Economic Research Forum (ERF)

Productive jobs: rebasing growth in the MENA region

794
With the oil rents of the Middle East set to wane, it is essential to generate opportunities for jobs that are sufficiently productive to sustain the living standards that the population has come to expect. As Paul Collier explained in the opening keynote address at ERF’s 25th annual conference, the bare bones of building productivity at twenty-first century levels are not mysterious: clusters of firms capable of innovation have to be built and linked to vocational training that equips a workforce with the skills that firms need.

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.

Further reading

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.

Most read

Green hydrogen production and exports: could MENA countries lead the way?

The Arab region stands at the threshold of a transformative opportunity to become a global leader in green hydrogen production and exports. But as this column explains, achieving this potential will require substantial investments, robust policy frameworks and a commitment to technological innovation.

Freedom: the missing piece in analysis of multidimensional wellbeing

Political philosophy has long emphasised the importance of freedom in shaping a meaningful life, yet it is consistently overlooked in assessments of human wellbeing across multiple dimensions. This column focuses on the freedom to express opinions, noting that it is shaped by both formal laws and informal social dynamics, fluctuating with the changing cultural context, particularly in the age of social media. Data on public opinion in Arab countries over the past decade are revealing about how this key freedom is perceived.

Climate change threats and how the Arab countries should respond

The Arab region is highly vulnerable to extreme events caused by climate change. This column outlines the threats and explores what can be done to ward off disaster, not least moving away from the extraction of fossil fuels and taking advantage of the opportunities in renewable energy generation. This would both mitigate the potential for further environmental damage and act as a catalyst for more and better jobs, higher incomes and improved social outcomes.

Child stunting in Tunisia: an alarming rise

Child stunting in Tunisia seemed to have fallen significantly over the past two decades. But as this column reports, new analysis indicates that the positive trend has now gone dramatically into reverse. Indeed, the evidence is unequivocal: the nutritional health of the country’s youngest citizens is rapidly deteriorating and requires immediate and decisive action.

Exchange rate undervaluation: the impact on participation in world trade

Can currency undervaluation influence participation in world trade through global value chains (GVC)? This column reports new evidence on the positive impact of an undervalued real exchange rate on the involvement of a country’s firms in GVCs. Undervaluation acts as an economy-wide industrial policy, supporting the competitiveness of national exports in foreign markets vis-à-vis those of other countries.

New horizons for economic transformation in the GCC countries

The countries of the Gulf Cooperation Council (GCC) have historically relied on hydrocarbons for economic growth. As this column explains ahead of a high-level ERF policy seminar in Dubai, emerging technologies like artificial intelligence, blockchain and robotics – what some call the fourth industrial revolution – present a unique opportunity for the region to reduce its dependence on oil and make the transition to a knowledge-based economy.

Egypt’s labour market: new survey data for evidence-based decision-making

As Egypt faces substantial social and economic shifts, understanding the labour market is crucial for designing policies that promote employment and inclusive economic growth. This column introduces the latest wave of the Egypt Labor Market Panel Survey, which provides fresh, nationally representative data that are vital for examining these dynamics.

Shifting public trust in governments across the Arab world

The Arab Spring, which began over a decade ago, was driven by popular distrust in governments of the region. The column reports on how public trust has shifted since then, drawing on survey data collected soon after the uprising and ten years later. The findings reveal a dynamic and often fragile landscape of trust in Arab governments from the early 2010s to the early 2020s. Growing distrust across many countries should raise concerns about future political and social instability.

Corruption in Iran: the role of oil rents

How do fluctuations in oil rents influence levels of corruption in Iran? This column reports the findings of new research, which examines the impact of increases in the country’s oil revenues on corruption, including the mechanisms through which the effects occur – higher inflation, greater public spending on the military and the weakness of democratic institutions.

More jobs, better jobs and inclusive jobs: the promise of renewable energy

Among the many economic and environmental challenges facing the countries of the Middle East and North Africa (MENA), two stand out: the need for jobs and the need to combat the threat of climate change by moving away from reliance on fossil fuels. As this column explains, embracing renewable energy technologies presents an opportunity for the region to diversify its economy, mitigate the possible negative impacts of digital technologies on existing jobs, reduce its carbon footprint and create significant levels of employment, particularly for women and the youth, across a variety of sectors.




LinkedIn