Economic Research Forum (ERF)

Exports and innovation in the MENA region: when skills matter

111
Firms that want to start exporting have to be able to innovate and upgrade their use of technology in the face of fierce competition in international markets. As this column explains, highly skilled production and non-production workers are essential. In other words, engaging in international trade creates the need for a bias towards skills.

In a nutshell

Production and exports in the MENA region remain concentrated in low value-added and capital-intensive sectors.

This problem is accompanied by the lack of skilled labour needed to move up the international value chain; at the same time, unemployment, especially among young people, is high.

For firms to find skilled labour, trade and investment measures are not enough; they must be coupled with enhancements in education and vocational training, encouraging creation of the skills that firms need to innovate and expand their activity into international markets.

Exporting firms are typically larger, more productive and more skill-intensive than their non-exporting peers. This suggests that there is an important link between international trade and the skills of the labour force. In general, the tougher the competition in international markets, the more likely a firm will be to improve its production processes, to innovate and to hire more skilled labour in order to export.

The intersection of trade and demand for skilled labour remains largely understudied in the MENA region, which is traditionally known for exporting fuel and low value-added manufactured products. But recent regional developments show that a large part of the old structures need to be revisited.

When it comes to industry and trade, the conclusion is the same: MENA economies are the most open group in the world, with a ratio of 44.7% of exports of goods and services to GDP. Most of them are also engaged in regional or multilateral trade agreements, such as the Greater Arab Free Trade Area, the EU-Association Agreements, and the World Trade Organization.

But a closer look at the composition of exports shows that 72.5% of these are mainly fuel, while only 17.3% are manufactured products. This latter ratio is not only extremely modest: it is also the lowest in the world compared with Latin America and the Caribbean, East Asia and the Pacific, and even sub-Saharan Africa (see Figure 1).

An even closer look at the composition of exported manufactured products shows a minimal share of 3.9% of high-tech products within this segment of exports (see Figure 2).

The failure of MENA economies to upgrade their production and trade structures and to create for themselves new higher value-added niches within world trade is a complex and multifaceted problem.

On the one hand, the region suffers from the highest unemployment rates in the world, as much as 26% for young people. Women are also disadvantaged and many have precarious jobs. On the other hand, the region is known for its lack of employability (OECD, 2016): there is often mismatch between the needed skills to be hired and the existing qualifications.

In our research, we analyse data from the World Bank’s 2013 Enterprise Survey to examine the nexus between exports, innovation and the demand for skilled blue- and white-collar labour in eight MENA countries: Djibouti, Egypt, Israel, Jordan, Lebanon, Morocco, Tunisia and Yemen.

In a first step, we examine the link between the exporting status of the firm and its innovative behaviour. In a second step, we examine the impact of innovation and use of technology on the demand for skilled blue- and white-collar labour.

Our findings suggest a positive and significant impact of exports on innovation and use of technology. Furthermore, demand for skilled production workers by firms in the MENA region is likely to be higher than that for non-production workers, especially among small and medium-sized enterprises (SMEs). Formally registered firms are also more likely to demand skilled labour, and large firms are likely to have a higher demand for both blue- and white-collar skills.

These results allow us to draw a number of conclusions with high policy relevance. First of all, encouraging formality in the MENA region should be a priority: formality is the only way to benefit from credit from formal channels and outside informal circles.

Designing adequate incentive programmes for informal firms to join the formal sector (such as through enhanced access to finance and preliminary tax exemptions) can give a real push to the manufacturing sector, allowing firms to thrive, innovate and expand their activities into the exporting sector.

Furthermore, the main concern in the MENA’s manufacturing sector remains the lack of skilled workers to allow firms to upgrade, innovate, use sophisticated technology and enter new segments with high value-added in the international market.

In this context, the OECD (2016) argues that the two key constraints on employment in Arab countries are a lack of job creation and employability.

While the lack of job creation could by explained by the concentration of MENA manufacturing in low value-added products and capital-intensive activities, employability and lack of skills is the other side of the coin. More open trade policies and investment incentives for large firms as well as SMEs in the MENA region may act as a driver of job creation in Arab countries.

But there will be increased need to hire skilled workers in order to face fierce competition in international markets. Considering that most products exported by the MENA region are intensive in skilled blue-collar workers, the lack of serious steps towards enhancing the quality of vocational training is likely to offset any trade and investment policy efforts and limit their outcome.

This is why strengthening partnerships between business, government and universities will improve the provision of skills, boosting on-the-job training and the provision of quality apprenticeship.

Moreover, vocational training with double degrees (such as the Donbosco, an Italian-Egyptian technical school) can be useful for two reasons. First, they can raise the prestige of vocational work, which is often not well thought of in Arab countries. Second, they will improve the quality of vocational education and training, leading to enhanced skills to match the needs of exporting sectors.

Further reading

Aboushady, Nora, and Chahir Zaki (2018) ‘Do Exports and Innovation Matter for the Demand of Skilled Labor? Evidence from MENA Countries’, EMNES Working Paper No. 9.

African Development Bank (2012) ‘African Economic Outlook 2012: Promoting Youth Employment’, African Development Bank, Tunis, Tunisia.

Brambilla, Irene, Daniel Lederman and Guido Porto (2012). ‘Exports, Export Destinations and Skills’, American Economic Review 102(7): 3406-38.

OECD (2016) ‘Youth in the MENA Region: How to Bring Them In’, OECD Publishing, Paris.

Source: constructed by the authors using the World Development Indicators

 

Most read

Fair competition is needed to empower women economically in the Arab world

The participation rates of women in the labour market in Arab countries are the lowest in the world. This column argues that remedying the under-representation of women in the labour force is a social and economic imperative for the region. There are three dimensions for action to realise the potential of Arab women: amending laws and regulations; instilling fair competition in markets; and promoting the digital economy.

Recession without impact: why Lebanese elites delay reform

The survival of Lebanon’s political elites is highly dependent on the wellbeing of the economy. Why then do they delay necessary reform to avoid crisis? This column examines the role of politically connected firms in delaying much-needed economic stabilisation policies.

Competition laws: a key role for economic growth in MENA

Competition policy lacks the attention it deserves in the countries of the Middle East and North Africa (MENA), a region characterised by monopolies and lack of market contestability. As this column explains, there are many questions about the extent of anti-competitive barriers facing new market entrants in the region. What’s more, MENA’s weak overall performance on competition is likely to be hindering economic growth and the path towards structural transformation.

The future of Egypt’s population: opportunities and challenges

Egypt’s potential labour supply depends on the growth and changing composition of its working-age population. This column reports the latest data on labour supply and fertility rates, concluding that the country has a window of opportunity with reduced demographic pressures to try to address longstanding structural challenges for the labour market.

Formidable challenges facing the Middle East require a sea change in economic policies

Weakening global growth, endemic conflicts and increased tensions within the Middle East and North Africa (MENA) – as well as emerging challenges such as climate change and rapid demographic shifts – are likely to have an adverse impact on the region’s economic, social and political stability in the coming years. This column outlines the policy responses that are needed to avert disaster.

Domestic demand and competition: a new development paradigm for MENA

A lack of competition in domestic and regional markets is holding back development in the Middle East and North Africa. This column argues that the region and the international community must ensure that barriers to market entry and exit are eliminated, and that independent regulatory bodies at the national and regional levels help to promote domestic demand as the main engine for sustainable and inclusive growth.

Effects of urbanisation on productivity and wages: evidence from Turkey

Are the substantial productivity gains associated with larger cities in developed countries similar for developing countries? This column provides evidence on urbanised economies in the non-Western world by focusing on Turkey, a country that has experienced fast urbanisation and a high rate of growth of the urban population.

How import dependence could lead to corruption in MENA

Export-led development strategies have had little success in MENA countries; what’s more, instruments of earlier import-substitution strategies – such as state-owned enterprises, high tariffs and subsidies – have survived. As this column explains, these legacies have created crony-capitalist industries that have limited the level of competition in many sectors of the economy and furthered the region’s dependence on imports.

Gender discrimination in small business lending: evidence from Turkey

Discrimination in access to financial services can prevent women from exploiting their entrepreneurial potential. This column reports on a ‘lab-in-the-field’ experiment to test for the presence of gender discrimination in small business lending in Turkey.

Social security for young workers in Arab countries

Social security coverage of young workers in Arab countries is low – in part because many are employed in informal jobs; and in part because they do not see the value of the system. This column reports survey evidence on young workers’ attitudes towards participation in both social security and politics. It also explores policy reforms that might make access to social security universal for young workers.