75660 . February 2013 Number 83 TRANSFORMING ARAB ECONOMIES: THE KNOWLEDGE AND INNOVATION ROAD Anuja Utz, Jean-Eric Aubert1 unemployed, approximately 40 million jobs must be created over the next decade. Introduction: Knowledge has always been central to development. A thousand years ago the Arab Figure 1. Youth unemployment rates by region civilization led the world in knowledge, prosperity, and development. Arab science and technology, as well as free trade and tolerance for all religions, were key to this development. It is time to restore these knowledge-based traditions to the Middle East and North Africa (MENA) region. Why embark on a knowledge- and innovation-based growth strategy? Unemployment is incontestably the main challenge facing Arab countries. The MENA region is characterized by a disproportionate share of Source: World Bank forthcoming 2013. young people, and suffers from the world’s highest rate of youth unemployment. At 20–25 Globalization, Technological Change, and percent, this rate is twice the global average Competitiveness: The twin forces of (figure 1). It is estimated that more than 10 globalization and technological progress million young people enter the labor market provide countries with new opportunities for annually, but three out of four working age economic development. Thanks to the women do not participate in the labor force. It development of the Internet and a variety of is estimated that to accommodate the new information and communication technologies (ICT), knowledge is now truly global, accessible, and utterly democratic. 1 Anuja Utz is a Senior Operations Officer at the Center for Along with this dramatic technological change Mediterranean Integration (CMI). Jean-Eric Aubert is has come a globalization of economies, with Consultant (CMI). This Quick Note was cleared by Mats intensified competition and the emergence of Karlsson, Director, MNCMI. It is based on Transforming Arab Economies: The Knowledge and Innovation Road , more-sophisticated value chains in production Prepared by the Center for Mediterranean Integration, with processes. the European Investment Bank and the Islamic Educational, Social, and Cultural Organization. Marseille and A knowledge economy, as observed by the Washington, DC. Organization for Economic Cooperation and The Center for Mediterranean Integration (CMI) is a multi- Development (1996)2 and as defined by the partner cooperative arrangement to facilitate access to advanced knowledge and best practices while generating 2 support among public and independent institutions to As observed by the Organisation for Economic increase cooperation, enhance sustainable development, Cooperation and Development in 1996, ―OECD economies and integrate policies in the Mediterranean region. More are increasingly based on knowledge and information. information is available at: www.cmimarseille.org. Knowledge is now recognized as the driver of productivity World Bank (2007), is one in which knowledge and improving governance are the needs of the is acquired, created, disseminated, and applied hour, but new governments in the region will to enhance economic development. Making the also have to deliver growth and jobs —quickly, move to a knowledge-economy involves more before disillusioned populations are driven to than developing high technology industries, revolt once again. Although the oil exporters investing in ICTs, or acquiring new seem to have weathered the storm a little better, technologies for use in a narrow fringe of the their regimes must act quickly too and do more economy. It involves a more systemic change in to diversify their economies beyond reliance on the overall functioning of an economy in which natural resources. The era when natural knowledge (both new and existing) and resources dominated trade has given way to an innovation (development and era where knowledge resources are paramount. commercialization of products and processes that are new to the firm, the market, or to the More generally, the Arab world is currently world) penetrate all sectors of economic undergoing a transition on three fronts: (i) a activity. In so doing, it increases productivity political transition, which seeks to replace and generates new goods and services. authoritarian powers with more democratic ones; (ii) a social transition in which equitable The impacts of this paradigm shift are all around us. programs to protect the poor will substitute for We witness countries—small ones such as inefficient policies promoting public sector- Finland and Singapore, medium-sized ones based employment and the subsidization of such as the Republic of Korea, and large ones basic goods; and (iii) an economic transition in such as China and India—that are able to favor of more competitive and productive harness the power of technical change, compete economic regimes. The three transitions are in the global economy, and nurture their intimately interrelated and mutually increasingly skilled populations. Others that reinforcing (figure 2). fail to acquire, adapt, and use new technologies to upgrade their knowledge capabilities, and Figure 2 - A triple transition in the Arab world express their creative talents are doomed to decline. Across the globe, far-sighted leaders are searching for new ideas and strategies to deal with a changed reality. A new paradigm of growth for the Arab World: The Arab Spring has shown that countries in the Arab world can no longer rely on narrow, statist paradigms of growth. In the southern Mediterranean, years of autocratic rule, characterized by harsh suppression of political freedoms, lack of justice, and crony capitalism, have been rejected by widespread popular movements for change in a number of countries. The challenge for these countries is to put in place a system that is free, just, inclusive, creative, and dynamic. Restoring confidence The report: Transforming Arab Economies: The Knowledge and Innovation Road focuses on the and economic growth, leading to a new focus on the role of economic side of this transition. On which areas information, technology and learning in economic must leaders of the Arab countries3 concentrate performance. The term ―knowledge-based economy‖ stems from this fuller recognition of the place of knowledge and technology in modern OECD economies.‖ See also World 3 This study covers all Arab countries, with the exception Bank (2007). of Comoros, Mauritania, Somalia, and Sudan. Reference is February 2013 · Number 83· 2 in order to stimulate growth, create jobs, restore help to significantly generate the jobs needed to trust, and provide a measure of hope and keep people, particularly young people, prosperity for their people? This is a humble productively employed. effort to try and answer some of these questions in an integrative framework that puts Message 2: Traveling the knowledge economy road knowledge and innovation-related policies at means expanding and deepening reforms in key center stage. policy pillars: developing more open and entrepreneurial economies, preparing a better- The incorporation of knowledge and educated and highly skilled population, improving innovation, understood as technologies and innovation and research capabilities, and expanding practices that are new in a given context, is key information and communication technologies and to boosting competitiveness and overall their applications. The success of a knowledge- productivity. Putting this type of approach to economy strategy depends on coordinated work in any country requires a vision, a progress on these key policy fronts. strategy that articulates that vision, and the Governments across the region would do well participation and coordination of multiple to pursue these types of reforms government departments, private sector and simultaneously. civil society stakeholders, and, in many Message 3: In addition to nationwide actions and countries, various development partners.4 reforms, governments should make focused efforts to establish appropriate conditions for the development The report addresses three key questions: of specific sectors and sites that are sources of new Why? What? How? Why should countries in activities and jobs. There are many opportunities the Arab world make the move to a knowledge- in Arab countries for sectoral and spatial and innovation-driven economy? What would diversification. The development of dynamic that move entail? And how should it be carried ―growth spots‖ would help to create trust and out? In response to these questions, the report confidence in the new economic model, thus provides general policy principles, which are facilitating the overall process of change and illustrated by good policy practices mostly reform. derived from the region. Message 4: The implementation of a knowledge- Main Messages: and innovation-based development strategy requires a vision, strong coordination at the top level of the Message 1: To cope with daunting challenges, government, and a participatory approach to particularly the need to create millions of jobs, the mobilize the population to back the needed reforms. countries of the Arab world should resolutely Strong coordination at the highest level of embrace an economic growth model based on government is necessary because of the cross- knowledge and innovation, following a global move cutting, inter-ministerial nature of such a toward the “knowledge economy.� Over the past strategy. A participatory approach is needed to decade, some Arab countries have already catalyze the ideas, energy, interests, and taken steps toward the knowledge economy to resources of change agents and of the spur growth and improve global population as a whole around this approach. competitiveness. Such efforts should be Sustained strategic efforts are needed to obtain intensified throughout the region. These would tangible outcomes and to anchor the new practices so that they will endure over the often made to the Middle East and North Africa (MENA) as medium- to long-term. a geographic region. The MENA region within the World Bank is made up of Algeria, Bahrain, Djibouti, Egypt, Iran, Message 5: Active regional integration processes Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Malta, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, within the Arab world and around the United Arab Emirates, West Bank and Gaza, and Yemen. Mediterranean would help to speed up the needed 4 The proposed approach encapsulates a set of policy evolutions. Regional integration processes are orientations that have been provided by the World Bank in crucial to expand trade, develop efficient labor a series of important reports related to jobs, education, markets, and benefit from the synergies in private sector development, and information and investments and skills that are vital for communication technologies (see reference list). February 2013 · Number 83· 3 successful projects. There are considerable ———. Forthcoming 2013b. Jobs for Shared opportunities within the Euro-Mediterranean Prosperity: Time for Action in the Middle context to spur collaborative networks, as East and North Africa. Washington, DC. through joint R&D platforms, innovation support funds, education programs, and Contact MNA K&L: diaspora mobilization. International Gerard Byam, Director, Strategy and Operations. organizations and bilateral agreements have a MENA Region, The World Bank key role to play in supporting the integration process. Regional Quick Notes Team: Omer Karasapan, and Roby Fields Tel #: (202) 473 8177 Key References The MNA Quick Notes are intended to summarize lessons learned from MNA and other Bank Knowledge Bell, Simon C. 2011. ―iMENA: An Innovation and Learning activities. The Notes do not necessarily Agenda for Jobs.‖ MNA Knowledge reflect the views of the World Bank, its board or its and Learning Fast Brief 89, World member countries. Bank, Washington, DC. Kelly, Tim, and Carlo Maria Rossotto (eds.). 2012. Broadband Strategies Handbook. Washington, DC: World Bank. OECD (Organisation for Economic Co- operation and Development). 1996. The Knowledge-Based Economy. Paris. World Bank. 2007. Building Knowledge Economies: Advanced Strategies for Development. Washington, DC. ———. 2008. The Road Not Traveled: Education Reform in the Middle East and North Africa. Washington, DC. ———. 2009. From Privilege to Competition: Unlocking Private-Led Growth in the Middle East and North Africa. Washington, DC. ———. 2010. Innovation Policy: A Guide for Developing Countries. Washington, DC. ———. 2012a. ―Knowledge Assessment Methodology 2012.‖ Washington, DC. www.worldbank.org/kam ———. 2012b. World Development Report 2013: Jobs. Washington, DC. ———. Forthcoming 2013a. Transforming Arab Economies: The Knowledge and Innovation Road. Prepared by the Center for Mediterranean Integration, with the European Investment Bank and the Islamic Educational, Social, and Cultural Organization. Marseille and Washington, DC. February 2013 · Number 83· 4