The Knowledge-based Economy and the Arab Dream: What Happened?

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Many of the Arab countries may be pursing knowledge-based economic development strategies based on flawed practices from countries perceived to have made successful transitions to knowledge-based economies. Several countries presented as archetypal models of the knowledge-based economy transition face substantial economic development problems, such as record high youth unemployment rates, with tremendous societal implications.
The importation of the knowledge economy concept to the Arab region was accompanied by an emphasis on the welfare of individuals being tied directly to their success in gaining and maintaining higher qualifications and skills which could be sold in the labor market to match high wage employment opportunities expected to be generated by emerging high skill, knowledge-based industries. However, the high wage, high skills jobs associated with knowledge-based industries have not materialized in the region and are increasingly subject to competition from the emergence of low wage, high skill workers in other developing countries.

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The Knowledge-based Economy and the Arab Dream: What Happened?

  1. 1. | Public Sector Social Sector Corporate Responsibility Tahseen Consulting is an advisor on strategic and organizational issues facing governments, social sector institutions, and corporations. We work alongside our clients to help optimize strategic decision-making, solve organizational challenges, and appraise the impact of strategic initiatives. You can read more about our capabilities at tahseen.ae About Us CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of Tahseen Consulting is strictly prohibited. Copyright © Tahseen Consulting 2012. www.tahseen.ae The Knowledge-based Economy and the Arab Dream: What Happened? Wesley Schwalje wes.schwalje@tahseen.ae
  2. 2. 1 Many of the Arab countries may be pursing knowledge-based economic development strategies based on flawed practices from countries perceived to have made successful transitions to knowledge-based economies. Several countries presented as archetypal models of the knowledge- based economy transition face substantial economic development problems, such as record high youth unemployment rates, with tremendous societal implications. The importation of the knowledge economy concept to the Arab region was accompanied by an emphasis on the welfare of individuals being tied directly to their success in gaining and maintaining higher qualifications and skills which could be sold in the labor market to match high wage employment opportunities expected to be generated by emerging high skill, knowledge-based industries. However, the high wage, high skills jobs associated with knowledge-based industries have not materialized in the region and are increasingly subject to competition from the emergence of low wage, high skill workers in other developing countries. Executive Summary Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? Highlights  Seventeen of the twenty-two countries in the Arab World have knowledge-based economy as a long-term policy objective  Credentialism and a sink or swim orientation of skills formation policy guided by the privatization of investment in skills subsequently sold in the labor market are becoming important precepts of Arab development policy.  Decreasing pressure on wages due the globalization of knowledge industries and growth in high skill, low cost talent in emerging countries challenges the assumption that more education, higher levels of skills, and national labor markets can provide prosperity to Arab citizens and nations.
  3. 3. 2Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? Inside Introduction 4 Knowledge-based Economy and the Reinvention of the Arab Dream 6 Broken Promises of the Arab Opportunity Bargain 10 Visions Are Not Seeing Things As They Are, But How they Might Be 12 The Full Employment Fallacy of the Arab Dream 17 Securing a Viable Arab Dream 22
  4. 4. 3Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? James Truslow Adams (1931) described the American Dream as: “… that dream of a land in which life should be better and richer and fuller for every man, with opportunity for each according to his ability or achievement … It is not a dream of motor cars and high wages merely, but a dream of social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position.” Since then, the phrase has become a guiding theme that describes the underlying beliefs of the United States and which is at the heart of national identity. Yet the concept of the American Dream is subject to generational reinterpretation. Introduction A recent survey provides some data on particular life milestones that signify achievement of the American Dream and important intergenerational differences in the interpretation of the concept. The survey shows that the American Dream is a particularly important aspiration of Generation X born between 1965 and 1977 and Generation Y born between 1978 and 1993. Respondents from Generation X and Y view a college education and a postgraduate degree as more important to achieving the American Dream than previous generations such as the Baby Boomers. Generation X and Y respondents were also less likely to associate other life milestones such as marriage, children, wealth attainment, and home ownership with achieving the American Dream than previous generations (MetLife Study of the American Dream, 2011). In their review of trend data from multiple public opinion polls on the American Dream between 1978 and 2008, Hanson and Zogby (2010) find a growing focus on spiritual over material success; a strong but slightly declining belief in getting ahead by hard work; a sizable decrease in sentiment regarding the working class to get ahead by working hard; a large increase in the belief that a college education is a necessity to get ahead; and strong support for government intervention in helping families achieve the American Dream. The trends highlighted by these surveys suggest the 21st century American Dream is nuanced from the one articulated by Adams. Working class segments of the American population are losing confidence in the relationship between hard work and ensured success. Furthermore, a university education is viewed as increasingly critical to realizing opportunity in pursuit of the American Dream. Brown, Lauder, et al. (2011) refer to the American reliance on the market mechanism as an arbiter of social justice and opportunity based on hard work and talent as the Opportunity Bargain. From this perspective, individual and family opportunity is indelibly linked to obtaining the highest wages for knowledge, skills, and abilities in the labor market with jobs accruing to those who are able to continuously upgrade their skills to match the high skill demands attributed to knowledge-based economic development.
  5. 5. Based on the assumption that knowledge-based economic development would generate new high skill, high wage employment opportunities for Americans, the US government adopted a free market approach that relied on creating personally financed educational opportunities for citizens to obtain qualifications and skills for labor market success in a global economic environment in which the US was perceived to maintain its dominance in new and growing knowledge based industries (Brown et al., 2011). Surveys such as those cited above and a growing body of academic work question the sink or swim orientation of American skill formation policy which is rooted in the belief that knowledge-based economic development will produce better and more high skill, high wage jobs that reward citizens for private investment in skills formation once they enter the labor market. These studies suggest that many young people in the US are living daily with unfulfilled hopes and dreams from a broken opportunity bargain which increasingly fails to ensure success for hard work and educational attainment. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 4
  6. 6. In so far as a similar global economic development narrative based on the transition to knowledge-based economies and accompanying high wage, high skill jobs was perpetuated by the engagement of international organizations with the Arab World in the early Nineties, a similar opportunity bargain as that in the US emerged in the Arab countries. Schwalje (2013) shows that seventeen of the twenty-two countries in the Arab World have adopted development of a knowledge-based economy as a medium to long-term economic policy objective. Initiated under the patronage of Zine El Abidine Ben Ali, the former President of Tunisia, the World Bank hosted a conference in 2009 that led to the ‘Tunis Declaration on Building Knowledge Economies.’ Referencing the need for the Arab World to create 5 million jobs per year for the next 20 years, the declaration draws a causal relationship between knowledge-based economic development and ensuing job creation which will create the need for increased supplies of high skill workers. Knowledge-based Economy and the Reinvention of the Arab Dream The appeal of an economic development trajectory and policy prescription that promised high skills, high wage jobs was perhaps irresistible in a region facing a youth bulge in which the number of youth 18 – 24 is expected to grow to 88 million by 2030 representing approximately 20% of the population (Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, 2008). 5Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? The declaration implies that, assuming the Arab World can develop a “solid education base, a dynamic information infrastructure, an effective innovation system, and a solid economic and institutional regime (Institute, 2009),” economic diversification will lead to increased private sector job creation. Unfortunately for many of the 21 signatory countries, such results have not materialized. Given the very visible economic decline and labor market issues that some of the countries which have been ardent followers of the knowledge-economy paradigm have experienced, it is increasingly difficult to defend the policy prescription of knowledge-based economic development reliant on more education, more innovation, and policy and institutional reform as a cure all trajectory for the Arab World. A shrewd observer would have realized an important line of fine print in the Tunis Declaration’s first provision which states “countries which make strides toward building knowledge economy … are in general [emphasis added] doing better than others in the competitive world economy (World Bank Development Institute, 2009).” By adopting the mantra of knowledge- based economy nearly all of the countries in the region have expressed an interest in economic and social growth and a better life for their citizens, at least on paper.
  7. 7. In addition to high skill, high wage job creation, however, the Arabization of the concept of knowledge-based economy infused economic development with a host of other development issues such as economic integration and diversification, innovation, entrepreneurship, education and training system reform, environmental sustainability, identity, language, gender equality, and political participation and democratic reform. As in the US, the importation of the knowledge economy concept to the Arab region was accompanied by a similar emphasis on the welfare of individuals being tied directly to their success in gaining and maintaining higher qualifications and skills which could be sold in the labor market to match high wage employment opportunities expected to be generated by emerging high skill, knowledge-based industries. For Arab governments, the heavy reliance of the concept of knowledge-based economy on human capital development provides a useful empirical connection to a number of attributed social and economic objectives, such as higher levels of educational attainment ; increased health; efficiency of consumer choices; higher levels of savings and charitable giving; social cohesion; increased self-reliance and economic independence; reduced crime; growth and competitiveness; increased productivity; domestic innovation. 6Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? With its association to human capital development, the concept of knowledge-based economy created a convincing economic development narrative that met the psychological needs of Arab citizens but, as evidenced by the Arab Spring, clearly missed the mark on delivering on physiological needs. Alongside the importation of the knowledge economy narrative, credentialism and the sink or swim orientation of American skills formation policy guided by the privatization of investment in skills subsequently sold in the labor market became important precepts of Arab development policy. The Arab Dream became rooted in the reliance on the free market as an arbiter of social justice and opportunity based on labor market success similar to the American Dream. The Arab Dream is progressively based on the principle of access to better education leading to high skill, high wage employment complemented by concurrent government investment in building knowledge-based industries that will create jobs. In practice, the market as an arbiter of opportunity and social justice is often facilitated by non- market forces. The Arab Dream is also nuanced by the strong preference for public sector employment.
  8. 8. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 7 In a similar fashion the international organizations that imported the concept of knowledge economy to the region and which reinforced its uptake with contingent aid, particularly to Egypt, Jordan, and Tunisia, used the Trojan horse approach to influence Arab leaders to embrace a variety of political, social, and economic reforms that would have been a tough sell separately. Due to the association of knowledge-based economy with socio-economic development, support for the concept relies on an emperor's new clothes logic in which lack of embrace of the concept is akin to being anti-reformist. The European Union has also leveraged its Neighborhood Policy, which attaches contingent aid to political, economic, trade, and human rights reform, to reinforce the adoption of knowledge-based economy as a mechanism to pave the way for market access to Arab countries. In many ways the adoption of knowledge-based economy as a prescriptive narrative guiding economic development is similar to an umbrella legislative act with rider provisions that have nebulous connections to the underlying bill. As shown by the example of the US, rider provisions can be an effective way of ferrying through legislation which might be vetoed, delayed, or receive less funding by attaching provisions to important issues under consideration by the legislature. In this way, the concept of knowledge-based economy is a convenient legislative Trojan horse for Arab governments with rider reforms that makes the overall concept seem much more substantive and convincing than its constituent parts. Structural changes in policy are often achieved through ambiguous agreement that can unite divergent visions and interests and acknowledgment of past policy failure rather than a common, explicit agreement on a way forward (Streeck & Thelen, 2005). For Arab governments, the knowledge-economy Trojan horse is a convenient mechanism to rapidly usher through a variety of potentially controversial, accompanying socio-economic development reforms that would ordinarily receive quite considerable legislative and public debate packaged in an appealing concept which promises high wage, high skills jobs for all in addition to the other associated economic and social benefits. While the Arab countries were good students, as evidenced by their embrace, implementation, and localization of reforms towards knowledge-based economic development, the high level of trust shown for international organizations and advisors as their teachers may have been misplaced and encouraged Arab countries to follow a convincing, but unproven development trajectory based on false equivalency
  9. 9. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 8 The concept of Knowledge-economy has helped to highlight and promote policy dialogue on key development challenges that the Arab World faces and brought coherence to a variety of socio-economic development discourses. The concept’s early emphasis on science and technology was particularly appealing in the Arab World given the ethnocentric appeal that recalls the preeminent position in science and technology the region once held in the Abbassid-era and the brain drain of prominent Arabs abroad. Knowledge-based economy also presents a convincing national narrative founded on an ideology of progress that is attractive to Arab leaders since their economic development progress is benchmarked relative to rich, developed countries which have purportedly transitioned to knowledge-based economies rather than potentially more appropriate developing country peer benchmarks in South America, Asia, and Africa. Policy prescriptions to advance towards knowledge-based economy are grounded in the emulation of developed country institutions and polices when a more practical prescription might have been to emulate less resource intensive but successful practices of countries that focused on the export of low-cost, high-end knowledge-based services or the more traditional low-cost export-oriented manufacturing strategies while making incremental, evolutionary advances up the value chain.
  10. 10. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 9 Broken Promises of the Arab Opportunity Bargain Although there are few regional public opinion surveys that can provide an indicator of the effectiveness of Arab governments to deliver on the opportunity bargain that has become enmeshed with the Arab Dream, a recent survey of 16,000 citizens across 21 countries in the Arab World shows several sources of breakdown. Carried out in late 2010 and early 2011 before the Arab Spring reached its boiling point, the survey provides a baseline indicator of several seeds of discontent that point towards unfulfilled promises associated with the pursuit of knowledge-based economy in the Arab World and a broken Arab opportunity bargain. The survey shows a strong social preference for public sector jobs in a number of countries that has precipitated a crisis in which regional governments are unable to create suitable employment opportunities to absorb the youthful population entering the labor market. The Arab Opinion Index, a study of 16,000 respondents in 12 countries carried out in mid-2011, also shows considerable dissatisfaction with the economic situation at the household and national levels and negative perceptions of government performance characterized by a lack of institutional trust. In Egypt and Tunisia, deteriorating economic conditions were cited as the primary cause of the Arab Spring. Across the region there is growing support for more representative systems that rely less on hereditary rule and more on ensuring political freedom and civil liberties, equality and social justice, economic opportunity, and stability. The survey also shows how the broken Arab opportunity bargain can affect social structure, as educational level and economic status is frequently cited as a factor in the approval of marriages in the region (Arab Center for Research and Policy Studies, 2012). Particularly in the less wealthy countries outside the Gulf, respondents described an Arab World that is not amenable to finding employment; lacks effective education; offers few opportunities for youth to get ahead through hard work; faces a dismal outlook for economic growth; and offers a difficult path to reaching life milestones such as securing affordable housing. In many countries, citizens indicate that they prefer to migrate to realize their dreams elsewhere.
  11. 11. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 10 Schwalje (2013) also reveals several economic trends which unfolded since the Nineties when the concept of knowledge-economy was imported to the Arab World which reflect a broken Arab opportunity bargain. He finds that gross value added from knowledge-based industries in the Arab World is the lowest in the world and has remained virtually constant over the last decade suggesting economic diversification has not led to the growth of knowledge-based industries. Furthermore, based on limited data from 14 Arab countries, employment in knowledge-based industries has not increased over the last decade which reflects the failure of Arab efforts to transition to knowledge economies as a means of producing high skill, high wage jobs. The socioeconomic issues cited above are at the heart of the series of protests that began in late 2010 and which continued into 2012 that resulted in the heads of state of Tunisia, Egypt, Libya and Yemen being deposed and which continue to challenge the leadership of several other countries in the region. While the lasting effects of the Arab Spring remain far from certain, national responses in the short term to the development challenges that incited the Arab Spring have involved a formulaic mixture of the following: introduction of national or municipal elections and initial steps towards universal suffrage; constitutional changes to limit and diversify power away from rulers; an increased role and greater representativeness of parliamentary bodies; adoption of constitutional amendments and referendums to diversify power; and widespread cabinet reshuffling. Particularly in the resource rich Gulf, sizable federal salary increases, creation of public sector jobs, and increased student and unemployment benefits have muffled voices affected by the broken Arab opportunity bargain. While initial steps to quell the Arab Spring and its tremors appear to have been somewhat effective, the fact that many of the countries in the region are potentially errantly relying on the assumption of the realization of a knowledge-based economic development trajectory to spark socio-economic development that has failed to materialize over the last 20 years has remained off the table. There has not been any serious regional discussion on whether the economic prescription of the transition to knowledge-based economies remains the right course for the region and can address the economic issues which caused the Arab Spring.
  12. 12. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 11 Post Arab Spring democratic and governance reforms and social transfers may be only distractions from what is a looming crisis resulting from the uniform regional pursuit of knowledge-based development based on an insular worldview that ignores the position of the Arab World relative to other emerging markets with fast growing and increasingly sophisticated industrial bases. Even within the Arab World, there is intense competition to be the “hub” of particular industries such as financial services, transport, tourism, and aerospace. In this global as well as regional competition to establish and grow new knowledge-based industries there are bound to winners and losers. However, beyond projecting tourism flows, immigration, and commodity prices, many of the economic development visions and national development strategies published in the Arab World that present development plans to 2020 or 2030 are based on isolationist views of the global economy that fail to consider that the economies of the Arab World face powerful and emerging rivals which will challenge the entry, growth, and competitive viability of knowledge-based industries in the region. This beyond the border competition may also erode current regional manufacturing and industrial bases due to quality and cost competition. Increasing levels of economic integration, driven by the accession of several Arab countries to the WTO, globalization, and the adoption of economic reforms to improve the enabling environment for business, entrepreneurship, and attraction of foreign direct investment, have also opened the door wider to foreign competition. Visions Are Not Seeing Things As They Are, But How they Might Be In many cases, regional economic development planning is based on the rose- colored visions which perpetuate a view that having a vision and legislation on the books that creates economic stability and openness ensures success of entry and investments in various industries while discounting competition from other emerging countries. The economic visions captured by Arab national development strategies typically flow from the top down through an adapted Westminster system where the executive branch, led by the ruler, is made up of senior members of the a cabinet who make important decisions informed by advisors while rarely consult weak, occasionally elected legislatures, if they exist at all. Such systems produce national visions and economic development strategies with perfunctory buy in established through consultative processes that seek allegiance and alignment to the party line rather than real input. The result is a missing link between the national vision and economic development strategy and institutional priority setting and budget allocation. Most critically, regional economic development plans have failed to recognize the global trends that have eroded the high wage, high skill opportunity bargain throughout Europe and the United States as these regions have pursued knowledge-based development.
  13. 13. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 12 The risk of Arab economies failing to effectively contest knowledge-based industries by not considering the globalization of knowledge is reminiscent of the story of Muhammad Ali’s attempt to industrialize Egypt through the establishment of a textile industry in the 1800s. In 1819, Muhammad Ali began an industrialization drive using imported foreign technicians which led to the establishment of 30 modern factories for textile manufacturing. By 1830, these factories employed 30,000 but within a decade all the factories had failed due to lack of technical skills, European competition, and increased production quality in Europe (Beinin, 1981). At the time, French and English technical superiority and lower labor and raw material costs allowed the Europeans to displace Egyptian imports to Europe. Egypt also faced skills shortages of engineers and mechanics which led to obsolescence of Egyptian textile equipment (Butterworth & Zartman, 2001). By the 1840s Egypt was relegated to a supplier of raw materials to the European textile industry and a net importer of finished textile products from Europe (Marsot, 1984).
  14. 14. Nations which have pursued economic development strategies to capitalize on offshoring have generally employed either a strategy based on the export of low-cost and high-end knowledge-based services or alternatively low-cost export- oriented manufacturing strategies. Because knowledge and business process and manufacturing outsourcing is a cost minimization strategy pursued by companies, wages in outsourced sectors face persistent compression forces from many countries which are in line to offer the lowest wages possible to secure employment for their citizens and spur economic growth. The Gulf countries, which employ many of their citizens in high wage roles in parastatals operating in knowledge-based industries, may be particularly threatened by competition from low wage knowledge workers and be subject to significant margin compression which challenges the economics of their entry into knowledge-based industries. With increasing cost competition in knowledge-based industries from emerging countries, the less resource wealthy Arab countries could feasibly follow a development trajectory grounded in selective participation in knowledge-based and manufacturing industries in which they have a cost advantage 13Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? and have or can develop quickly sufficient workforce skills to compete against emerging country rivals. However, the high wage structure of Gulf labor markets is at odds with the emergence of high skill, low cost knowledge workers in other countries and attempts by global companies to minimize costs through outsourcing. While leapfrogging into some of the more innovation-driven, high skills knowledge-based industries might be a long-term vision for Arab countries, such a development trajectory ignores the immediate need now to create jobs and provide economic opportunity for youth. Across the region there is also the risk of competitive latency in which global industry possibility frontiers are driven by an increasing array of countries which may create additional competitive gaps compared to leading edge countries and companies that go unrecognized or cannot be reached due to market failures in skills formation by the Arab countries. Schwalje (2013) provides evidence of a lack of effectiveness of Arab skills formation systems that influences Arab firms to contest lower-skilled, non-knowledge intensive industries at the detriment to regional competitiveness and knowledge-based economic development.
  15. 15. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 14 The commodification of knowledge work and Muhammad Ali’s example from Egypt are also particularly relevant for the region’s sovereign wealth funds which have a socio- economic development mandate alongside economic diversification. It remains unclear how sovereign wealth funds contribute to knowledge-based development through investments in private equities of companies and joint ventures with multinational corporations. The common strategy of holding toehold shares in international companies with few knowledge transfer mechanisms places financial returns over the indigenization of industries which can create jobs locally. This strategy also potentially erodes war chests that countries may need to address national socio-economic development challenges. The investment of sizable sums abroad with nebulous links to national economic betterment carries emerging social risks which are not priced into investment returns. This implies investment returns should be suitably impaired to accommodate the social risk of potentially neglecting the gainful employment and financial stability of citizens at home. Ensuring the socio-economic mandate and alignment of sovereign wealth funds with knowledge-based development is particularly critical with commodity market fluctuations and development of alternative energy sources which could seriously impact domestic product derived from oil and gas exports and limit state funds to meet the socio-economic exigencies. While the American opportunity bargain is more premised upon a Schumterian view of creative destruction in which technological advance associated with the emergence of knowledge-based industries is the main source of growth and incumbent firms and countries are the most likely source of these innovations, the Arab opportunity bargain relies on a modernized interpretation of creative destruction which posits that emerging markets can also be sources of knowledge-based innovation. The low levels of regional R&D and innovation led to substantial expenditures in the Nineties on critical components necessary for innovation systems, research, market-oriented R&D, and entrepreneurship such as educational systems; institutions conducting basic, applied, and interdisciplinary research; business incubators; funding institutions; and professional societies. An important question for the Arab World to answer in making investments is how much of a risk creative destruction poses for high skill, high wage job creation since continually innovating economies present both employment opportunities for workers in new industries who have the right skills as well as failed dreams for those who do not have the right skills, experience, or education.
  16. 16. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 15 Contrary to what the region’s economic development strategies suggest, the future of the Arab Dream is very much reliant not only on what happens nationally and regionally but what happens globally in terms of increased economic integration, availability of cheap highly skilled labor, rival competition for knowledge-based industries, demand for commodity exports, and the economic health of other countries.
  17. 17. 16Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? In their analysis of the structure of European labor markets, in which knowledge-based industries contribute 74% of regional gross domestic product and employ as much as 77% of the regional labor force, Goos, Manning et al. (2009) find noticeable job polarization characterized by disproportionate increases in high paid, high skilled jobs and low paid, low skill jobs alongside a decline in routine, intermediate skilled jobs. Employment polarization trends, if they accompany the transition to knowledge-based economies in the Arab World, could potentially be very troubling for regional governments particularly in light of the prevalence of companies offshoring what are currently high wage, high skill and intermediate skilled, routine service jobs. If some countries in the Arab World are unable to compete in high skill, knowledge-based industries The Full Employment Fallacy of the Arab Dream due, for example, to high wage expectations which makes it cheaper to offshore, inferior education and training systems, skills gaps and shortages, or reliance on expatriate labor that can be bid away, their economic development trajectory might lead to a high share of employment in low wage, low paid occupations which could perpetuate wage inequality and ignite embers of economic marginalization already smoldering from the Arab Spring. Arab governments are struggling to find a balance between economic interests such as productivity and industrial and global competitiveness and social interests of full employment. A key question is does full employment mean a high wage, high skill job for all citizens or any job with a sufficient salary regardless of skill level or quality. The Gulf countries which rely on relatively cheap imported labor from Arab and Asian countries to perform low skill, low wage roles may increasingly need to substitute citizens from their own countries should labor market conditions improve sufficiently in other feeder Arab and Asian countries. Better employment conditions in labor exporting countries could force Gulf countries to search farther afield for less skilled, low priced labor that may continue to constrain productivity rates. Alternatively, nationalization of low skill positions by paying above market wage rates relative to job responsibilities may still offer lower than expected levels of income and not convey sufficient social esteem. Both options would serve to undermine the viability of industries and reduce competitiveness when exposed to global competition and are reforms the population is likely to oppose. Many of the feeder countries to the Gulf states are also emergent outsourcing destinations suggesting growing opportunities in feeder countries. Wage arbitrage by offering higher wages than feeder developing countries is drying up as a strategy for sourcing labor for the low skill, low wage sectors in Arab economies. Traditional Taylorist and Fordist forms or work organization decreased the threshold of skills and training required by employees since work was organized according to a strict division of labor with work broken down into specific subtasks (Asian Development Bank, 2004). Digital Taylorism has now increased the ability of firms to outsource work globally with IT at cut-rate prices relative to performing the work at home. However, the extent to which Digital Taylorism has taken hold in the Arab World is unclear.
  18. 18. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 17 While the profit motive to reduce headcount and lower costs is understandable for profit maximizing firms, the social need to ensure full employment for citizens challenges the purely economic rationale of Digital Taylorism. In the Arab World, it is the government institutions and the government controlled companies that define the rules of the game. The small and medium sized business which make up the majority of businesses in the region are too small and fragmented to offset the power accorded to government in such an industrial structure. Due to the reliance on the public sector as a mechanism for job creation in many Arab countries, Digital Taylorism may result in a situation where functions are outsourced but government and government linked firms still maintain their staff as duplicative shadow departments with the task of managing contractors and consultants to perform the jobs they were initially hired to do. Employment in the public sector or in government linked parastatals is a infrequently spoken of postulate of the Arab opportunity bargain where overemployment can often serve as a redistributive social safety net that bails out less profitable, competitive, or budget-minded government linked firms and institutions while ensuring sufficiently high wages for their employees at the expense of more successful firms and workers and by passing on higher prices to consumers. Budgetary constraint flexibility shown to public sector institutions and parastatals allows Arab governments to deliver on the political objective of full employment. Such redistribution is facilitated by the institutional structure of Arab economies where government coalitions supporting redistribution can easily gain enough support to overcome opposition from individual businesses. It might be argued that the political objective of ensuring high wage jobs and full employment for citizens forces Arab While public sector employment offers job security and a mechanism to create full employment in the region, such income distribution policies can have important implications. When wages are not linked to productivity, they send the wrong signals for labor market allocative efficiency. governments, particularly in the Gulf countries, to be less dependent on market rationality in labor markets, profitability of parastatals, and public sector fiscal constraint. Compulsory hiring quotas at wage rates not linked to productivity are also a form of income redistribution imposed on private sector firms in the Gulf aimed at full employment. While private sector firms might be expected to resist hiring quotas which inflate salary expenses, they are unable to defend their interests other than to relocate outside the country or risk losing market access. The Great Financial Crisis has provided evidence that Arab governments are ready to adopt extreme measures to protect the full employment postulate of the Arab opportunity bargain. The regional slowdown affected several state linked firms that were additionally sidled with the social obligation of concessionary overemployment and unable to cut costs through layoffs. Motivated by such considerations as protecting the government’s reputation, economic contribution to the economy, and commitment to full employment, many of these companies received financial injections due to poor performance. In these cases, governments had a significant interest in preserving employment even at the expense of subsidizing government linked firms.
  19. 19. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 18 In the Arab World, public sector hiring was based on guarantee rather than need resulting in surplus public sector labor. Because wages, social factors, and other favorable conditions of employment offered by the public sector are considered superior to the private sector, the public sector attracts educated labor away from the private sector. Overemployment in the public sector reduces unemployment but can be accompanied by a number of negative consequences such as employee underutilization, poor discipline, moonlighting, low productivity, higher production costs, inefficiency and wastage, and a detachment between pay and performance. While some of Arab countries might be considered to have high employment levels, from the perspective of utilization of the labor force to derive economic value, they exhibit low productivity. In such a cases, full employment is not economically rational since the same or higher levels of output and productivity could be achieved with less employees. Given the likely overemployment in the public and government owned companies in many Arab countries, a more intense focus on the bottom line for public sector institutions and parastatals might lead to layoffs and unemployment which could serve as a source of tension for regional governments. The potential for tension would need to be balanced with the long-term need to compete effectively with other developing countries. For some Arab governments, the goal of full employment supersedes labor market rationality. However, it must be considered that full employment is not the same as deploying labor for the highest and best use. For example, in surveying the public sector, Al-Yahya (2008) finds evidence that formal educational qualifications are frequently not related to current jobs and a high number of public sector employees who believe their current jobs require low levels of their perceived skills and capabilities. This is evidence of underutilization and overemployment which likely affects productivity and service delivery within the public sector. Full employment that offers high wage jobs is a valuable mechanism to establish, retain, and secure political legitimacy while at the same time achieving allocative efficiency in labor markets that improve economic development and create socio-economic benefits. Full employment based on public sector job guarantees stands at odds with economically rational employment that is necessary to the development of high skill, knowledge-intensive industries.
  20. 20. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 19 In the long run, it could be cheaper to pay for several months of unemployment than to burden public and private sector firms with employees who could stall performance improvement or affect global competitiveness. The placement of released workers in the private sector may also be complicated by less generous salaries and benefits offered in the private sector due to the prioritization of profit maximization and economic interests over social interests and the critical question of whether redeployed workers would have the skills required by new employers. Controlling labor supply rates through introduction of part time employment or early retirement could also be an option. The strategy of full employment based on high concentrations of the labor force employed in the public sector relies on the maintenance of an economically irrational allocation of the labor force which would require considerable redeployment to the private sector and layoffs to reorient the Arab opportunity bargain towards knowledge- based economic development. Rationalization of overemployment in the public sector is not possible without mass layoffs. Widespread use of cash-based accounting and line item budgeting complicate things further. Governments have numerous political incentives to engineer information. Hillier (1996) explains that governments engage in creative accounting to convince citizens that deficits are under control; spending is in line with budgets; liabilities that must be met by future generations are less than they are; that past decisions justified as sound investments are still viable; and that performance has improved relative to the past. Cash based accounting places an emphasis on not spending more than what is allocated and ensuring actual expenditures for specific line items are in line with budgeted amounts. By emphasizing control over expenditures rather than results, cost based budgeting has led to public policy making that is at times disconnected with budgetary allocation, a situation that has the potential to result in overpromising politically but underfunding and under delivering in the eyes of the public.
  21. 21. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 20 Because there is less concern for spending efficiency, soft budgetary constraints have created an environment where there is little concern for total cost of output and a separation between fiduciary responsibilities and management. Soft budgetary constraints associated with political aims of full employment in the Arab World lead to bloated public sector salary expenses that can compromise the effectiveness of government institutions in serving public interests. In dealing with the aftershocks of the Arab Spring, cash based accounting systems may be a recipe for disaster. Inflated public sector salary expenses combined with unanticipated, extra budgetary expenses to introduce social and economic measures to keep citizens assuaged may strain national budgets and lead to the further degradation of government performance since institutional budgets will be crowded out by extra budgetary expenses. The desire for economic betterment has driven a major increase in educational attainment, but young Arabs are entering a crowded market that offers few opportunities and not much in the way of a social safety net if they don’t wind up on their feet. The goal of Arab governments cannot simply be full employment, the goal must be revised to economically and socially rational employment in a post awakening Arab World. The antiquated Arab dream of full employment through high wage, public sector employment has transitioned to one where the market is the ultimate arbiter of opportunity, and competition in knowledge-based industries is contingent on increasingly low wage, high skills workers who benefit from the Arab region’s competitiveness crippling income redistribution polices that lead to employee underutilization, low productivity, higher production costs, inefficiency and wastage, and a detachment between pay and performance.
  22. 22. How Arab governments respond to the broken regional opportunity bargain could make the difference between a lost generation of youth plagued by chronic unemployment and social marginalization as well as significantly impact future generations. Disaffected youth have the potential to become a perpetual thorn in the side of Arab nations as Urdal (2006) finds a relationship between youth bulges experiencing economic hardship and political violence. Discontent amongst Arab youth based on an evolving opportunity bargain that no longer promises free education, a public sector job guarantee, and state support could severely compromise ambitious economic development plans. Over the last decade, the Arab World has changed significantly. Internet use increased 27 times to 82 million users, the fastest regional growth rate in the world. The region had one of the highest growth rates of airplane carrier departures reflecting an emerging openness and integration. Regional per capita GDP adjusted for purchasing power grew at an annual rate of 4% to $8,507, with the strongest growth in the Levant and North Africa. However, with the region’s quickly growing population, this growth rate trailed all other developing regions of the world (World Bank, 2013). Although several of the Arab countries have placed amongst the fastest growing countries in the world, only 105 million, or approximately 30% of the population, are estimated as middle class with daily expenditures between $10 to $100 per day. It is estimated that the Arab World represents only 6% of the world’s middle class, and spending represents just 4% of total spending by the world’s middle class. By 2030, the middle class is expected to grow to 234 million or 44% of the Arab population, representing 5% of the world’s middle class and 4% of global middle class consumption. Securing a Viable Arab Dream The Arab Spring was a tangible reminder that securing a viable Arab Dream is a major issue of concern to regional governments. The Arab Dream must include a revised opportunity bargain which factors in how the marginalized can have access to livelihoods. 21Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? While such estimates are not exact, these figures suggest that large growth rates are slowly producing a growing middle class and eliminating rampant income inequality, but other regions like East and Southeast Asia have made huge gains compared to the Arab World (Kharas & Gertz, 2010; Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, 2008). The slow growth of the Arab World’s middle class will make it difficult to rely on consumption in the transition to knowledge- based economies. These statistics also highlight the likelihood that a large number of Arabs will continue living in the poor economic circumstances which fueled the Arab Spring if nothing is done. At the same time the Arab World is being rapidly integrated into the global economy. From 2000 to 2008 trade as a percentage of regional gross domestic product increased at a compound annual growth rate of 2.87%, with imports and exports increasing from 72% of regional gross domestic product in 2000 to 90% in 2008 (World Bank, 2013).While the region certainly gains from market access, integration also leaves the region exposed to competition from other countries.
  23. 23. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 22 Many Arab youths have invested their time and money in education, but then subsequently found that their credentials and hard work does not allow them to fulfill their dreams of gainful employment. The Arab Dream is grounded in a regional pursuit of knowledge-based economic development driven by policies that envision the emergence of high skill, high wage economies that will create jobs. However, the global availability and growth of low cost, high skill workers threatens the viability and fundamentals of sophisticated, innovation-driven knowledge-based industries taking root in the region and devalues the credentials of skilled workers. If knowledge-based industries fail to take root and lead to employment, many of reforms and money spent on higher education expansion, education quality, R&D ecosystems, and entrepreneurial growth could be deemed inappropriately spent. In such a scenario, the winners may continue to be politically connected elites while Arabs who receive inferior credentials will have lower wages and face a tenuous situation leading to wage inequality and the continuous threat of being replaced at any time by low cost, high skill workers elsewhere. Creating a new opportunity bargain requires not just benchmarking and replicating the development trajectories of wealthy, developed countries but also being aware of the vulnerability Arab economies face in an era of globalization and the emergence of high skill, low wage knowledge workers that have changed the fundamentals of knowledge-based industries.
  24. 24. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 23 While some Arab countries are more suited to competing in a high skill, low wage global economy, other Arab countries which are unable to compete in high skill, high wage knowledge-based industries will need to adequately calibrate the expectations of their citizens regarding the types of jobs which will be available in the future and the likely instability of salaries due to wage compression from competing low wage, high skill workers. Efforts to privatize education attainment so that labor market success or failure passes the burden on to individuals are prone to market failure without sufficient demand for skills from the labor market. Short term, quick fix government payouts to solve the problems with the broken Arab opportunity bargain are also likely to fail. Arab governments will have to take a hard look at the economic counsel they have received over the last two decades to judge its worth in securing the economic interests of the region. Reforms to reinvigorate the Arab Dream must challenge the assumption that more education is always the answer, reconsider the full employment promise which hampers global competitiveness, reduce wage inequality to ensure equal distribution of wealth, and determine the Arab world’s position in an global economy with emerging low cost, high skill competitors that challenge knowledge-based economic development both in the developed and developing world. While some Arab countries are more suited to competing in a high skill, low wage global economy, other Arab countries unable to compete in high skill, high wage knowledge-based industries will need to adequately calibrate the expectations of their citizens regarding the types of jobs which will be available in the future and the likely instability of salaries due to wage compression from competing low wage, high skill workers. Efforts to privatize education attainment so that labor market success or failure passes the burden on to individuals are prone to market failure without sufficient demand for skills from the labor market. Short term, quick fix government payouts to solve the problems with the broken Arab opportunity bargain are also likely to fail. Arab governments will have to take a hard look at the counsel they have received over the last two decades to judge its worth in securing the economic interests of the region. Reforms to reinvigorate the Arab Dream must challenge the assumption that more education is always the answer, reconsider the full employment promise which hampers global competitiveness, reduce wage inequality to ensure equal distribution of wealth, and determine the Arab world’s position in an global economy with emerging low cost, high skill competitors that challenge knowledge-based economic development both in the developed and developing world.
  25. 25. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 24 Adams, J. T. (1931). The Epic of America Boston: Little, Brown, and Co. Alyahya, K. (2008). The Over-Educated, Under-Utilized Arab Professional: Why Doesn’t Human Capital Development Bring Desired Outcomes? Evidence from Oman and Saudi Arabia. Dubai: Dubai School of Government. Arab Center for Research and Policy Studies. (2012). The Arab Opinion Project: The Arab Opinion Index. Doha: Arab Center for Research and Policy Studies. Asian Development Bank. (2004). Improving Technical Education and Vocational Training Strategies for Asia. Manila: Asian Development Bank. Beinin, J. (1981). Formation of the Egyptian Working Class. Middle East Research and Information Project Reports, 94, 14-23. Brown, P., Lauder, H., & Ashton, D. (2011). The Global Auction: The Broken Promises of Education, Jobs, and Incomes. New York: Oxford University Press. Butterworth, C., & Zartman, W. (2001). Between the State and Islam. Washington, DC: Woodrow Wilson International Center for Scholars. Goos, M., Manning, A., & Salomons, A. (2009). Job Polarization in Europe. American Economic Review, 99, 58-63. Hanson, S., & Zogby, J. (2010). Attitudes About the American Dream. Public Opinion Quarterly, 74(3), 570–584. Hillier, D. (1996). Perspectives on Accrual Accounting Occasional Paper 3: International Federation of Accountants. References Kharas, H., & Gertz, G. (2010). China’s Emerging Middle Class: Beyond Economic Transformation. In C. Li (Ed.), The New Global Middle Class: A Cross-Over from West to East Washington, DC: Brookings Institution Press. Marsot, A. L. A.-S. (1984). Egypt in the Reign of Muhammad Ali. New York: Cambridge University Press. MetLife Study of the American Dream. (2011). The 2011 MetLife Study of the American Dream. Ney York. Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat. (2008). World Population Prospects: The 2008 Revision. Retrieved February 22, 2011, from Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, http://esa.un.org/unpp Schwalje, W. (2013). Knowledge-based Economic Development as a Unifying Vision in a Post-awakening Arab World. International Journal of Human Resources Development and Management, Forthcoming. Silatech. (2010). The Silatech Index: Voices of Young Arabs. Doha: Silatech Streeck, W., & Thelen, K. (Eds.). (2005). Beyond Continuity: Institutional Change in Advanced Political Economies. Oxford: Oxford University Press. World Bank. (2013). World Development Indicators. Retrieved March 1, 2013, from World Bank http://data.worldbank.org/ World Bank Development Institute. (2009). Tunis Declaration On Building Knowledge Economies. Tunis: World Bank Development Institute Retrieved from http://info.worldbank.org/etools/docs/library/252535/TunisKEDeclaration.p df.
  26. 26. Have Questions? For more information contact Wes Schwalje, Chief Operating Officer wes.schwalje@tahseen.ae Tahseen Blog Join our group on LinkedIn Find us on Facebook Follow us on Twitter View our presentations on Slideshare Engage With Us on Social Media

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