How can countries in the Middle East and North Africa (MENA) capitalise on the transition to renewable energy to foster a sustainable, productive and inclusive economy? A seminal contribution to this challenge was made by Oxford economist Paul Collier in a report presented at the 2019 ERF annual conference and published subsequently in the Middle East Development Journal.

Collier argues that the challenge facing MENA is all too obvious. One way or another, most countries in the region depend on or have benefitted from oil rents, whether directly by extracting and exporting oil and gas, or indirectly through remittances sent by Arab workers in the oil-producing and exporting countries. Other ways include being recipients of development aid, exporting goods and services to these countries, and the investing by oil-rich countries into the Arab economies that are not oil producers.

This web of extensive economic ties between the two groups (the oil-producing countries and the non-oil-producing of the Arab world), powered by oil and its derivatives, means that every country in the region will be drastically affected by fossil fuels becoming stranded assets as concerns about carbon emissions and climate change escalate.

Collier’s analysis and recommendations emanate from his acceptance of these deep connections and the intricate web of dependence on oil rents in the entire region. It is a dependence that has compromised productivity and severed the critical relationships that are characteristic of advanced, productive economies.

How MENA countries can rebase the growth of their economies

Collier’s basic premise is that as oil rents are set to wane, fossil fuel deposits are under threat of being transformed into stranded assets. This is the legacy of four decades of MENA countries’ dependence on fossil fuel rents: an economic structure that does not generate mass opportunities for employment that are sufficiently productive to sustain the living standards that the population has come to expect.

It is now an opportune time to restructure MENA economies and to wean the region off its costly dependence on non-renewable assets.

MENA countries need a social transformation and a new development strategy

The central question is about what can be done to make the transition from dependence on fossil fuels to developing renewable sources of income and wealth. Collier suggests the formulation of a new development strategy and a whole new set of policies. Whether you call this strategy a new industrial policy, or a refocusing of its aims and means, is not the issue for Collier, because the bare bones of building productivity at 21^st century levels are not mysterious.

Collier urges the building of new clusters of firms capable of innovation and linked to vocational training that equips a workforce with the skills that firms need. Small firms are characteristically the dominant type of firms in the region; they are typically too small to invest in leading technologies, or to take advantage of economies of scale and scope, and to afford research and development (R&D) to foster innovation. Clustered firms are more amenable to investing in higher technology, capitalising on economies of scale and being able to afford innovative production structures.

This transformation is not about a ‘grand scheme’ or a ‘master plan’. Rather, it is about a ‘social project’ or even a ‘cultural revolution’, which should involve all sectors of the economy working together to achieve transformation quickly and cumulatively. This project is far more complex and comprehensive than just a transition to renewable energy and a green economy.

As Collier says, ‘The scale of the change from a rent-seeking economy to a skill-based economy is massive. It requires both cultural and institutional changes, and the changes are too large to be planned in any detail: it is a transformation.’ This is a complex process and a unique event, and so, by its nature, it cannot be planned in detail; any set of proposals will need to be responsive to unanticipated future events and resilient to shocks.

Unique events such as proposed by Collier are, by their nature, subject to radical uncertainty (Kay and King, 2020). The way to navigate such uncertainty will involve building a process of rapid social learning based on experimentation, not by insisting on implementing a highly specified plan.

Collier envisages a process in which as society adapts and experiments, new opportunities will open up and the next steps will become clearer. What is needed is an adaptable framework along the lines of those used successfully in other regions and by countries such as China and some of the Southeast Asian countries.

Local networks and local jobs

Collier recommends, first and foremost, that people in the region become productive workers. This does not happen automatically and will require a series of conditions that have to be met. The most elementary requirement is to lay down the conditions that allow the potential for economies of scale and economies of specialisation to be realised.

For that to happen, he recommends that workers be organised into teams and firms into clusters. This cannot take place without establishing firms, as the most fundamental function of the firm is the organisation of workers.

Many workers in MENA are forced to work solo as there are too few firms; too much of the labour force is either in small informal enterprises or the public sector. In the most advanced economies, in contrast, 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 simply within the firm.

The most crucial factor supporting the transition to productive employment is to organise the training of the local workforce to equip them with the skills needed by firms in urban areas.

Collier notes: ‘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 the newly productive worker to quit for a rival firm that can afford to pay him/her more since it does not need to recover the costs of training. If a worker invests in a firm-specific training, the rational action is for the firm to exploit his new productivity.’

Workers should invest in general skills and firms should invest in specific skills

How best to accomplish this? Collier suggests that the best way is for workers to invest in general skills and for firms to invest in firm-specific skills. In practice though, efficient training will often intertwine general and firm-specific skills. Given that workers face much higher costs of borrowing than firms, they tend to under-invest even in general skills. It follows that we need public policy to generate the required level of investment in skills.

In general, state-provided training is unlikely to be successful because it is too detached from the changing needs of employers. To make sure that training is pertinent, firms must be directly involved in the provision of training, usually in collaboration with local colleges and institutions so that an integrated balance of firm-based and classroom-based methods evolves.

This calls for a nuanced public policy that imposes a levy on firms that forces them to finance skill acquisition and partly to broker the marriage of college-based and firm-based facilities.

Organise and structure authority at the level of urban clusters

The next requirement is to organise the structure of authority so that it corresponds to the decisions that need to be taken at the level of the urban cluster. But this has opposite implications for business and government.

Businesses are organised to compete with each other. But for the provision of city-wide 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 authorities so that training colleges and centres can be organised, as they are pertinent for the changing array of firms located in the cluster.

Equip firms with the skills needed for international competition

The final requirement is not to equip the workforce with skills; rather, it is to equip firms with the skills needed to remain abreast of international competition. This demands the development of direct linkages of firms and workers to university research departments, although the flow of knowledge is not simply from universities to firms but also a flow of new knowledge back to universities.

This arrangement requires the decentralisation of government; universities need sufficient local autonomy to be able to collaborate with local government in financing the research pertinent to the type of firms that the city hopes to attract.

A nexus approach to skill development, finance, research and education

At the heart of all of this is the development of a nexus of activities that promotes high productivity by combining firms, local governments and local tertiary education that work together to create and maintain a cluster of high performance. This brings firms that are spatially clustered together by products and interdependence, and organisationally bound into collaboration by business associations and government training levies.

Local governments should be guaranteed sufficient financial and policy autonomy to invest in the infrastructure that enhances the productivity of the firms that they seek to attract to their cities. The tertiary education sector should be organised to train the workforce that the firms need and to conduct the research that keeps firms competitive. The whole system should be designed to respond flexibly to change; each part has an incentive to spot emerging problems and work within the system to prepare appropriate responses.

Can MENA countries erect productive structures similar to those that successful cities have used?

The development of some major cities in Europe and the United States has followed this model of development. American cities such as Boston, some European cities, such as Edinburgh and Munich, and some Asian cities such as Singapore could not have developed their productive structure and excelled if they had not developed and exploited these productivity-enhancing levels.

Can MENA countries erect similar structures? They already have major cities, they already have well-equipped universities and they already have some capable large firms. But they need and require 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.

Perhaps more damaging is the fact that educated young workers in the region have used their education to acquire credentials for entry into the public sector rather than to acquire skills that would make them productive in a sustainable private sector activity.

Equally problematic is that governments in MENA have been organised around a structure of command-and-control by a 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.

All of these areas require transformation to foster a sustainable, productive and inclusive economy.

Further reading

Collier, Paul (2019) ‘Rebasing Economic Growth in the MENA Region’, Middle East Development Journal 11(2).

Diwan, Ishac, Adeel Malik and Izak Atiyas (2019) Crony Capitalism in the Middle East: Business and Politics from Liberalization to the Arab Spring, Oxford University Press.

Kay, John, and Mervyn King (2020) Radical Uncertainty: Decision-Making Beyond the Numbers, WW Norton & Company.