In a nutshell
For people to become more productive workers, they have to be organised into firms; firms need to be located in urban clusters; and the local workforce must be equipped with the required skills.
The nexus of high productivity is a combination of formally organised firms, effective local government and a tertiary education sector set up to train the workforce that firms need and to conduct the research that keeps firms competitive.
This has been achieved in many cities elsewhere in the world and it is feasible for MENA countries: they already have major urban areas; they already have well-equipped universities; and they already have some capable large firms.
For people to become productive workers, a series of conditions have to be met.
The most elementary is that the potential for economies of scale and economies of specialisation has to be realised. For that to happen, workers have to be organised into teams. This is the most important function of the firm. In sub-Saharan Africa, this has yet to happen – most of the workforce works solo or in micro-enterprises, dooming people to low productivity. Even in MENA, there are too few firms: too much of the labour force is either in small, informal enterprises or in the public sector.
One level up from the firm is the cluster. Firms cluster together partly to reap further scale economies that accrue at the sector level rather than within the firm. This is why the city of Qiaotou in China has so many button-producing firms, which make two thirds of the world’s supply.
But firms also cluster together to reap the gains from specialisation: the firms in the cluster are interdependent. For example, London has a vast range of firms specialising in distinct aspects of finance and law, enabling complex transactions that require a wide array of distinct skills to be completed swiftly.
A successful cluster depends on a city with good connectivity both internally and externally. Developing such cities, in which the large population needed for scale and specialisation does not result in congested gridlock, requires huge and timely public investment.
The third level of productivity is to organise the training of a local workforce that is equipped with the skills needed by firms in the city. The labour market does not do this automatically because neither individual firms nor individual workers have sufficient incentives to invest in training. If a firm invests in a general skill, the rational action is for newly productive workers to quit for a rival firm that can afford to pay them more since it does not need to recover the costs of training. If workers invest in firm-specific training, the rational action is for the firm to exploit their new productivity.
In principle, these problems can be addressed by workers investing in general skills and firms investing in firm-specific skills; but in practice, efficient training will often intertwine general and firm-specific skills. Furthermore, workers face much higher costs of borrowing than firms, and so will under-invest even in general skills. Hence, public policy is needed to generate the required level of investment in skills.
But state-provided training is unlikely to be successful because it is too detached from the changing needs of employers. To ensure that training is pertinent, firms must be intimately involved in the provision of training, usually in collaboration with local colleges so that an integrated balance of firm-based and classroom-based methods evolves.
The challenge for public policy is partly to organise a levy on firms that forces them to finance skill acquisition, and partly to broker the marriage of college-based and firm-based facilities.
The fourth level of productivity is to reorganise the structure of authority so that it corresponds to the decisions that need to be taken at the level of the urban cluster. This has opposite implications for business and government.
Businesses are organised to compete with each other. But for the provision of citywide training, they need to cooperate. Locally based businesses need to come together, forming associations that can work as a counterpart to local government, both for appropriate training and as a lobby for appropriate urban infrastructure.
Conversely, government needs to be decentralised from national to city-level authority so that training colleges can be organised that are pertinent for the changing array of firms located in the cluster.
The final level of productivity is not to equip the workforce with skills, but to equip firms with the skills needed to remain abreast of the international competition. This draws less on training colleges than on university research departments, although the flow of knowledge is not simply from universities to firms. The experimental innovations of firms provide a flow of new knowledge back to universities.
As with training, this requires decentralisation of government: universities need sufficient local autonomy to be able to collaborate with local government in financing the research pertinent for the type of firms that the city hopes to attract.
Hence, the nexus of high productivity is a combination of formally organised firms, local government and local tertiary education that work together:
- The firms are spatially clustered together by products and interdependence, and organisationally bound into collaboration by business associations and government training levies.
- The local government has sufficient financial and policy autonomy to invest in the infrastructure that enhances the productivity of the firms that it seeks to attract to the city.
- The tertiary education sector is organised to train the workforce that the firms need and to conduct the research that keeps firms competitive.
- The whole system is designed to respond flexibly to change: each part has an incentive to spot emerging problems and work within the system to prepare appropriate responses.
This is what has been achieved in some American cities, such as Boston, some European cities, such as Munich and Edinburgh, and some Asian cities, such as Singapore. It is feasible for MENA countries: they already have major cities; they already have well-equipped universities; and they already have some capable large firms.
But psychologically it requires a huge shift from the rent-seeking style of life that has been endemic. As carefully documented by Diwan et al (2019), firms have relied on crony capitalism to prosper rather than on productivity. Similarly, educated young workers have used their education to acquire credentials for entry to the public sector rather than to acquire skills that would make them productive in commercially sustainable activity.
Meanwhile, government has been organised around command-and-control by highly centralised authority, rather than into decentralised structures of authority designed according to functional pertinence and trusted to fulfil purposes that they have fully internalised. A psychological and institutional transformation is required – that is the focus of my accompanying column on The Forum.
Diwan, Ishac, Adeel Malik and Izak Atiyas (eds) (2019) Crony Capitalism in the Middle East: Business and Politics from Liberalization to the Arab Spring, Oxford University Press.