as a first step, accompanied by campaigns to mobilize con- but they would, at least, show that a significant community cerned communities, notably youth, and by sectoral audits of innovators, academics, scientists, and business people, to unearth innovative and promising opportunities that could supported by capable civil servants, was fully and seriously profitably be scaled up. engaged in developing the country. Such policy measures might include (i) the design of a focused, but comprehensive, inno- Some sectors also present attractive prospects for job creation. vation and S&T plan; (ii) a program to streamline the public ICT-based industries such as business process outsourcing research sector, which is cluttered with underfunded research (BPO) and call centers, areas in which Jordan has a compara- laboratories and teams; (iii) a refocusing of technology trans- tive advantage owing to the widespread use of English and a fer offices, presently devoted entirely to foreign technologies, history of links with American and other foreign investors. on domestic assets; (iv) closer links between the universities Another promising sector is health tourism, in which Jordan and the economy and society, through incentives for teachers has already invested heavily: the kingdom now enjoys a solid and researchers; (v) innovation- and management-oriented hospital infrastructure. There is a need, however, to raise the programs for students; (vi) incentives for graduates to perform skills of nurses and intermediary medical workers, which could work on local and regional needs; (vii) the adaptation of techni- help fill several thousand jobs. Finally, the water sector is a cal and vocational schools to respond better to the demands of source of massive technical and industrial effort, along with employers; and (viii) the development of a culture of evaluation appropriate institutional arrangements, in view of water’s vital within government departments responsible for innovation, importance for the country. research, and education.6 Several strong sectors can be strengthened for the good of the  Egypt economy as a whole through well-targeted actions—among them BPO and information technology (IT) outsourcing, offshor- ing, and food processing. Second, in the interest of soothing Egypt is experiencing serious problems in its political transition, social tensions and improving social cohesion, inequalities in having been plagued by tensions between various groups and access to higher education should be addressed by harmoniz- parties with strongly diverging views of the proper develop- ing conditions of access to both public and private universities. ment path. Ideas aside, the capabilities of the government to Finally, the media should be invited to showcase success stories engineer major reforms are limited. Early in the past decade, with a view to changing mind-sets and setting in motion a Egypt enjoyed relatively high growth, thanks to significant positive dynamic toward change and renewal. reforms of its business environment that earned it a spot among the top reformers in the World Bank’s Doing Business surveys in the late 2000s. Those reforms helped to attract waves of FDI, particularly in the ICT sector. But the benefits of  Lebanon these positive trends were for the most part captured by the cronies of the Mubarak regime, contributing to the uprising Lebanon’s government currently has very limited capacity to that erupted in early 2011, in the wake of Tunisia’s Jasmine act. But the country benefits from a relatively good climate for revolution. innovation, both institutional and technological. A relatively large contingent of change agents active in various spheres of Policy instability, bureaucracy, and corruption, as well as Lebanon’s society and economy have the ability to turn ideas restrictive labor regulations and skill shortages are major into competitive enterprises, effective technoparks, and agile obstacles to the development of the country, and, particularly, venture capital organizations. Local and municipal authorities to the cultivation and exploitation of knowledge and innova- also play a very active role in a context where the central power tion. But pockets of dynamism can be found in industry (in the lacks room to maneuver. The country also benefits from an telecommunications sector, for example), in the universities impressive diaspora. (in the form of entrepreneurial teams), and even in govern- ment, where various bodies have been able to engineer effi- Under such circumstances, the best policy is to facilitate ini- cient innovation programs. Building on these dynamic spots tiatives taken by civil society, to ensure that they unfold under would improve the climate for broader reforms. Some reforms conditions of transparency, and that success stories are widely and programs, once put in place, could take advantage of publicized. In taking these steps, the government would con- the country’s S&T system, which has some useful assets in tribute, along with Lebanon’s community of change agents, to the form of R&D capabilities and a cadre of scientists and a climate of self-confidence and trust, thereby preparing the researchers who could be recruited to work on projects with ground for further and deeper reforms when the time is ripe. high value added. In this context, the World Bank is launching a project to support the provision of $30 million in venture capital and seed funding Building on programs and policies that have already demon- through Kafalat (see chapter 6; World Bank 2012b). This effort strated their efficiency and utility, a number of measures could should help to strengthen the innovative and entrepreneurial be implemented without further ado. Most of these would not dynamism of the Lebanese economy. 6. These policy measures and supporting analysis are developed by Dubarle (2012) in an internal note prepared for the European Investment Bank (EIB) on obstacles to collaboration between the academic and business sectors. Egypt is one of several case studies in Dubarle’s analysis. 160 Annex 3. A country application of the knowledge economy model  Algeria Resource-rich countries: Algeria presents features of both the oil-rich countries and The countries of the the southern Mediterranean countries. Influenced by the pro- democracy stirrings of the latter, it is also ensnared by the Gulf Cooperation “resource curse” associated with wealth from oil and gas, which helps maintain the status quo and permits inertia on many Council fronts. But Algeria has tremendous opportunities to diversify its economy beyond oil and gas, beginning with the agrifood sector and continuing with chemicals and pharmaceuticals. The countries of the Gulf Cooperation Council (GCC) have been Tourism also offers opportunities, once safety and security aware for some time of the need to diversify their economies can be assured. The building and construction industry could and to embark on a new development model inspired by the open up huge markets for innovation and jobs (and not only knowledge economy.8 Dubai and Qatar have so far done the low-skilled jobs) through public procurement. Investments most to put that awareness into action, with some success. and initiatives launched since mid-2000 include the estab- Elsewhere, the global economic downturn and the Arab Spring lishment of an innovation agency (ANDRAVET), the building have served as a wake-up call, stimulating a will to act in most of technoparks (such as Sidi Abdallah), and various reforms countries of the Gulf. The complacency that has characterized and projects related to the ICT sector. The impact of those so many economies rich in natural resources needs to give measures on job creation, however, has been modest. way to reforms capable of removing key obstacles to sustained growth independent of the oil markets. The underlying question seems to be the capacity of Algerian society to engage in effective collective action. Some efforts All of the GCC countries have a top-down governance process, have been made by the Conseil National Economique et Social, and their regimes have retained a marked authoritarian char- with World Bank support, to stimulate a collective dialogue on acter. They have been able to weather the Arab Spring thanks the knowledgeeconomy model, with a series of public gather- to their vast resources, which they have distributed to their ings of high officials and influential policy makers.7 But the people through transfers of various kinds. But several Gulf follow-up to these consultations has been fitful at best. For countries face problems of leadership succession, with atten- the stalemate experienced in present-day Algeria, the best dant political uncertainties. They also face social challenges strategy may involve quiet advances on projects with strong related to their conservative traditions, notably with respect transformative power, focusing on demonstration projects to the status of women. publicized through solid, well-designed media campaigns. The existence of a lively civil society that is eager for change The question of how best to reduce dependency on oil and gas should also help. The engagement of civil society in favor of is common to all of the GCC countries. The alternative model greater knowledge and innovation has manifested itself in a is largely inspired by the idea of leapfrogging—using oil and remarkable initiative described in box A3.3. gas revenues to bypass the early developmental stages of the BOX A3.3 The Nabni 2012 initiative: 100 measures for a new Algeria Nabni is a participative Web-based think tank created in April 2011 to prepare an action plan for a new Algeria released on July 5, 2012, marking the 50th anniversary of the former colony’s independence from France. Nabni is nurtured by dozens of members of Algerian civil society, including members of the Algerian diaspora. They have come up with 100 measures, implementable in the short term, aimed at improving the daily life of citizens, restoring trust, and preparing for the future. The measures cover a diverse set of themes: access to public services, health and social development, living conditions for students and young people, enterprise and employment, access to finance, access to housing, land management, education and research, infrastructure, and governance and reform. More than half of the proposed measures relate directly to the pillars of the knowledge economy: simplifying the process of starting a business, reducing bureaucratic hurdles, providing stipends for students to facilitate mobility and internships, rewarding excellence in research, granting four mobile 3G licenses, establishing free access to government information, and so on. A brief fact sheet is available for each of the 100 proposed measures, including the rationale for the measure, details on key points, and identification of the government institutions best positioned to implement the measures. Source: Nabni2012.org. 7. These meetings were held in Algiers in 2006 and 2008, with support from the World Bank Institute’s Knowledge for Development (K4D) Program. 8. This section is based on Andersson and Djeflat (2013). Transforming Arab Economies 161 Annex 3. A country application of the knowledge economy model world’s industrial leaders and to become global leaders in and investment. A key issue is the national capacity to admin- advanced service sectors such as finance, media, and tourism. ister reforms at a time when the handling of key management Constrained by limited indigenous talent in entrepreneurship responsibilities has been handed over mainly to expatriates, and management, some countries, notably Qatar and Saudi as discussed above. Arabia, have attempted to jumpstart their diversification efforts by attracting foreign firms and multinationals through power- The GCC countries also confront the problem of finding the ful incentives and first-class telecommunications, housing, right balance between nationals and expatriates in the man- and transportation infrastructure. They have also made huge agement of their economy. Some—notably Qatar, the United investments in universities and research centers, and have Arab Emirates (UAE), and Saudi Arabia—have chosen to made significant improvements in their business environment.9 employ large numbers of high-level expatriates to manage firms (including state-owned enterprises) and government In the countries of the Gulf that are mostly desert, cities are agencies responsible for economic development, leaving only central to growth and diversification. Most of these coun- strategic and political decisions to the nationals. This policy tries have therefore invested heavily in urban development. has had the advantage of facilitating a rapid take-off of new They now need to develop creative strategies that will enable sectors and activities, but has also raised questions about the them to make the most of their investments by developing a long-term capabilities of the countries to manage and direct vibrant climate for innovation that will make them competitive their development process, which requires efficient handling with other global hot spots in finance, media, and education. of relations with global firms that are key to the sustainability Despite substantial reforms and excellent facilities designed of the economic model. In addition, relying too much on foreign to attract global firms, defects in the business environment workers, especially at the top, diminishes job opportunities for persist (table A3.2). nationals, particularly those with the postsecondary diplomas Key issues include bureaucratic hurdles, labor-market that are now issued in great numbers by the top universities rigidities, and an inadequately trained indigenous workforce. in the region. Education systems continue to present serious weaknesses Qatar and Saudi Arabia are among the countries that have in their ability to impart basic skills, particularly in techni- adopted policies in recent years to increase the number of cal and vocational training. Despite being twinned with top nationals in their recruitment processes, a trend that affects foreign counterparts, universities in the GCC countries have both highly educated people and those with intermediate skills. yet to build strong R&D capabilities. In addition, some coun- Other countries, notably Oman and Bahrain, have been more tries (particularly Saudi Arabia) present serious difficulties inclined to rely on domestic talent, which may have delayed their related to contract enforcement and poor judiciary systems. take-off but may make them more resilient and sustainable The diversification model of the small Gulf states—pioneered in the long term. Relying on home-grown skills also entails by resource-poor Dubai—is based on partnering with foreign difficulties. Locals receive salaries that are much higher than firms, academic institutions, and other entities to build hot those paid to similarly qualified expatriates for similar work. spots of global innovation in rising sectors through an aggres- Those salary differences are imposed on private companies, sive policy of incentives and infrastructure. The approach has both domestic and foreign, which must meet quotas for the borne some fruit. But when approaching the frontier of a com- recruitment of locals. These practices seriously distort the petitive sector, as Dubai has approached finance, success is by labor markets. The question of developing cadres of manag- no means assured. For one thing, speculation tends to infect ers and decision makers from the domestic population will be and undermine the rapid real-estate growth that is inherent in solved only through deliberate measures to cultivate public and the model. The building of world-class educational institutions private sector expertise through advanced training programs, and research centers, as pursued by Dubai, Abu Dhabi, and dedicated schools of public administration and management, Qatar, is a long-term journey that requires sustained efforts and other actions.  TABLE A3.2   ­Obstacles to doing business in the Gulf countries (late 2000s) Obstacles Most important Second-most important Third-most important Bahrain Poor work ethic Restrictive labor regulations Inadequately educated workforce Kuwait Inefficient government bureaucracy Inadequately educated work force Political instability Qatar Inflation Restrictive labor regulations Inadequate supply of labor Oman Restrictive labor regulations Access to financing Inadequately educated workforce Saudi Arabia Inefficient government bureaucracy Inadequately educated work force Restrictive labor regulations United Arab Emirates Inflation Inadequately educated workforce Restrictive labor regulations Source: Ewers and Malecki (2010), based on the World Bank’s Doing Business surveys. 9. For an in-depth analysis of the approach taken by the Gulf countries to the knowledge economy, along with related issues and prospects, see Ewers and Malecki (2010). 162 Annex 3. A country application of the knowledge economy model The annex continues with a closer look at the situation of Saudi education by offering them opportunities equal to those offered Arabia, in view of its importance in the region, the size of its to boys. This is a clear move toward a new social contract and economy, and its high level of unemployment. Some additional a positive sign of the modernization of Saudi Arabia’s economy comments are then offered on Oman, which presents some and society. interesting political and societal features. A few words will be added about the region’s fragile states, which could also The rigidity of the labor market and the strong preference of benefit from innovation-based development. Saudis for secure jobs in the public sector affect the develop- ment and functioning of the Saudi economy, and particularly its readiness for the knowledge economy. The draw of the  Saudi Arabia public sector skews the allocation of human resources, while a sense of entitlement and complacency, or at least a lack of motivation, among public employees saps the efficiency Saudi Arabia faces the considerable challenges of maintaining of the administration in the implementation of policy. Public its status as a regional power while also preserving stability employees lack incentives for ambitious implementation of at home by providing jobs to a large contingent of educated the government’s plans, including those related to knowledge youth. Its overall development strategy, pursued for the past and innovation, which demand drive and creativity. Measures decade or so, has been largely based on a knowledge economy to provide the necessary incentives should be put in place. approach. The chief components of that approach include: Introduction of a national social security system may be an  he continued development of King Abdul-Aziz City for • T important step, as it would reduce the urgency of the search Science and Technology (established in the 1980s), which for security and the consequent attractiveness of the public has expanded research centers and programs in many sector over the private sector. areas (for example, water, oil and gas, petrochemicals, biotechnology and genetic engineering, aviation and space, Considering the scope of its plans and challenges, the kingdom nanotechnologies) should ensure that its knowledge and innovation agenda • A  massive program of new cities (chapter 6) and the cre- includes a strong policy of technical and vocational educa- ation of technology and industrial zones (notably an ICT tion and training (TVET) and an active innovation policy. The park in Riyadh) TVET policy requires a set of complementary actions: (i) an upgraded vocational guidance service to encourage second-  he building of first-class science and technology universi- • T ary-school graduates to enter the TVET system and become ties (King Abdullah University of Science and Technology) mid- and upper-level technicians; (ii) an expanded program  ducation programs specifically focused on talented youth • E of apprenticeships and other schemes that link work with (for example, The Foundation for Giftedness and Creativity) training throughout the TVET system; (iii) the development • T  he development of numerous libraries, Web sites, data- of modular competency-based training schemes; and (iv) the bases, and the King Abdullah Initiative for Arabic Content granting of substantial autonomy to TVET centers so that they • Y  esser, an e-government electronic transaction program can respond quickly to evolving demands and opportunities. (chapter 7) The country’s innovation policy should be multifunctional in the sense that all of the sources of innovation detailed in table These initiatives have come together with a series of reforms A3.3 are explored and pursued. So far none of these roads to improve the business environment and an aggressive policy has been systematically explored.10 Detailed plans should of attracting foreign investors managed by SAGIA, a powerful be prepared to exploit the potential opportunities offered by agency that is also responsible for building the new cities. In each of these roads. addition, important steps have been taken to promote girls’  TABLE A3.3   ­Four roads to innovation for Saudi Arabia Incubation Acquisition Incubating potential ventures and building innovative prototypes Acquiring corporate ventures through capital investment, venture that could become successful products in international markets. capital partnerships, mergers, and acquisitions. This requires This requires support for entrepreneurship through national entering global value chains, through foreign direct investment, to awards and scholarships programs to develop an innovative culture encourage application-oriented research and development and to and an entrepreneurial spirit. stimulate upgrades of technical skills. Incremental improvement Research Improving existing products by adding new features and value-ad- Promoting Saudi research and innovation through regional and ded services. national funding and through the private efforts of Saudi industries. This requires multi-industry support mechanisms to help Saudi in- Well-funded public-private partnerships are required to stimu- dustrialists make minor innovations that can generate big rewards. late collaborative research between Saudi (and foreign) firms and research centers, focusing on the seed stage. Source: Adapted from Chebbo (2008). 10. The research road is a possible exception, with the establishment of numerous research organizations and centers of excellence. These appear to be paying off, since the kingdom occupies a prominent place among Arab countries in scientific publications and patents. Between 1996 and 2006, the number of scientific papers published by or with the participation of researchers residing in Saudi Arabia was 26,854, the 2nd-highest in the Arab world and the 48th worldwide. Transforming Arab Economies 163 Annex 3. A country application of the knowledge economy model • J  obs have been created at the expense of productivity and  Oman competiveness. Operating partly through a quota system, the policy of “Omanization” favors locals in the workplace The case of Oman, a quite open society, illustrates many of the but exacerbates skill shortages and lowers productivity. questions facing countries that have moved gradually toward  man’s environmental record is poor. Oman’s carbon • O a knowledge economy model.11 Oman has achieved high eco- footprint is among the largest in the world. Consumer nomic growth over an extended period, with GDP gaining 5.5 subsidies and top-down policy making mean that con- percent in 2011, a stable macro economy with modest infla- sumption of water and energy is highly inefficient. tion (3.7 percent in 2011), and a significant trade surplus (33 Agricultural activities destroy groundwater and con- percent of GDP). At the same time, the country has a relatively tribute to rapid soil erosion and loss of biodiversity. equal distribution of wealth, a stable society, no major ethnic The number of private cars has exploded, while public or religious conflicts, and a low crime rate. transport is sorely lacking. The Arab Spring did not bypass Oman. The leadership reacted  mani society lacks a research culture and has yet • O promptly to turbulent demonstrations by taking a series of to embrace experimentation, risk-taking, innovation, strong measures that revealed a spirit of openness and dia- and entrepreneurship. The universities lack autonomy. logue in the face of social and political demands, including a Despite the creation of open research grants and the devel- reshuffling of the government. 12 Probably most important for opment of a research and innovation policy, government the long-term sustainability of the country are the genuine policies remain heavy-handed and bureaucratic, generat- strengths of the Omani development model. Although Oman ing red tape and micromanagement. Government is still has much less oil and gas than the UAE or Qatar, and also viewed as the performer rather than the enabler. a lower level of income, it is fair to say that the country Like other countries in the Middle East, Oman has a young now offers a unique policy model within the Arab world that population, a third of whom are under 16. They are rapidly could serve as a source of inspiration for others outside the becoming well educated but face a looming shortage of Gulf, both for its unique features and for the results it has attractive job opportunities. Given high incomes and living produced. costs, high dependency on dwindling oil reserves, and strong dominance by the public sector, Oman must find a way to In its educational policy, public communications, and foreign nurture new industries, products, and firms. Outstanding policy, the regime has consistently stressed shared values, social and environmental issues could profitably be turned tolerance, openness, and sustainable development. Traditional into a pull factor for research, technical advance, innovation, architecture prevails. The Omani people have a unique historical and enterprise development. legacy, being the only Arab country with a historical presence in both Asia and Africa. A pro-employment policy, access to land ownership, affordable consumer goods, and universal health and education services provide good living conditions. A research council has been created under a policy to promote Fragile states research and innovation. For all its virtues, however, the Omani model also meets with stark challenges. Some of these are traceable to the fact that the country joined the modern world just 40 years ago, and This bird’s-eye view ends with a few words on fragile states— its human resource base is still thin. Other problems stem Iraq, Libya, Syria, and Yemen—all of which fall into the from prevailing incentives and the way institutions operate. resource-rich category. Actions should be calibrated to what In short: is feasible, while not neglecting pockets of competence that • P  ower remains centralized. While the sultan is a respected exist in the society, comparative advantages (including oil and and unifying force, political parties are absent, and the new gas resources, mining, but also agriculture in Iraq and Syria), legislative role of the consultative assembly is still unclear. and opportunities created during reconstruction processes. A few principles are worth stating:  echanisms for horizontal collaboration across vertical • M hierarchies are undeveloped. The lack of a full-time prime  o not be overambitious, but take advantage of easy wins • D minister means that line ministries are overly independent to rebuild people’s self-confidence through job creation and tend to pursue their own agendas. A culture favor- and reliable delivery of basic goods and services. ing consensus decisions and a fear of making mistakes  uild on specific groups within universities, firms, govern- • B discourage officials from taking on cross-cutting issues ment institutions, and communities that are highly moti- that are relevant to multiple authorities. vated and are benefiting from foreign support to ensure a modicum of continuity over the next few years. 11. This section is based on Andersson (2012). 12. Although the turmoil was short-lived, its repercussions were not. In the weeks and months that followed the demonstrations, the sultanate went through dra- matic changes at a pace hardly seen since Sultan Qaboos bin Sa’id united the country 40 years ago. The sultan reshuffled his cabinet, replacing more than half his ministers over a brief period. He closed the powerful but unpopular Ministry of National Economy, created 50,000 new public sector jobs, ordered new funding for education, and raised minimum wages and unemployment benefits, among other measures. On governance, he instituted a system by which citizens could submit complaints and promised to heed their suggestions. 164 Annex 3. A country application of the knowledge economy model  ake good use of resources from oil and gas exploitation, • M Chebbo, Maher. 2008. “Corporate Innovation: The Engine placing them in dedicated funds to support innovation and for Economic Growth in a Knowledge Economy.” enterprise creation as well as social development and the Presentation at the First Annual Conference of the satisfaction of basic needs. Arabian Knowledge Economy Association, Jeddah, • T  ake advantage of reconstruction processes to promote Saudi Arabia, January 12–13. the use of new technologies and to provide workers with CMI (Center for Mediterranean Integration). Forthcoming technical training. 2013. Un nouveau modèle de développement pour  uild capabilities within government at the central and • B le Maroc: Une feuille de route pour l’économie local levels in budget management, organizational plan- fondée sur la connaissance. Marseille. ning, and democratic and participatory processes. • E  mbrace good governance, transparency, and the fight Djeflat, A. 2012. “Morocco’s Effort on the Knowledge Economy.” against corruption. Unpublished background note, CMI, Marseille. Such approaches, and the multiplication of successful initia- Dubarle, Patrick. 2012. “Obstacles to Industry-University tives that embody them, foster an overall climate of change Collaboration in Egypt.” Unpublished paper pre- and reconstruction, a self-reinforcing climate imbued with pared for CMI innovation policy program (IT1), trust and self-confidence that, like a single drop of oil, can Center for Mediterranean Integration, Marseille. spread gradually across the nation. IEQ (Institut d’Économie Quantitative). 2007. Rapport Annuel sur l’Economie du Savoir 2007. Tunis. ―――. 2009. Rapport Annuel sur l’Economie du Savoir 2009. Conclusion Tunis. ―――. 2011. Rapport Annuel sur l’Economie du Savoir 2011 . Tunis. El-Issawi, Fatima. 2012. “Tunisian Media in Transition.” Many Arab countries face similar challenges, and many dif- Carnegie Endowment for International Peace, ferent paths are open to them to address those challenges. Washington, DC. http://carnegieendowment.org/ All of those paths pass through decisive institutional reforms 2012/07/10/tunisian-media-in-transition/co12. and economic diversification. That said, a distinction must be made between the resource-rich and the resource-poor coun- Ewers, Michael C., and Edward J. Malecki. 2010. “Leapfrogging tries. Resource wealth is a double-edged sword. It has allowed Into the Knowledge Economy: Assessing The some countries to make bold investments designed to achieve Economic Development Strategies of the Arab dramatic gains in the economic and industrial arena. But it Gulf States.” Journal of Economics and Social also reduces the pressure to carry out reforms that ultimately Geography 101 (5): 494–508. must be made and allows countries to delay their transition to a knowledge- and innovation-based development model. The Kuznetsov, Yevgeny. 2012. Personal communication with the fact remains that, starting from the initial conditions in which author. World Bank, Washington, DC. countries find themselves (as sketched out at the beginning of this annex), all manner of trajectories can be envisaged. Uppenberg. Kristian. 2012. “Knowledge Transfer in the MENA The factors that determine the choice of trajectory will be the region: Egypt.” Unpublished background note, political economy of change that characterizes each country; European Investment Bank, Luxembourg. the change in mind-set that is needed to overcome the status van der Meer, Jacques. 2012. “Knowledge Transfer in the MENA quo and to embrace bold, creative visions and strategies; and Region: Jordan.” Unpublished background note, the way those strategies interact with other forces and ongoing European Investment Bank, Luxembourg. political changes. World Bank. 2012a. Program Document for a Proposed First Programmatic Development Policy Loan. Report References 61420-JO, World Bank, Washington, DC. Acemoglu, D., and J. Robinson. 2012. Why Nations Fail: The ―――. 2012b. “Project Appraisal Document on a Proposed Origins of Power, Prosperity and Poverty. New Loan for Supporting Innovation in Small and York: Crown. Medium Enterprises in Lebanon.” World Bank, Washington, DC. Andersson, Thomas. 2012. Personal communication with the author. World Bank, Washington, DC. ―――. 2012c. “Interim Strategy Note for the Republic of Tunisia for FY 2013–14.” Middle East and North Africa Andersson, Thomas, and Alexander Djeflat. 2013. The Region, World Bank, Washington, DC. Real Issues of the Middle East and the Arab Spring: Addressing Research, Innovation and Entrepreneurship. Berlin: Springer. Transforming Arab Economies 165 Transforming Arab Economies: Traveling the Knowledge and Innovation Road The imperative of creating millions of good jobs is the first of many daunting challenges confronting the Arab world. To meet those challenges, Arab countries would do well to embrace a model of economic growth based on knowledge and innovation, building on the global move toward the knowledge economy. Over the past decade, some countries of the region have spurred growth and improved their global com- petitiveness by taking the first steps in the direction of the knowledge economy. To go further, however, Arab societies must deepen their commitment to reforms in four key policy areas: developing more open and entrepreneurial economies, preparing a better-educated and more highly skilled population, improving their capabilities for innovation and research, and expanding information and communication technologies and their applications. The success of a knowledge-economy strategy depends on coordinated progress on all four fronts, with bold approaches tailored to each country’s challenges and opportunities. “Recent events in the Arab world have affirmed the need for greater opportunity and dignity for all. Governments across the region are grappling with the challenge of job creation, especially jobs for youth and women. Transforming Arab Economies: Traveling the Knowledge and Innovation Road provides countries of the Arab world with a new approach to development strategies that can help them achieve sustainable growth and create jobs—both key for ensuring social and economic inclusion. This work speaks directly to those in government, business, and civil society across the Arab world who are keen to work in new and different ways, using knowledge, innovation, and technology as key drivers to shape a more inclusive growth path and a better tomorrow.” Inger Andersen, Vice President, Middle East and North Africa, World Bank “CMI is to be congratulated on producing this daring and timely work. Envisioning the future is a bold step and a major challenge at a time when the protagonists of the Arab revolutions are so preoccupied with the present. The creation of wealth and jobs will require considerable changes in the political arena toward greater democracy, a more resolute search for social justice through more inclusive policies, and a new departure toward the knowledge economy at the eco- nomic level. Given the diversity of the countries of the Arab world, the knowledge economy will have the best chance of taking hold if the complementarities between the Gulf states and the countries of the Maghreb and the Mashreq are care- fully exploited. This important work deserves to be widely discussed within the halls of government in the Arab world.” Rachid Benmokhtar Benabdallah, President of the National Observatory of Human Development and member of the Academy of Science and Technology, Morocco “Transforming Arab Economies not only makes a powerful and compelling case for the adoption of a knowledge- and innovation-driven growth scenario for the Arab World, it also underlines the importance of a clear vision to drive the deep reforms needed to make it happen, reforms that cut across sectorial and ministerial silos. Such a vision should ensure that reforms are pursued in a participatory fashion that guarantees broad-based support for implementation. The report also highlights the idea of ‘growth spots’ that would facilitate the adoption of the new economic model. This timely and very important report from the World Bank should be required reading for all decision makers and concerned citi- zens in the Arab world. Our future is being shaped right now by the actions we take to bend the future to our dreams.” Ismail Serageldin, Librarian of Alexandria, Director of the Bibliotheca Alexandrina, and former World Bank vice president CMI Contact The Center for Mediterranean Integration (CMI) is a multi-partner cooperative arrangement to facili- Center for Mediterranean Integration tate access to advanced knowledge and best practices while generating support among public and Villa Valmer independent institutions to increase cooperation, enhance sustainable development and integrate 271 Corniche Kennedy policies in the Mediterranean Region. CMI programs strive to provide solid inputs for evidence-based 13007 – France policy choices and, in so doing, help to improve governments strategies and actions, increase the Phone: + 33 (0)4 91 99 24 51 /56 level of innovative activities and investments in the Region, and stimulate cooperation between Fax: + 33 (0)4 91 99 24 79 countries around the Mediterranean. www.cmimarseille.org