82736 v2 Transforming Arab Economies: Traveling the Knowledge and Innovation Road �OVERVIEW Transforming Arab Economies Transforming Arab Economies: Traveling the Knowledge and Innovation Road A note to the reader Transforming Arab Economies: Traveling the Knowledge and Innovation Road was prepared by the Center for Mediterranean Integration (CMI) with the World Bank, the European Investment Bank (EIB), and the Islamic Educational, Scientific, and Cultural Organization (ISESCO). A longer version of the study is available on the CMI website: www.cmimarseille.org/ke. The full report includes individual chapters organized into three main parts. Part 1 presents the rationale and approach for the transition to the knowledge- and innovation-driven economy. Part 2 describes the policies to be implemented in key areas of the knowledge economy: gover- nance, education, innovation, and information and communication technology. Part 3 discusses economic diversification initiatives that can help countries make the most of their knowledge-economy investments. © 2013 International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone: +1 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in the work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other informa- tion shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. 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CMI Production: Loraine Falconetti Graphic design: Emmanuelle Dezanet for Dynamic Creative, France Transforming Arab Economies: Traveling the Knowledge and Innovation Road ontents Foreword ................................................................................................................................................. vii Acknowledgments ................................................................................................................................... viii Acronyms and abbreviations ................................................................................................................... x Main messages ........................................................................................................................................ xi Introduction: Back to fundamentals ........................................................................................................ 1 Part 1 Why embark on a growth strategy based on knowledge and innovation? ..................................... 3 The Arab world faces daunting challenges, chiefly unemployment ................................................................................................................ 4 Countries throughout the world are moving toward knowledge-based growth strategies ........................................................... 5 The Arab world trails other regions in knowledge-economy efforts .............................................................................................................. 7 enhanced knowledge-economy efforts would significantly contribute to job creation ..................................................................... 12 Part 2 What to do to build a knowledge- and innovation-driven economy ............................................... 17 Policy pillars .............................................................................................................................................................................................................................................. 18 Enact business-friendly reforms and improve governance ................................................................................................................................ 18 Provide more and better education ......................................................................................................................................................................................... 20 Stimulate technological innovation and upgrading .................................................................................................................................................... 23 Develop an information society ................................................................................................................................. 26 Diversification initiatives ........................................................................................................................................... 29 Facilitate the development of promising sectors ........................................................................................................................................................ 29 Develop dynamic sites and locales .......................................................................................................................................................................................... 31 Part 3 How to implement a knowledge- and innovation-driven strategy ................................................. 33 each country is unique and must chart its own path .................................................................................................................................................... 34 Move with ambition ............................................................................................................................................................................................................................... 35 Coordinate policies at the highest level of government ............................................................................................................................................ 36 Mobilize the population through a participatory approach ..................................................................................................................................... 37 Adapt the model to the country’s development level and government capabilities ............................................................................ 38 engineer change from micro initiatives to macro changes .................................................................................................................................... 39 Stimulate regional integration within the Arab world and around the Mediterranean ..................................................................... 40 References and bibliography ................................................................................................................... 43 Appendix 1 Outline of the full report ........................................................................................................ 45 Appendix 2 Knowledge, innovation, and economic growth ...................................................................... 49 Appendix 3 Data on the knowledge economy in the Arab world .............................................................. 53 Iv List of boxes Box 1. Knowledge: The key to productivity and innovation ....................................................................................................................................... 5 Box 2. How is a country’s preparedness for the knowledge economy measured? .............................................................................. 6 Box 3. A road partly traveled: The countries of the Middle East and North Africa and the knowledge economy to date 8 Box 4. Jordan’s Education Reform for the Knowledge Economy (ERfKE) program ............................................................................ 22 Box 5. Connecting education and employment .................................................................................................................................................................. 23 Box 6. Kafalat, a Lebanese institution providing venture finance ....................................................................................................................... 25 Box 7. Promoting collaborative R&D projects between universities and industry in Egypt .......................................................... 25 Box 8. YESSER and effective e-government in Saudi Arabia .................................................................................................................................. 28 Box 9. Engineering sectoral and spatial diversification: The Moroccan example ................................................................................. 30 Box 10. The job-efficiency ratio: How many jobs will €1 million bring? ........................................................................................................... 30 Box 11. The path followed by the knowledge-economy success stories ......................................................................................................... 35 Box 12. Key coordinating bodies for knowledge- and innovation-driven development strategies: Republic of Korea and Finland ..................................................................................................................................................................................................................................... 36 Box 13. The Nabni 2012 Initiative: 100 measures for a new Algeria suggested by the diaspora .................................................. 37 Box 14. The Center for Mediterranean Integration ............................................................................................................................................................ 42 List of figures Figure 1. A triple transition in the Arab world ........................................................................................................................................................................... 1 Figure 2. Youth unemployment rates by region, ages 15–24, 2008 .......................................................................................................................... 4 Figure 3. Rates of female participation in the labor force, by region, 2008 ....................................................................................................... 4 Figure 4. Strong links between knowledge and growth .................................................................................................................................................... 7 Figure 5. Regional scores on the KEI, 2012 ................................................................................................................................................................................. 9 Figure 6. Country scores on the KEI, 2000 and 2012 ............................................................................................................................................................ 9 Figure 7. Country rankings on the GCI, 2010–11 and 2012–13 ..................................................................................................................................... 10 Figure 8. Country performance on the 2012 KEI plotted against the 2011–12 GCI ...................................................................................... 10 Figure 9. Performance on the KEI and EIR index for MENA and other regions and country groups, 2009 ............................. 11 Figure 10. Estimating the employment effects of knowledge ......................................................................................................................................... 12 Figure 11. Elasticity of employment to the KEI in MENA countries, 1995–2008 ............................................................................................... 13 Figure 12. Share of firms identifying lack of skills as a business constraint ...................................................................................................... 15 Figure 13. Employment in the public sector in MENA and selected countries, averages during the 2000s .............................. 15 Figure 14. The knowledge and innovation policy system .................................................................................................................................................... 18 Figure 15. Constraints to doing business in the Arab world ............................................................................................................................................. 19 Figure 16. Average firm entry density for selected emerging economies, 2004–09 ..................................................................................... 19 Figure 17. Secondary and tertiary gross enrollment rates, by world region, 1990 and 2010 ................................................................ 20 Figure 18. Quality of education as measured by TIMSS, 2011 ......................................................................................................................................... 21 Figure 19. The Skills Toward Employment and Productivity (STEP) approach ................................................................................................. 21 Figure 20. Gross R&D expenditures as percentage of GDP for selected Arab countries and comparators ............................. 23 Figure 21. Resident vs. nonresident patent applications (annual average 2000–10) .................................................................................... 24 Transforming Arab Economies v Figure 22. Export shares from MENA, by technology category, 2005–09 .............................................................................................................. 24 Figure 23. Innovation policy positioning ............................................................................................................................................................................................ 24 Figure 24. Mobile subscriptions in MENA countries, 2011 ................................................................................................................................................. 26 Figure 25. Rankings of MENA countries on the NRI for 2010–11 and 2012 .......................................................................................................... 27 Figure 26. Internet users in MENA countries, 2011 ................................................................................................................................................................. 27 Figure 27. Comparison of mobile and broadband penetration in MENA and OECD ...................................................................................... 28 Figure 28. Development of El Gazala Technopole (Tunis): Number and distribution of employees, 2010 .................................. 31 Figure 29. A pragmatic agenda: From micro reforms to major changes .............................................................................................................. 39 List of tables Table 1. Four pillars of knowledge-economy strategies ................................................................................................................................................ 5 Table 2. Employment growth rates in Arab countries, 2000–09 ............................................................................................................................... 13 Table 3. Actions needed to promote growth in new and established sectors ............................................................................................... 29 Table 4. Actions needed to build innovative and dynamic sites ................................................................................................................................ 32 Table 5. The heterogeneity of countries in the MENA region ..................................................................................................................................... 34 Table 6. Appropriate policy measures for countries at various stages of advancement toward a knowledge economy 38 Table 7. Areas for improvement and selected actions to advance Mediterranean integration ...................................................... 41 vI Foreword oreword Recent events in the Arab world have shown the vital importance for countries to engage in continuous, broad-based, and inclusive development. The main challenge in the Middle East and North Africa today is to create more and better jobs. Vast numbers of unemployed or underemployed youth, male and female, now expect concrete national and regional transformation through the rapid creation of decent jobs. If the aspirations and creative forces of Arab youth can be put to work, then the region’s potential for growth, stability, social justice, and human fulfillment will be enormous. The extent of change will depend in good part on how well the knowledge economy takes hold throughout the region. Creating jobs entails more investment in knowledge-related sectors and new emphasis on how to develop competitive, productive, and sustainable economies. Countries in the region must take advantage of the ongoing knowledge revolu- tion to develop economies that are agile, networked, and constantly learning. The private sector must be enlisted to help build an entrepreneurial culture and create needed jobs. Such an approach is essential to cope with unemployment and pave the way for sustain- able growth and economic development. Transforming Arab Economies: Traveling the Knowledge and Innovation Road places a knowledge- and innovation-driven model at the heart of new development strategies in the region. It highlights how the knowledge and innovation approach can help Arab countries diversify their economies and innovate, creating new enterprises and jobs. The study places these issues in a suggested integrative framework that includes developing more open and entrepreneurial economies, preparing a better-educated and highly skilled population, improving innovation and research capabilities, and expanding information and communication technologies and their applications. It exhorts policy makers to adopt new policy agendas and a new type of open mindset that can lead to the creation of more jobs of higher value in a rapidly connected and globalized world. Given the diversity of the Arab world, the study does not provide a cookie-cutter approach but rather offers examples from within the region, as well as from countries from Finland to Korea that have put in place effective strategies to maximize the use of knowledge, innovation, and technology. Patience and determination will be required, because the fruits of investments in knowledge may not begin to appear for a few years. Putting this type of approach to work in any country requires a vision and strategy on the part of each country in the region. Fostering greater integration within the Arab world and around the Mediterranean would be a key booster for this approach. This is where the Center for Mediterranean Integration can add value. CMI is a place for dialogue, a place where all stakeholders—from governments, academia, the private sector, and civil society—can engage in open exchange on how to make an effective transition to the knowledge economy. Given the events of the Arab Spring, there is no time to lose and no reason for com- placency. Countries need to be pragmatic and to take advantage of opportunities as and when they arise. I hope that this report can be useful in providing insights into how countries in the Arab world can develop strategies that are adapted to the challenges and opportunities of our time. Mats Karlsson, Director, Center for Mediterranean Integration Transforming Arab Economies vII Acknowledgments cknowledgments Transforming Arab Economies: Traveling the Knowledge and Innovation Road was pre- pared by a multipartner team led by Anuja Utz (task team leader) and Jean-Eric Aubert (senior consultant), with assistance from Latifa Belarbi, Sophie Muller, and Tamer El Sayed Taha, and with guidance and supervision from Mats Karlsson, director of the Center for Mediterranean Integration (CMI). It was developed with the World Bank, the European Investment Bank (EIB), and the Islamic Educational, Scientific, and Cultural Organization (ISESCO). This document is a condensed version of the full report, which is summarized in appendix 1. The full report will be available on the CMI website (www. cmimarseille.org/ke). The team benefited from the valuable support of Simon Bell (sector manager, Financial and Private Sector Development, World Bank), Mourad Ezzine (sector manager, Human Development, World Bank), Jacques van der Meer (advisor, EIB), and Dr. Mukhtar Ahmed (former deputy director general, ISESCO). The following World Bank staff members authored first drafts of various chapters of the full report: Jean-Eric Aubert, Latifa Belarbi, Derek H. C. Chen, Ndiamé Diop, Marjo Koivisto, Yevgeny Kuznetsov, Samia Melhem, Sophie Muller, Kurt Larsen, Ismail Radwan, Pierre Strauss, Tamer Taha, Anuja Utz, and Zeine Ould Zeidane. Particular mention should be made to other contributors who prepared insightful background reports—namely, Carl Dahlman (Georgetown University); Benedict de Saint Laurent (ANIMA), Abdelkader Djeflat (University of Lille); Patrick Dubarle, Laila El Saedy, Guy Fleuret, Philippe Guinet, Jussi Hätönen, Kristian Uppenberg, and Jacques van der Meer (EIB); and Flavia Tsang, Ohid Yaqub, Desiree Van Welsum, Tony Thompson-Starkey, and Joanna Chataway (Rand Europe). The overall orientation of the work and the drafts were shaped by two regional work- shops for participants from Algeria, Egypt, Jordan, Lebanon, Morocco, and Tunisia, held at CMI in November 2011 and at ISESCO headquarters in Rabat in June 2012, as well as through country consultations and participation in other events in the region. Maha Merezak (ISESCO) was particularly helpful in organizing these events and in consolidating related contributions. The team would like to thank the following individuals for provid- ing useful inputs: Nabeel Al-Fayoumi (Royal Scientific Society, Jordan), Youcef Aklouf (National Agency for the Promotion and Development of Technology Parks, Algeria), Rigas Arvanitis (Institut de Recherche pour le Développement), Ahmed Benghazi (Axis Capital, Inc., Tunisia), Rachid Benmokhtar (National Observatory of Human Development, Morocco), Shéhérazade Berrehouma (Union Tunisienne de l’industrie, du commerce et de l’artisanat, UTICA), Fadi Daou (MultiLane Inc., Lebanon), Pavel Dvorak and Constantinos Shiatis (European Bank for Reconstruction and Development, EBRD), Ghaith Fariz (UNDP Arab Knowledge Report), Hamid El-Zoheiry (Ministry of Higher Education and Scientific vIII Acknowledgments Research, Egypt), Jean-Louis Reiffers (Forum Euroméditerranéen des Instituts de Sciences Économiques), Henry Roux-Alezais (Institut de la Méditerranée), Amir Wassef (Egypt-Japan University of Science and Technology), and Cheonsik Woo (Korea Development Institute). Carlos Braga (World Bank) and Carl Dahlman (Georgetown University) served as peer reviewers of the concept note, about which valuable comments were also received from Caroline Freund, Jonathan Walters, Janette Uhlmann, and Carlo M. Rossotto (all from the World Bank). The draft report was reviewed at the World Bank in October 2012. Peer reviewers included Jamal al-Kibbi and Robin S. Horn. Helpful comments were received from Caroline Freund, Bob Rijkers, Kevin Carey, Omer Karasapan, Randa Akeel, Peter McConaghy, Hnin Hnin Pyne, Kurt Larsen, Pinki Chaudhri, Carlo M. Rossotto, Cecilia M. Paradi-Guilford, Joulan Abdoul-Khalek, Isabelle Huynh, Murat Seker, Esperanza Lasagabaster (all from the World Bank), and Bruno Lanvin (INSEAD). Useful contributions were received throughout the drafting process from Adriana Jaramillo, Olivier Lavinal, Juan Manuel Moreno, Eavan O’Halloran, Gilles Pipien, Najet Tenoutit, Simon Thacker, and Jeffrey Waite (all from the World Bank), and Thomas Andersson (International Organisation for Knowledge Economy and Enterprise Development). Members of CMI’s Oversight Committee—Nawel Ben Romdhane Dhrif (Ministry of Investment and International Cooperation, Tunisia), Mohamed Chafiki (Ministry of Economy and Finance, Morocco), and Mahmoud El-Said (Centre for Project Evaluation and Macroeconomic Analysis, Egypt)—provided helpful guidance and substantive com- ments throughout the drafting process. This report was enhanced by work performed in connection with the Deauville Partnership report on trade and foreign direct investment, which was coordinated by CMI, and by information gathered at the “Transition to Transition” workshops organized by CMI and EBRD in Morocco and Tunisia. It was also discussed at high-level events held at CMI in October and December, 2012, as part of CMI’s “Rencontres Valmer” series. Finally, we would like to acknowledge the contribution of ISESCO to this work, especially for supporting the organization of country consultations in Morocco and Tunisia, as well as for hosting a high-level conference to disseminate the report’s main messages. We also thank ISESCO for their support for the production of three language versions (Arabic, English, and French) of the condensed report, and for the translation of the full report into French. Steven B. Kennedy edited the report, and Michelle Lemaire provided vital adminis- trative support. Transforming Arab Economies IX Acronyms and abbreviations cronyms and abbreviations BPO business-process outsourcing ECA Europe and Central Asia EFE Education for Employment project ERfKE Education Reform for the Knowledge Economy (Jordan) EU European Union FDI foreign direct investment GCC Gulf Cooperation Council GCI Global Competitiveness Index GDP gross domestic product ICT information and communication technology ITES information technology–enabled services KAM Knowledge Assessment Methodology KEI Knowledge Economy Index LAC Latin America and the Caribbean MENA Middle East and North Africa MKE Ministry of Knowledge Economy (Republic of Korea) OECD Organisation for Economic Co-operation and Development R&D research and development SME small and medium-size enterprise TFP total factor productivity TVET technical and vocational education and training USAID U.S. Agency for International Development USPTO U.S. Patent and Trademark Office WEF World Economic Forum X Main messages ain messages Message 1. To cope with daunting challenges, particularly the need to create millions of good jobs, the countries of the Arab world should resolutely embrace an economic growth model based on knowledge and innovation, following a global move toward the “knowledge economy.” Over the past decade, some Arab countries have already taken steps toward the knowledge economy to spur growth and improve global com- petitiveness. Such efforts should be intensified throughout the region. These would help to significantly generate the large number of jobs needed to keep people, particularly young people, productively engaged in society. Message 2. Traveling the knowledge economy road means expanding and deepening reforms in key policy areas: developing more open and entrepreneurial economies, preparing a better-educated and more skilled population, improving innovation and research capabilities, and expanding information and communication technologies and their applications. The success of a knowledge-economy strategy depends on coordinated progress on these key policy fronts. Governments across the region would do well to pursue these types of reforms simultaneously. Message 3. In addition to nationwide actions and reforms, governments should make focused efforts to establish appropriate conditions for the development of specific sectors and sites that are sources of new activities and jobs. There are many oppor- tunities in Arab countries for sectoral and spatial diversification. The development of dynamic “growth spots” would help to create trust and confidence in the new economic model, thus facilitating the overall process of change and reform. Message 4. The implementation of a knowledge- and innovation-based development strategy requires a vision, strong coordination at the top level of government, and a participatory approach to mobilize the population to back the needed reforms. Strong coordination at the highest level of government is necessary because of the cross-cutting, interministerial nature of such a strategy. A participatory approach is needed to catalyze the ideas, energy, interests, and resources of change agents and of the population as a whole around this approach. Sustained strategic efforts are needed to obtain tangible outcomes and to anchor the new practices so that they will endure over the medium to long term. Message 5. Active regional integration processes within the Arab world and around the Mediterranean would help to speed up the needed evolutions. Regional integration processes are crucial to expand trade, develop efficient labor markets, and benefit from the synergies in investments and skills that are vital for successful projects. There are considerable opportunities within the Euro-Mediterranean context to spur collaborative networks, as through joint research and development platforms, innovation support funds, education programs, and diaspora mobilization. International organizations and bilateral agreements have a key role to play in supporting the integration process. Transforming Arab Economies XI Introduction ntroduction: Back to fundamentals Knowledge has always been central to development. A thou- This report focuses on the economic side of this transition.1 sand years ago the Arab civilization led the world in knowledge, On which areas must leaders of the Arab countries concentrate prosperity, and development. Arab science and technology, as in order to stimulate growth, create jobs, restore trust, and well as free trade and tolerance for all religions, were key to provide a measure of hope and prosperity for their people? this development. It is time to restore these knowledge-based This report is a modest attempt to answer some of these ques- traditions to the Middle East and North Africa. tions in an integrative framework that puts knowledge- and innovation-related policies at center stage. The incorporation The twin forces of globalization and technological progress of knowledge and innovation, understood as technologies and provide countries with new opportunities for economic practices that are new in a given context, is key to boosting development. Thanks to the development of the Internet and competitiveness and overall productivity. Putting this type of a variety of new information and communication technolo- approach to work in any country requires a vision, a strategy gies, knowledge is now truly global, accessible, and utterly that articulates that vision, and the participation and coordi- democratic. Along with this dramatic technological change has nation of multiple government departments, private sector come a globalization of economies, with intensified competi- and civil society stakeholders, and, in many countries, various tion and the emergence of more-sophisticated value chains development partners.2 in production processes. The impacts of this paradigm shift are all around us. Across the globe, farsighted leaders are FIgURe 1 searching for new ideas and strategies to deal with a changed A triple transition in the Arab world reality. We witness countries—small ones such as Finland and Singapore, medium-sized ones such as the Republic of Korea, and large ones such as China and India—that are able to harness the power of technical change, compete in the global economy, and nurture their increasingly skilled populations. 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 char- acterized by the suppression of political freedoms and justice and by crony capitalism have been rejected by popular move- ments 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 and improving governance are the needs of the hour, but new governments in the region will also have to deliver growth and jobs—quickly, before disillusioned populations are driven to revolt once again. Although the oil exporters seem to have weathered the storm a little better, their regimes must act quickly, too, and do more to diversify their economies beyond reliance on natural resources. The era when natural resources dominated trade has given way to an era in which knowledge resources are paramount. More generally, the Arab world is currently undergoing a This report addresses three key questions: Why? What? How? transition on three fronts: (i) a political transition, which seeks Why should countries in the Arab world make the move to a to replace authoritarian powers with more democratic ones; knowledge- and innovation-driven economy? What would that (ii) a social transition in which equitable programs to protect the move entail? And how should it be carried out? In response to poor will take the place of inefficient policies promoting public these questions, the report provides general policy principles; sector-based employment and the subsidization of basic goods; these are illustrated by good policy practices mostly derived and (iii) an economic transition in favor of more competitive from the region, but also from countries around the world that and productive economic regimes. The three transitions are have upgraded their knowledge capabilities and unleashed intimately related and mutually reinforcing (figure 1). their creative talent. 1. The study covers all Arab countries, with the exception of Comoros, Mauritania, Somalia, and Sudan. Reference is often made to the Middle East and North Africa (MENA) as a geographic region. The MENA region within the World Bank is made up of Algeria, Bahrain, Djibouti, the Arab Republic of Egypt, the Islamic Republic of Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Malta, Morocco, Oman, Qatar, Saudi Arabia, the Syrian Arab Republic, Tunisia, United Arab Emirates, West Bank and Gaza, and the Republic of Yemen. The full version of this study (World Bank 2013) is summarized in appendix 1 and will be available for download at www. cmimarseille.org/ke. 2. This proposed approach encapsulates a set of policy orientations that have been provided by the World Bank in a series of important reports related to jobs, education, private sector development, and information and communication technologies (see reference list for World Bank publications over the past years), as well as by a host of other organizations. 1 Transforming Arab Economies 1 Why embark on a growth strategy based on knowledge and innovation? In this chapter °± The Arab world faces daunting challenges, chiefly unemployment °±  ountries throughout the world are moving toward knowledge-based C growth strategies °± The Arab world trails other regions in knowledge-economy efforts °± E  nhanced knowledge-economy efforts would significantly contribute to job creation Transforming Arab Economies 3 PART 1. Why embark on a growth strategy based on knowledge and innovation? In addition to the jobs imperative, Arab countries face a The Arab world faces host of challenges: • Inadequate ­ social protection policies exacerbate inequali- daunting challenges, ties. In most countries, two out of three people in the poorest quintile do not receive income support. Social protection chiefly unemployment systems have frayed under the strain of poor resource- management systems. The average MENA country spends 5.7 percent of gross domestic product (GDP) on food and Unemployment is incontestably the main challenge facing fuel subsidies. However, in some countries, the people in Arab countries. The Middle East and North Africa (MENA) the richest quintile benefit more from the subsidies than do region has a disproportionately large share of young people those in the poorest quintiles. Gaps in coverage also leave and suffers from the world’s highest rate of youth unemploy- informal and rural workers without protection. ment. At 20–25 percent, the rate is twice the global average ­ • Food security remains an important concern for the (figure 2), and it reaches 40 percent in Egypt and Tunisia, notably poorest households of the region. Cereal productivity is among those with tertiary education. More than 100 million approximately half that of the rest of the world (1.5 versus people are between the ages of 15 and 29, making up 30 percent 3 metric tons per hectare). Yet 40–60 percent of irrigated of the region’s total population and about 47 percent of the land is dedicated to growing cereals. The region imports working-age population. More than 10 million young people 30 percent of the world’s traded wheat, a figure that is enter the labor market annually, but three out of four working- expected to rise to 55 percent in 2030, making the region age women do not participate in the labor force (figure 3). It is particularly vulnerable to rising food prices. estimated that to accommodate these young people and prevent • Urbanization ­ will pose additional social challenges. Already a further rise in unemployment in the region, approximately 58 percent of the population resides in urban areas, and 40 million jobs must be created over the next decade. that figure is expected to rise to 65 percent by 2030. The The job deficit is the consequence of inefficient economic issue is how to manage the growth-enhancing benefits of systems, many of which are still in place, although change is agglomeration while minimizing environmental damage in the air. The shortage of jobs is a function of multiple factors, and threats to public health from pollution, poor sanitation, ranging from the performance of the educational system to the and other causes. It is also about how to prevent unplanned configuration of the private sector and the overall operation of urban growth and expansion of informal settlements, while the governance system. From this viewpoint the Arab Spring improving access to basic services, such as public trans- has opened up unprecedented opportunities by breaking down portation, safe water, and so on. the “authoritarian bargain” that had prevailed in some countries • ­ Climate change will add further stress. Climate change will for decades. That bargain consisted of providing jobs through increase water scarcity in a region that is already the world’s an enlarged public sector, while subsidizing the basic needs driest. It could pose a grave threat to food security, increasing of the population. As a development model, the authoritarian yield fluctuations and vulnerability to rising food prices. These bargain has proved unsustainable because it is economically will fall hardest on the region’s poor, who spend anywhere inefficient and socially inequitable. The region must thus launch from 35 to 65 percent of their income on food. Increased its own employment miracle and put in place policies to develop global warming could also contribute to a further rise in competitive, productive, and sustainable economies. sea level, exposing millions of people to coastal flooding. Figure 2 Figure 3 Youth unemployment rates by region, Rates of female participation in the labor force, ages 15–24, 2008 by region, 2008 Source: Gatti and others 2013. Source: Gatti and others 2013. 4 PART 1. Why embark on a growth strategy based on knowledge and innovation? Because the jobs deficit and other key challenges described knowledge is acquired, created, disseminated, and applied above are closely connected, meeting them requires an to enhance economic development. Making the move to a integrated approach. A new type of economic approach, based knowledge economy involves more than developing high tech- on knowledge and innovation, could respond directly and nology industries, investing in information and communication simultaneously to the aforementioned challenges. technologies (ICTs), or acquiring new technologies for use in a narrow fringe of the economy. It involves a more systemic change in the overall functioning of the economy, in which knowledge (both new and existing) and innovation (develop- Countries throughout ment and commercialization of products and processes that are new to the firm, the market, or to the world) penetrate all the world are moving sectors of economic activity. In so doing, the economy increases productivity and generates new goods and services (box 1). toward knowledge- BOX 1 based growth Knowledge: The key to productivity strategies and innovation We know that the source of wealth is something spe- cifically human: knowledge. Although Arab countries differ widely in their political If we apply it to tasks we already know how to do, we systems and practices, many governments now sense the call it “productivity.” urgent imperative to adjust and redefine the rules of the game. With the advent of the Arab Spring, countries of the If we apply it to tasks that are new and different, we call it “innovation.” region are revisiting their growth and development strategies, with the key objective of reducing unemployment. To succeed Only knowledge allows us to achieve those two goals. in the great transition that lies before them, countries will Source: Peter Drucker, Managing for the Future, 1992. need more productive and competitive economies powered by knowledge and innovation. Only such economies can create jobs in sufficient number and do so sustainably. Under current economic structures (with their associated rate of job creation), A development strategy based on the knowledge-economy it has been estimated that a rate of economic growth of 7 approach would focus on key policy areas that include: percent a year would be required to avoid further deterioration education, the fundamental enabler of the knowledge of the employment situation. Because such growth rates are economy; innovation, the source of renewal of economies unreachable in the current state of the global economy and in and societies, information and telecommunication technology, the foreseeable future, Arab countries have little choice but the key infrastructure of the digital age, and the broader to reorient their current economic structures in favor of new economic and institutional framework, which determines arrangements capable of delivering more jobs and increasing the overall efficiency and impact of investments made in the productivity and innovation in all sectors of the economy and other three areas. These elements are encapsulated in the society, including the poorest segments. four-pillar framework of the knowledge economy, as defined by the World Bank (table 1). Transitioning to a knowledge- A knowledge economy, as observed by the Organisation based economy means taking a holistic approach, as well as for Economic Co-operation and Development (OECD 1996)3 effective action—reform, investment, and coordination—in all and as defined by the World Bank (2007a), is one in which four of these policy areas.  TABLE 1   Four pillars of knowledge-economy strategies ­ Economic and Information and Education and skills Innovation system institutional regime communication infrastructure The country’s economic and The country’s people need educa- The country’s innovation system— A dynamic information infra- institutional regime must provide tion and skills that enable them to firms, research centers, univer- structure is needed to facilitate incentives for the efficient use of create and share knowledge, and sities, think tanks, consultants, the effective communication, existing knowledge, the acquisi- to use it well. and other organizations—must dissemination, and processing of tion of new knowledge, and the be capable of tapping the growing information. application of both to economic stock of global knowledge and activity—to improve productivity, adapting it to local needs, as well to raise quality, to innovate, and as creating new products and pro- to launch new enterprises. cesses that can compete in export markets and meet needs at home. 3. As observed by the OECD in 1996, “OECD economies are increasingly based on knowledge and information. Knowledge is now recognized as the driver of pro- ductivity and economic growth, leading to a new focus on the role of information, technology, and learning in economic 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 Bank (2007a). Transforming Arab Economies 5 PART 1. Why embark on a growth strategy based on knowledge and innovation? The World Bank has developed a Knowledge Assessment pillars of the knowledge economy, as described in table 1. Methodology (KAM), a global benchmarking tool to assess Box 2 shows that the MENA region needs to intensify its a country’s readiness for a knowledge-based economic efforts to match the performance of two comparator regions: model. It measures the overall preparedness of a country (Eastern) Europe and Central Asia and Latin America and or a region for the knowledge economy, based on the four the Caribbean. BOX 2 How is a country’s preparedness for the knowledge economy measured? The four-pillar framework of table 1 can also be used to measure countries’ efforts in the global knowledge economy and to shed light on their relative progress over time. The World Bank’s Knowledge Assessment Methodology (KAM, www. worldbank.org/kam) is a global Web-based tool that provides a basic assessment of countries’ and regions’ readiness for the knowledge economy. Countries’ efforts and investments in the knowledge economy are continuous, and all countries make such efforts. Therefore, they are like a river in continuous flow. But some countries flow more quickly than others. The KAM tries to capture these differences in speed and monitors countries in a global perspective, charting their progress on the four pillars and on combined indexes. The KAM compares 146 countries on the basis of 148 structural and qualitative variables that serve as proxies for measur- ing progress on the four knowledge-economy pillars. The basic scorecard consists of three key variables that serve as proxies for each of these pillars, as described in table 1. The Knowledge Economy index (KEI) is based on the average of all normalized scores on the 12 variables of the basic scorecard and measures the overall preparedness of a country or a region for the knowledge economy. The figure below provides a snapshot of the most recent performance of the Middle East and North Africa (MENA) region on the four knowledge-economy pillars in comparison with two other world regions: (Eastern) Europe and Central Asia and Latin America and the Caribbean. It reveals that the MENA region as a whole could to do more to harness the benefits of knowledge for growth and economic diversification. The MENA region’s knowledge-economy performance in comparative perspective, 2012 Middle East and North Africa, Europe and Central Asia, Latin America 10 5 0 Comparison Group: All; Type: weighted, Year Source: Knowledge Assessment Methodology (www.worldbank.org/kam, World Bank 2012a). Note: Owing to a lack of data for the MENA region as a whole, the variables on tariff and nontariff barriers (parts of the basic KAM scorecard) have not been included in the figure above. 6 PART 1. Why embark on a growth strategy based on knowledge and innovation? There are strong links between knowledge and growth. This is illustrated by the strong correlation between economic per- The Arab world trails formance, as measured in gross national income per capita, and knowledge-economy preparedness, as measured by the other regions in KEI (figure 4). However, correlation does not mean causality, as richer countries have more to invest in knowledge-economy knowledge-economy assets. Nevertheless, it is impossible for an economy to grow and become competitive without investment in those intangibles efforts that lie at the core of the knowledge-economy model. The eco- nomic impacts of such intangibles are captured by total factor productivity (TFP), which measures the contribution to growth Some Arab countries have already begun traveling the of factors other than increases in labor and capital. Thus, the knowledge-economy road, upgrading their human resources knowledge- and innovation-based approach focuses on enhanc- through improvements in education that have significantly ing the drivers of growth, that is, enhancing the quality of human increased the region’s capacity to absorb new technologies and and physical capital and, in particular, on raising TFP. For low- know-how, investing in ICT infrastructure and the backbone and middle-income countries, the rich empirical literature on logistics needed to connect to the global economy, building growth shows that capital is the principal determinant of growth, solid research and development structures, and improving with labor and TFP trailing well behind.4 But upper-middle and their overall business environment. This is particularly true high-income countries derive more of their growth from gains of the oil-rich countries of the Gulf Cooperation Council (GCC), in TFP, and the consensus among researchers is that, over the which aim to transform some of their cities into global inno- longer term, growth is a function of TFP. Appendix 2 summarizes vation spots. Among the resource-poor countries, several the findings of economic research on the positive influence of countries have made noticeable efforts to organize their knowledge, innovation, education, and ICTs on economic growth, development strategies around knowledge-economy initia- productivity, and employment. tives through sectoral or national plans (box 3). Figure 4 Strong links between knowledge and growth PPP (current international $) R2=0.921 GNI per capita, 2010 KEI 2012 Source: Authors’ calculations. Note: The Knowledge Economy Index (KEI) measures the overall preparedness of a country or a region for the knowledge economy, and is based on the average of all normalized scores on the four pillars of the knowledge economy: economic and institutional regime, education, innovation and ICTs. www.worldbank.org/kam. GNI = gross national income; PPP = purchasing power parity 4. Yusuf (in Nallari and others 2011) underlines that TFP has long been a catchall for other factors, the measurement and individual contributions of which have proved difficult to pin down. Among a long list, six factors are most amenable to policy action: human capital variously measured, and its quality; technological capability and innovation; managerial skills; organizational effectiveness; institutions affecting incentives, competition, allocative efficiency, and governance; and the characteristics of urbanization. Typically, all six affect the production and use of knowledge, resource allocation, and productive utilization. Transforming Arab Economies 7 PART 1. Why embark on a growth strategy based on knowledge and innovation? BOX 3 A road partly traveled: The countries of the Middle East and North Africa and the knowledge economy to date In Algeria, the Conseil national économique et social (CNES) has organized national conferences on the knowl- edge economy to raise awareness of key issues. The government has undertaken reforms in the information and communication technology (ICT) sector and initiated the development of technology parks. It recently announced a plan to increase national expenditure on research and development by up to 3 percent of gross domestic product by 2015. Jordan has embarked on a major effort to reform the education system at the early childhood, basic, and sec- ondary levels to produce graduates with the skills needed for the knowledge economy. It has taken steps to become a regional center of ICT development. Partnerships with Microsoft and Cisco are expected to provide more attractive job opportunities for highly skilled young graduates. In the last few years, Jordan has acted to improve the innovation climate through the creation of a National Council for Competitiveness and Innovation, among other measures. It has also embarked on the formulation of its 2012–2016 Science, Technology, and Industry strategy. The Kingdom of Saudi Arabia has embarked on a strategy to move to a knowledge economy by 2025 and has put in place a host of education reforms. It is investing in the development of new universities, especially to boost science and technology, and has embarked on a major plan to develop so-called knowledge cities, including the holy city of Al-Madina. This concept is designed to position the country in knowledge-based industries and to attract and develop talent from around the world. Lebanon is moving on the innovation front. In 2011, the government requested World Bank support for a project to support innovative activities in the private sector. The proposed work could include a pilot investment fund to provide a combination of cash and equity financing to foster innovative ideas and support start-ups and other firms in the early stages of growth. Morocco pioneered regulatory reforms in the mobile phone sector in the late 1990s, making it one of the coun- tries with the highest teledensity in the region. It also initiated the building of a number of technology parks and technological industrial zones that attracted foreign direct investment (FDI) and advanced manufacturing operations. It has developed a series of national plans in several domains—industry, agriculture, fisheries, industry, ICT, and tourism—directly inspired by a will to follow a knowledge-based development path. In Oman, a combination of pro-employment policies, access to land ownership, facilitation of affordable consumer products, and freely available, all-encompassing health and education services has supported improved living conditions. A research council has been instituted to give high priority to research and innovation, including the initiation of open research grants. Qatar has endeavored to enlarge its development model from one based solely on oil and natural gas to a knowledge-based economy. An education reform law passed in 2001 attempted to break the mold of the rote memorization system, and the development of Education City by the Qatar Foundation for Education, Science, and Community Development is aimed at making Doha the center of educational excellence in the Middle East. Qatar initiated and has hosted the annual World Innovation Summit on Education (WISE) in Doha since 2009. Tunisia, following the preparation and publication of knowledge-economy annual reports, developed a compre- hensive knowledge-economy strategy as part of its five-year plans to cope with high unemployment, especially among youth. It has established a series of technopoles throughout the country to renew and expand its economic base. Tunisia’s development plan for 2011–14 goes further in articulating a knowledge and innovation-driven growth path. In the United Arab Emirates, Dubai has based its development over two decades on a clear knowledge and innovation strategy. Its strategy of building a transport and logistics hub (centered on a world-class port) has spawned a successful tourism industry. In addition, the United Arab Emirates has developed core competencies in technology, media, and telecommunications. These examples were shared at the 2009 Knowledge Economy Conference, held under the auspices of ISESCO and the Government of Tunisia, with World Bank support. The conference produced the Tunis Declaration: http://info.worldbank.org/etools/docs/library/252535/TunisKEDeclaration.pdf. Source: Authors. 8 PART 1. Why embark on a growth strategy based on knowledge and innovation? But these steps, laudable as they are, Figure 5 have not kept pace with the rest of the Regional scores on the KEI, 2012 world. Among developing regions, MENA has a middling score on the Knowledge 10 Economy Index (KEI) (figure 5). 2012 Looking at performance trends over the last decade (figure 6), it is clear that the 8 GCC countries tend to perform better than other Arab countries. Secondly, gains on the KEI indicate that they have progressed 6 relatively well over the past decade.5 Another interesting benchmark relates to competitiveness. The World Economic 4 Forum (WEF) has developed a well-known indicator—the Global Competitiveness Index (GCI)—that distinguishes three types of economies: (i) factor-driven, (ii) effi- 2 ciency driven, and (ii) innovation-driven. In the last, knowledge and innovation play an increasing role.6 0 Source: Knowledge Assessment Methodology (www.worldbank.org/kam, World Bank 2012a). Figure 6 Country scores on the KEI, 2000 and 2012 2000 2012 Source: Knowledge Assessment Methodology (www.worldbank.org/kam, World Bank 2012a). 5. Performance on the KEI does not reflect social and political factors such as the status of women and the authoritarian exercise of power that characterize many of the GCC countries. These may be considered as hurdles in the overall modernization process. 6. The GCI has been the key methodology used by the World Economic Forum in its assessments of competitiveness (World Economic Forum 2011). The model rests on the belief that the determinants of competitiveness are numerous and interact in a complex manner. The GCI captures these interactions through a weighted average of 12 pillars of competitiveness. Four basic requirements essential for factor-driven economies are institutions, infrastructure, macroeconomic environment, and health and primary education. Six efficiency enhancers that are key for efficiency-driven economies include higher education and training, efficient goods markets, labor market efficiency, financial market development, technological readiness, and market size. Two innovation and sophistication factors that are key for innovation-driven economies are business sophistication and innovation. Transforming Arab Economies 9 PART 1. Why embark on a growth strategy based on knowledge and innovation? Figure 7 Country rankings on the GCI, 2010–11 and 2012–13 Ranking 2010-2011 Ranking 2012-2013 Source: World Economic Forum 2010, 2011, 2012. Note: Rankings for Tunisia are for 2010–11 and 2011–12. Figure 8 Country performance on the 2012 KEI plotted against the 2011–12 GCI 6 5.5 y = 0.3395x + 2.6999 y = 0.2159x + 3.0784 R² = 0.7885 R² = 0.7191 5 4.5 GCI 4 3.5 Individual countries (excluding Arab countries) Arab countries 3 Linear (world excluding Arab countries) Linear (Arab countries) 2.5 KEI Source: Global Competitiveness Index 2011–12 (World Economic Forum 2011); World Bank (2012a). 10 PART 1. Why embark on a growth strategy based on knowledge and innovation? The country rankings on the GCI show that Figure 9 the GCC countries lead the pack (figure 7). Performance on the KEI and EIR index for MENA and Some countries, such as Tunisia and other regions and country groups, 2009 Morocco, perform relatively better on this competitiveness index than on the KEI, which, Economic Regime Index unlike the GCI, does not account for a broader KEI and complex set of parameters affecting micro-level performance. The changes in country rankings between 2011 and 2013 on the GCI can be an indication of how different countries have been affected by the events of the “Arab Spring.” MENA countries appear to exhibit what may be termed “knowledge-weak competitive- ness.” When country performance on the KEI is plotted against the GCI, it can be seen that the competitiveness of the Arab world is derived from factors other than those related to knowledge (figure 8). The bulk of the economies in the Arab world are factor- driven; significant changes are therefore needed to convert them to efficiency- and innovation-driven economies. The impact of the economic and institu- tional regime, and its effect on the overall business climate, is key. Mediocre gover- nance, resulting in a poor business climate, is the single greatest hindrance to economic and social development in the region—and to knowledge-based development in par- ticular—except in the GCC countries, which perform relatively well on the economic and institutional regime index (figure 9) and where knowledge and innovation factors constitute the chief impediments to develop- ment. Political and economic volatility, espe- cially in the recent past, have also exerted a downward pull on the KEI by weakening the overall economic and institutional regime. The current events, however, provide an opportunity to make economic governance Source: Knowledge Assessment Methodology (www.worldbank.org/kam, World Bank 2009b). more transparent and effective, in order to Note: Weighted average derived from the KAM and authors’ computations, except where data unleash the region’s considerable potential. are unavailable (Iraq, Libya, and Palestine). Transforming Arab Economies 11 PART 1. Why embark on a growth strategy based on knowledge and innovation? Enhanced knowledge- The employment effects of knowledge-economy efforts in the MENA region over the past decade are perceptible. The economy efforts would following findings can be drawn from the model: ­ MENA countries, as in other regions of the world, a • In significantly contribute higher score on the KEI is associated with higher growth rates. In fact, the impact of the KEI was even more signifi- to job creation cant in the MENA region than in other regions during the period 2000–05, while it was rather limited during 1995–99. A unit increase in the KEI represents a gain of some 15 places in the ranking, since there are 146 countries in the World Bank’s KAM and the KEI ranges from 0 to 10. It is difficult to estimate the precise impact of a knowledge- and In the MENA region, a unit increase in the KEI for 1995 innovation-driven economic model on growth and employ- tended to increase the average growth rate of real GDP ment, even if improved performance by individuals, firms, and per worker for the period between 1996 and 2000 by 0.28 other groups can be related to or explained by some aspect of percentage point, while a unit increase in the KEI for 2000 increased knowledge or innovation. Nevertheless, econometric increased the average growth rate of real GDP per worker estimates and related considerations summarized in this report for 2001–05 by 0.89 percentage point. point to the likelihood that a sustained knowledge-economy effort over a sufficiently long period can be an important source ­ elasticity of employment to growth in the MENA region, • The of jobs in the Arab region, provided that labor markets function on average, hovered around 0.80 over the period 1991– well and skill mismatches are significantly reduced. 2009, meaning that an increase of one percentage point in GDP was associated with an average increase of 0.8 The KEI is the basis of a model that can be used to measure percentage point in employment for the next three years. the impact on employment of countries’ knowledge effort. The model, illustrated schematically in figure 10 and described • The ­ elasticity of employment to knowledge investment (as in detail in annex 1 of the full version of this report (World measured by the KEI) resulting from the combination of Bank 2013; available at www.cmimarseille.org/ke), has made these coefficients, calculated at the level of each country, it possible to estimate the contribution of knowledge-economy ranged from 0.2 in Kuwait to 1.3 in Qatar for the period efforts to growth and to employment in MENA countries in the 2000–09. The coefficient value of 1.3 implies that a unit period between 1995 and 2008, with two subperiods: 1995–99 increase in the KEI for the year 2000 produced an average and 2000–08. In the model, the elasticity of employment to annual increase of 1.3 percentage points in employment increases in knowledge investments in a given country is medi- in Qatar over the period 2000–08. The average elasticity ated by the elasticity of employment to growth in that country. of employment to knowledge investment for MENA as a whole was close to 0.7 for the period 2000–08, compared with just 0.23 for the period 1995–99. In other words, a unit increase in the KEI for the year 2000 produced an average annual increase of 0.7 percentage points in employment Figure 10 in MENA as a whole over the period 2000–08 (figure 11). Estimating the employment effects of knowledge The picture of the knowledge economy’s impact on employment is therefore positive and encouraging. The aforementioned estimates must also be viewed against the observed rate of employment growth for the countries of Knowledge Economic Employment growth growth the region over the period 2000–09 (table 2). Those coun- tries—the small resource-rich economies principally—for which the growth rates of employment are relatively high are also those that have experienced the most significant progress on the KEI since a decade ago. Similarly, those Employment effects countries that exhibit a small growth rate of employment due to knowledge are, in general, those that have experienced either little (via economic growth) progress or a regression in their KEI ranking. This con- firms the positive contribution of the knowledge-economy effort to the job creation process. 12 PART 1. Why embark on a growth strategy based on knowledge and innovation? Figure 11 Elasticity of employment to the KEI in MENA countries, 1995–2008 1995-99 2000-08 oil exporting, developed oil exporting, developing oil importing, developing Source: Chen, Diop, and Muller 2012; World Bank 2013 (annex 1).  TABLE 2   Employment growth rates in Arab countries, 2000–09 ­ Employed population Compounded annual Country name 2000 2009 growth rate (%) Algeria 7,772,217 13,195,310 6.06 Egypt, Arab Rep. 19,254,668 23,980,516 2.47 Libya 1,624,133 2,103,832 2.92 Morocco 8,819,170 10,758,452 2.23 Tunisia 2,711,153 3,271,820 2.11 Bahrain 200,000 400,000 8.01 Kuwait 1,200,000 2,100,000 6.42 Oman 700,000 1,100,000 5.15 Saudi Arabia 6,000,000 8,100,000 3.39 United Arab Emirates 1,700,000 3,500,000 8.35 Gulf Cooperation Council 9,800,000 15,200,000 5.00 Non-GCC 53,202,748 69,935,998 3.09 Total 63,002,748 85,135,998 3.40 Source: Authors. Transforming Arab Economies 13 PART 1. Why embark on a growth strategy based on knowledge and innovation? However, the knowledge contribution so far has been insufficient to significantly reduce unemployment, except in the small economies of the GCC. Future efforts to spur development of the knowledge economy can contribute to economic growth and employment creation through three channels: ­ • Intensifying the knowledge-economy effort. In general • Steering ­ economies toward more competitive sectors. MENA countries have performed below the world average Economic structures mediate the effect of higher growth in terms of the effort they have devoted to developing the on jobs, particularly skilled jobs. The main provider of knowledge economy, as discussed above. To have a serious skilled jobs in the region has been government. As a matter impact, knowledge-economy efforts should be significant, of fact, MENA countries employ a significantly larger share as shown by the results given above. Raising a country’s of people in the public sector (between 14 and 40 percent) KEI even by one unit is a tall order. As mentioned earlier, it than comparator countries (figure 13). There is a need to is equivalent to gaining about 15 places in the KEI rankings. steer economies toward sectors in which growth is more But this degree of progress is possible with a sustained likely to create jobs. There is not much that can be expected effort. Several years are typically required, as variables from sectors that are exposed to foreign competition in related to education and innovation do not increase quickly terms of growth and employment. But opportunities exist (contrary to those related to the business environment in non-traded goods and services, in sectors in which the and ICT, where progress can be rapid). MENA countries possess unique comparative advantages owing to geography or other factors, and in environment- • Reducing ­ the skills mismatch. In most countries there and infrastructure-related activities. is a wide mismatch between the skills demanded by employers and those presented by job seekers. Close to 40 With sustained effort, it should be possible to significantly percent of the firms surveyed through investment climate increase the contribution of the knowledge economy to job assessments in MENA reported that the limited avail- creation in the region within a reasonable period.7 Based on the ability of skilled labor is a major constraint on business estimates and figures provided above, it would not be unrea- (figure 12). That mismatch attenuates the positive adjust- sonable to expect an increase in the knowledge-economy effort ment of employment to increases in the KEI. Where the across the region of a magnitude sufficient to boost the annual labor force has the requisite skills, as in Qatar (thanks to rate of employment growth by one percentage point over the the presence of skilled expatriates), knowledge-economy rate recorded in the decade 2000–09.8 Over a decade, such an investments have had a significant impact on jobs. Most increase, if realized, would create, for example, some 300,000 MENA countries have an abundance of highly educated new jobs in Tunisia, about 1.5 million new jobs in Egypt, and workers, but their skills are not adapted to the demands some 700,000 new jobs in Saudi Arabia (in addition to the of the economy. Major adjustments are needed in the jobs expected to be generated under current trajectories). education and training systems of the region to ensure As discussed above, most Arab countries have some room to a better fit between graduates’ skills and the demands maneuver, because so far they have generally underinvested in of employers. In the meantime, short-term measures to the pillars of the knowledge economy (relative to countries at a retrain workers or provide them additional education in similar level of development). Building a knowledge economy response to clearly identified labor demands can have an requires long-term commitment, but it is the best choice for important impact on reducing the gap in skills-related sustained economic growth with an appropriately high level supply and demand. of job creation. ³ ° ³ Part 1 provided a rationale for embarking on a growth strategy based on knowledge and innovation. Part 2 examines the kinds of policies needed to build such economies. 7. This period would vary from one country to another. Five to ten years are generally necessary to see the benefits of efforts, reforms, and initiatives in the different knowledge-economy policy pillars. 8. The estimates offered here derive from the data presented above on the elasticity of employment to the KEI. For the period 2000–09, the region as a whole showed an elasticity of 0.7 percent for 15 positions in the KEI. That gain seems reasonable in view of the relative underinvestment of the region in the various knowledge-economy pillars. In addition, one may presume a significant reduction in skill mismatches and an improved elasticity of employment to economic growth induced by improved competitiveness. Taking all those factors into account, an increase of one percentage point in the annual growth rate of employment induced by more and better knowledge-economy efforts is plausible. 14 PART 1. Why embark on a growth strategy based on knowledge and innovation? Figure 12 Share of firms identifying lack of skills as a business constraint Source: World Bank Investment Climate Surveys, 2006–10. Figure 13 Employment in the public sector in MENA and selected countries, averages during the 2000s a. MENA countries b. Comparator countries Source: Gatti and others 2013. Transforming Arab Economies 15 What to do to build a knowledge- and innovation- driven economy In this chapter °± Policy pillars °± Diversification initiatives Transforming Arab Economies 17 PART 2. What to do to build a knowledge- and innovation-driven economy The basic policy components of the knowledge- and innovation- resumed and deepened as soon as possible to build momen- driven approach include improving the business and tum for the transition to a knowledge economy. Figure 15 governance environment, establishing high-quality educa- shows that the three factors with the greatest impact on the tion and training systems, fostering a climate of innovation, business environment in the Arab world are lack of access to and building a dynamic information society. In addition, it is finance, restrictive labor regulations, and inefficient govern- important to stimulate the emergence of growth sectors and ment bureaucracy. sites, in the interest of economic diversification. All of this would be stronger if accomplished within a broader strategy Improve the entrepreneurial climate. The region is charac- of international cooperation and regional integration. Figure 14 terized by one of the lowest rates of firm entry (new domestic presents the ecology of knowledge and innovation that needs firms plus incoming foreign firms) in the world (figure 16). A to be sustained by a set of coordinated actions. high rate of firm entry is a sign of economic dynamism and renewal. A low rate of entry, slow growth, and limited capacity to generate employment are linked to the overall quality of Figure 14 the business environment. Governments across the region The knowledge and innovation policy system would do well to implement policies to improve the overall entrepreneurial climate by reducing bureaucracy, eliminat- ing regulations that stifle initiative, and removing unearned privileges of groups close to ruling powers. It is also vital to level the playing field by simplifying business procedures, reducing barriers in protected markets (in order to create incentives for investment), and increasing bank competition to provide credit to firms. Expanding sources of financing, including Islamic finance, would be one part of the equation (World Bank 2009a). Facilitate trade and foreign investment. To complement the changes evoked above, trade channels must be widened, customs barriers lowered, and exchanges of technology facili- tated (Chauffour 2013). Logistical platforms must be improved and expanded, as has been done, for example, by Morocco at the port of Tangiers. The establishment of special industrial zones makes it possible to attract foreign firms and to promote exports through various incentives. Such zones make the most sense if they also stimulate the local economy through the development of subcontracting links and new business spi- noffs. They should, however, not be a taken as a pretext for avoiding nationwide reforms, which are essential to progress on this agenda. Policy pillars Reform labor markets. Since a large share of the popula- tion either does not participate in any economic activity or gains little from it because of the limited availability of high- value-added jobs, the labor markets in the region function at a low-productivity equilibrium. In addition, the allocation of  nact business-friendly reforms and E talent is distorted toward the public sector, which has limited improve governance productivity in the aggregate but offers highly desirable con- ditions to individual workers. This equilibrium is both inef- Sound macroeconomic policies, good governance, and a ficient and inequitable (Gatti and others 2013). The rigidity of business-friendly climate provide the basis for knowledge- the labor markets perpetuates an unfair situation between based strategies, as they do for virtually all development those who are “in” and those who are “out” (people discon- strategies. To make an effective transition to the knowledge nected from networks and those employed in the informal economy, it is necessary to continue to improve the business economy, particularly youth and women). It also perpetuates climate in order to stimulate business formation and attract skill and competence gaps within the economy, a major issue foreign investment, which together foster growth and com- that prevents countries from taking maximum advantage of petitiveness. Several Arab countries have made substantial knowledge-economy efforts. The obstacles to improved labor progress over the past decade, as seen from the World Bank’s markets will not disappear overnight, as they derive from a Doing Business surveys, heeding demands for change from the regulatory environment that reinforces the status quo, which business community and making the best of assistance from is afflicted by rigid employment protection, a public sector international institutions. In some cases, the events triggered that distorts the overall preferences of actors, and inadequate by the Arab Spring have slowed the pace of reforms, even in education systems based on status rather than achievement. countries that are not suffering from political disturbance or Deep regulatory and cultural changes are urgently needed outright civil war. To be credible, necessary reforms should be on this front. 18 PART 2. What to do to build a knowledge- and innovation-driven economy Figure 15 Constraints to doing business in the Arab world Source: World Economic Forum and OECD 2011. Figure 16 Average firm entry density for selected emerging economies, 2004–09 MENA countries entry density comparator countries Source: Gatti and others 2013. Note: Entry density measures the number of newly registered limited liability firms per 1,000 working-age people (those between ages 15 and 64). “Average 80 countries” represents the average entry density in the 80 developing countries for which data are available. Transforming Arab Economies 19 PART 2. What to do to build a knowledge- and innovation-driven economy those efforts are not yielding the expected results in terms of Provide more and better education quality education. This is to say that more schooling has not Education is the key enabler of a knowledge- and innovation- been synonymous with more learning in most parts of the Arab driven economy. Considerable progress has been made across world, and the divide between education and employment has the Arab world in recent years to expand access to education yet not been bridged. Efforts are needed to imbue students (figure 17). But although countries have invested a respect- with the soft and life skills with which to function effectively as able share of their gross domestic product (GDP) in education, productive economic actors and responsible citizens. Figure 17 Secondary and tertiary gross enrollment rates, by world region, 1990 and 2010 a. Secondary gross enrollment rates, 1990 and 2010 1990 2010 b. Tertiary gross enrollment rates, 1990 and 2010 1990 2010 Source: UNESCO 2012. 20 PART 2. What to do to build a knowledge- and innovation-driven economy International achievement tests, such as TIMSS and PISA, Productivity approach provides a simple yet comprehensive reveal that students in the Arab countries still trail those of way to look at skills development for more jobs and higher many other countries at comparable levels of development productivity that could be useful to orient areas of action in in the acquisition of basic knowledge (figure 18). The quality countries of the Arab world (figure 19). of learning in Arab countries is still below the level expected given their economic development, as measured by the GDP Acknowledging that each country is unique and must chart per capita. its own path, countries in the region would do well to press on with reform in some key areas. These include Governments need to act to reform the education system as a improving teaching in basic education, developing TVET, and whole so that education is linked more closely to employment. increasing education-employment linkages, and reorienting Forging that link begins with early childhood development and the higher education system from emphasis on the social basic education, moves on to secondary and tertiary education sciences and humanities toward greater focus on the sci- that fosters the core skills needed for creative and critical ences and on engineering. Overall, countries need to align thinking (including through technical and vocational education the governance, management, financing, and performance and training, TVET), and finishes by developing an effective incentives of their education systems to produce better lifelong learning system. The Skills Toward Employment and learning outcomes. Figure 18 Quality of education as measured by TIMSS, 2011 TIMSS mathematics scores, 2011 4th Grade log GDP per capita Source: Authors. Figure 19 The Skills Toward Employment and Productivity (STEP) approach Invest early Invest in quality Listen to & equitably the market Productivity & growth 1 2 3 4 5 Getting infants off Ensuring that all Building Encouraging Facilitating labor to the right start students learn job-relevant skills entrepreneurship mobility and job and innovation matching Source: World Bank 2010a. Transforming Arab Economies 21 PART 2. What to do to build a knowledge- and innovation-driven economy Improve the quality of basic education. Greater investment in and employment must be explored, such as the ongoing early child development could help give Arab children a solid multinational Education for Employment (EFE) initiative that start and a foundation for learning. Reforming teaching and is in place several countries of the region should be expanded learning is of paramount importance. All along the education and introduced around the region (box 5). system, teaching methods that remain based on rote learning could usefully be revised; the quality of teaching materials Encourage science and technology in higher education. In could be upgraded; and the qualifications of teachers could be higher education, the vast majority of students choose programs raised.9 Some countries, notably Jordan, have implemented in the humanities and social sciences, and many graduates have ambitious programs that have demonstrated improvements difficulty finding jobs. In 2009, fewer than a quarter of university in educational performance (box 4). students in Algeria, Lebanon, and Saudi Arabia were majoring in science, technology, or engineering, In comparison, the share Develop technical and professional education. There is an was more than two-fifths in East Asian countries such as China, apparent mismatch between the skills needed to bolster growth Korea, and Malaysia (World Bank 2012b). The most effective and the outputs of the education and training system. Across way to ameliorate this situation is to improve the quality of the region, technical and professional education needs an over- scientific and technical education upstream—in secondary and haul. There is a need to improve the governance of TVET and even primary school. The establishment of new universities in introduce participation, accountability, and decentralization in partnership with prestigious foreign institutions has already its public provision. New funding sources, including from the begun to raise scientific and technological capacities in several private sector, are needed to sustain diversified provision of countries, improving their international competitive position. higher-quality TVET services. Cooperative education schemes Members of the Gulf Cooperation Council (GCC)—such as the delivered in partnership with employers seem to work well, as United Arab Emirates, Saudi Arabia, and Qatar—and Morocco, demonstrated by international experience, including a number with its new private universities, are showing the way. More of pilot programs in countries such as Tunisia (business-pro- generally, the establishment of private universities should be cess and information technology outsourcing) and Morocco encouraged when the public system presents rigidities, provid- (the skills program of the Office Cherifien des Phosphates to ing that student aid programs (in the form of grants and student retrain 15,000 young people). New ways of linking education loans) can be established to compensate for social inequities. BOX 4 Jordan’s Education Reform for the Knowledge Economy (ERfKE) program The Education Reform for the Knowledge Economy (ERfKE) program in Jordan is a 10-year, multidonor program to deliver comprehensive education reform. The first phase (ERfKE I, 2003-09) focused on general education system reforms. ERfKE II (2006-10) focused on increasing the level of skills necessary for participation in the knowledge economy at all levels of education. In tandem, the Jordan Education Initiative was launched in 2003 under the umbrella of the World Economic Forum (WEF), as a multistakeholder partnership that integrates information and communication technologies (ICTs) into the education process as a tool for teaching and learning in grades 1 to 12. The results of the reforms are tangible. By 2010 Jordan had the highest literacy rate in the Middle East and North Africa; gross enrollment rates at the primary and secondary levels reached 98 percent and 97 percent, respectively, by 2006; up to 3,000 schools were connected to online learning portals, with 80 percent of schools connected to the Internet; and there was a 37 percent increase in qualified kindergarten teachers with a bachelor’s degree and certification. The target of training 50,000 teachers in basic ICT skills was exceeded, in that more than 85,000 teachers were trained and 55,000 certified, compared with a baseline of 5,000 trained ICT teachers in 2003. New curricula and teaching methods emphasiz- ing higher-order thinking, critical thinking, student-centered learning, and other aspects of knowledge-economy-based education were developed. Assessments of learning show improvements owing to the new curricula, learning materials, and teacher training. The results of the 2008 National Assessment for the Knowledge Economy showed a clear improvement in performances in math, science, and reading. The 2007 TIMSS results showed positive and marginally significant improvement in perfor- mance. In science Jordan improved its regional and international ranking. Between 2003 and 2007, Jordan moved up in the international TIMSS ranking from 25 to 20 in science and from 32 to 31 in mathematics. The results were achieved in consistent steps that began with a broad consultation process. From that process a national strategy was developed to guide the Ministry of Education. A decision-support system was created to provide timely infor- mation on education activities, with 90 percent of decision makers and researchers using the system by 2008. Constant improvements were made to the curricula, learning environments, and broadband connections, the latter through coop- eration between industry and the national network. Source: World Bank 2010b, 2011c; Bannayan and others 2012. 9. In this context, the System Assessment and Benchmarking for Education Results project provides key insights on ways to improve teaching policies in several MENA countries (World Bank 2012c). 22 PART 2. What to do to build a knowledge- and innovation-driven economy Thus, all Arab countries, irrespective of their initial condi- tions, require a shift from managing educational inputs to  timulate technological innovation S engineering the education system to obtain better results. and upgrading Rather than controlling the allocation of educational inputs and resources, Arab governments should set clear learning Innovation energizes and renews the productive foundations and skills-acquisition objectives (as measured by performance of economies and societies. Innovation should be understood on tests, including international tests, and by improvements in as the development and diffusion of products and processes employability), to establish incentives to induce an assortment that are new to a given economy and society (rather than new of public and private actors to pursue those objectives, and to the world). Innovation results from the actions of entrepre- to coordinate the actions taken. The approach needs to focus neurs who exploit technological or scientific opportunities to not only on improving the technical relationships between the satisfy needs or markets that they have identified. Research and inputs and outputs of education (education engineering), but development (R&D) effort is a proxy for innovation efforts, but also on the incentives facing the actors involved (teachers, innovation does not proceed only and directly from research, schools) and on the public accountability of policy makers as discussed below. to citizens. The innovation effort in the Arab countries has so far been relatively modest, as demonstrated by the low level of R&D BOX 5 expenditures (figure 20), which, in addition, are largely funded by the state and not by the business sector. Patenting activity Connecting education and employment by residents is also low (figure 21). The share of high- and medium-tech exports in total manufacturing exports is modest The high unemployment rate of young Arabs has been but improving slightly (figure 22). attributed to the mismatch between education and market needs. The multinational Education for Employment (EFE) project focuses on the role that the private sector can play Figure 20 in reducing that mismatch. The project comprises a network Gross R&D expenditures as percentage of GDP of locally run, not-for-profit organizations that provides for selected Arab countries and comparators youth with real jobs, rather than training without the solid prospect of a job. EFE projects are currently based in Egypt, Jordan, Morocco, Palestine, Tunisia, and Yemen. EFE iden- tifies areas of the economy that offer strong potential for growth and job creation but that lack qualified person- nel. Local businesses agree to hire a specified number of graduates from the program, provide funding, and offer in-kind contributions (such as office space and administra- tive staff). They encourage other business leaders to hire graduates and introduce EFE to government leaders and other decision makers. EFE is also implementing a new entrepreneurship program to help aspiring young entre- preneurs start their own enterprises. In its first five years of operation (2006–11), the EFE Network trained and placed in jobs more than 2,300 disadvantaged young people from across the Middle East and North Africa. About 50 percent of graduates were women. A similar number of people are expected to have been trained in 2012. Ways should be found to rapidly scale up such programs. GERD as percentage of GDP Source: Education for Employment (http://www.efefoundation.org). Source: World Bank 2012d; UNESCO 2012. Note: GERD = gross domestic expenditure on research and development Transforming Arab Economies 23 PART 2. What to do to build a knowledge- and innovation-driven economy Figure 21 Resident vs. nonresident patent applications (annual average 2000–10) resident non resident Source: World Development Indicators, World Bank. Figure 22 Figure 23 Export shares from MENA, by technology Innovation policy positioning category, 2005–09 Knowledge economy percentage of total manufacturing exports Innovation policy S&T policy research trade education resource-based exports innovation low-technology exports policy medium-technology exports others finance high-technology exports industries Source: UNIDO 2011. Source: World Bank 2010c. 24 PART 2. What to do to build a knowledge- and innovation-driven economy Going beyond science and technology policies. As in many Put research structures in service of the economy and society. countries, Arab policy makers, believing that innovation would Public and academic research structures in the region should emerge naturally from an enhanced R&D effort, invested mas- be systematically evaluated. A strict criterion of excellence sively in academic research, R&D structures, and public labo- should be applied when evaluating basic research efforts, ratories. Then, when the results of these investments proved whereas economic, social, and environmental relevance disappointing, and inspired by then-fashionable global trends, are most appropriate in the evaluation of applied research. they began to devote sizable resources to building innova- Cooperation between universities and the business world is tion sites in the form of incubators and technology parks—a essential to the process of innovation. Efficient government trend that has developed over the last decade with a focus incentives, as demonstrated by the experience of numerous on information technology businesses, which account for advanced and emerging economies, stimulate cooperation about half of the firms and jobs created in those sites. More on specific projects through matching funds that raise con- recently, drawing on international evidence, policy makers tributions from the business sector. Several countries, such have expanded and honed their instruments of intervention, as Egypt, have implemented well-designed programs in this as for example, to stimulate university-industry cooperation or area (box 7). It is also necessary to systematically eliminate a mobilize venture capital. The need to broaden the concept of host of regulatory obstacles that prevent university-industry innovation, and its policy arms, should be strongly reaffirmed cooperation, such as overly restrictive compensation schemes (figure 23). Policy makers in the region should give priority to for researchers or professors, pension transfer mechanisms, supporting innovators, tailoring research structures in service and so on. of the economy, strengthening university-business ties, and organizing channels to tap into global knowledge. BOX 7 Support innovators. Innovation policy should begin with mech- Promoting collaborative R&D projects anisms to support innovators: technical, commercial, legal, between universities and industry in Egypt and financial support provided through structures such as incubators that operate as closely as possible to innovators. The Innovation Fund was the principal component of Egypt’s Incubators have proliferated in the Arab countries, as they Research, Development, and Innovation Program, which supports innovation and entrepreneurship (with resources have elsewhere, but have had uneven results in the region, provided by the European Union). While it was active, the often because they lack appropriate management and profes- Innovation Fund supported cross-cutting projects related sionalism, connections to adequate technical or commercial to industrial challenges and national priorities. Projects networks, and sufficient quantities of venture capital. On the were initiated and run in collaboration between research other hand, some countries, such as Lebanon, have been able bodies and industry. Grants were awarded on a competitive basis to collaborative consortia from universities, research to devise ways of mobilizing capital using public guarantees institutes, and industry. From a large number of high- (box 6). Innovators also need full access to technological ser- quality applications that indicated clear demand from the vices to test their ideas and inventions, and the environment in research and business communities, the Innovation Fund which they operate must offer efficient standards, measure- was able to select 51 projects for funding before encounter- ment equipment, and related infrastructure. ing budget limitations. Almost 43 percent of the fund’s 134 beneficiaries were from industry, which contributed about €1.6 million (as co-finance) to Egypt’s R&D expenditures, reflecting clear interest in R&D based on applied research BOX 6 and market demand. Because of the fund’s support for international collaboration, more than 26 European and Kafalat, a Lebanese institution providing Mediterranean partners participated in the development of funded projects that led to exchange of knowledge and venture finance know-how with Egyptian counterparts. Seven collabora- tions have developed new products and services that are Kafalat, a Lebanese company created in 1999, provides expected to generate around €40.4 million as return on loan guarantees to small and medium enterprises (SMEs) investment by 2014. based on business plans and feasibility studies. It targets Source: www.rdi.eg.net. innovative start-ups and SMEs in industry, agriculture, tourism, traditional crafts, and high technology. Kafalat- guaranteed loans benefit from interest-rate subsidies financed by the Lebanese treasury and administered by the Central Bank of Lebanon. Kafalat aids borrowers by Facilitate tapping into global knowledge and technology. using its feasibility studies to induce lenders to require A major way to upgrade domestic technology is to tap and lower collateral. Kafalat also serves the lender’s interest by use foreign technology that is abundantly available through a lowering loan risks. Kafalat-guaranteed loans in Lebanese variety of channels. A prime source of transfers of knowledge pounds are exempt from the statutory reserve requirement of the Central Bank of Lebanon. This reduces the costs and technology is multinational companies operating within of the lending bank, allowing it to lend at lower rates of the country. Several initiatives in the region, including those interest. Kafalat’s credit guarantee system encourages of Morocco in the automobile and aeronautics industries, and business formation and increased domestic investment, in Jordan in information technology, point the way in this area. output, and employment. Currently the maximum loan Technology is also accessible through diaspora networks, amount for a Kafalat Innovative guarantee is 300 million Lebanese pounds (about $200,000). which have the added advantage of bringing in critical financial and managerial capabilities, as illustrated by Lebanon, and Source: Authors, based on www.kafalat.com.lb. can be mobilized with appropriate schemes, as demonstrated in Scotland, Chile, and China. Transforming Arab Economies 25 PART 2. What to do to build a knowledge- and innovation-driven economy Develop an information society  In today’s knowledge-based world, countries need to transform Progress has also been made in Internet penetration. themselves into dynamic information societies.10 Information Between 2000 and 2010, the number of Internet users in and communication technologies (ICTs) are the backbone of the Middle East and North Africa (MENA) grew tenfold to today’s economies, as transportation and electricity were in more than 100 million. At the end of the period, penetra- the last century. Arab countries have invested heavily in ICTs tion varied across countries, ranging from 12 users per 100 over the past 15 years. Mobile telephony has achieved healthy people in Algeria to 85 per 100 in Qatar (figure 26). Internet growth in the region, as in most countries of the world (figure 24). penetration can have beneficial effects on the economy. A one percentage point increase in the number of Internet Economies in the Arab world are at various stages in leveraging the networked economy. The Global Information Technology users is correlated with a boost in exports of 4.3 percent- Report 2012 of the World Economic Forum (WEF) covers 142 age points and with increases in exports from low-income economies and includes the Networked Readiness Index (NRI), to high-income countries of 3.8 percentage points (Qiang, which measures the degree to which economies across the Rossotto, and Kimura 2009). But Internet diffusion in many world leverage ICTs for enhanced competitiveness.11 The GCC countries has been hindered by the lack of broadband access countries again feature prominently in the rankings in both the and international bandwidth that lags well behind many 2010–11 (138 economies) and 2012 compilations of the index potential competitors. In 2009, available Internet bandwidth (figure 25), with 3 in the top 30 (Bahrain, Qatar, and the UAE) per capita was 18 to 20 times greater in Bulgaria than in thanks to their fairly sophisticated enabling environment for Tunisia, Morocco, and Jordan. The price per megabit in entrepreneurship and innovation, coupled with good ICT readi- Bulgaria was three times lower than in Morocco and five ness (infrastructure, affordability, and skills). times lower than in Tunisia (Chauffour 2013). Figure 24 Mobile subscriptions in MENA countries, 2011 mobile subscribers (per 100 persons) Source: World Bank 2012d. 10. At the 2003 World Summit on the Information Society organized by the International Telecommunications Union, world leaders declared their “common desire and commitment to build a people-centered, inclusive, and development-oriented Information Society, where everyone can create, access, utilize, and share infor- mation and knowledge, enabling individuals, communities, and peoples to achieve their full potential in promoting their sustainable development and improving their quality of life” (www.itu.int/wsis/basic/faqs.asp). 11. The 2012 NRI framework gauges the degree to which a country’s market and regulatory framework support high levels of ICT uptake; the degree of a society’s readiness to make good use of an affordable ICT infrastructure; the efforts of individuals, businesses, and government to increase their capacity to use ICT, as well as the actual use of ICT in their day-to-day activities; and the broad economic and social impacts accruing from ICT and the transformation of a country toward an ICT- and technology-savvy economy and society. 26 PART 2. What to do to build a knowledge- and innovation-driven economy Figure 25 Rankings of MENA countries on the NRI for 2010–11 and 2012 NRI 2012 NRI 2010-11 Source: WEF and INSEAD, 2011 and 2012. Figure 26 Internet users in MENA countries, 2011 Internet users (per 100 persons) Source: World Bank 2012d. Transforming Arab Economies 27 PART 2. What to do to build a knowledge- and innovation-driven economy Further development of the information society in Arab coun- enhanced productivity, though there have been some notable tries requires action on several fronts: increasing broadband efforts (box 8). Moving in this direction requires a series of penetration, making more effective use of ICT applications, complementary actions: increasing the transparency of gov- and upgrading ICT skills. ernment data, making e-procurement possible, and enhancing ways to promote citizen engagement to improve government Figure 27 accountability. Morocco was the first country in the MENA region Comparison of mobile and broadband to make available online at least a portion of its government data. Under a new social accountability policy supported by the penetration in MENA and OECD World Bank in 2011, the Office of the Prime Minister in Tunisia created a “citizen scorecard” system designed to build social accountability and good governance in public services, dubbed MENA the “Public Services Barometer.” The vast potential of ICTs should also be tapped in the fields of education, health, busi- OECD ness, and other economic activities, working with the private sector. Governments can help by increasing ICT spending, pro- moting ICT literacy in schools, developing e-government ser- vices, and, as needed, subsidizing IT training within government. Improve workers’ IT skills to increase productivity and employability. ICTs are shaping job trends and fostering new opportunities such as microwork, ICT-enabled contracting, online gaming jobs, and the growing “app” economy. To capi- talize on such opportunities, a multipronged approach will be needed in the Arab world to introduce ICT into all levels of Source: Rossotto and others 2011. the educational system, to develop e-content, and to increase ICT literacy throughout the population. ICTs can create new Increase broadband penetration. Broadband access in MENA job opportunities for workers across the skill spectrum, cir- is constrained, despite large untapped demand (figure 27). This cumvent some of the rigidities of the labor market, and foster is mainly a consequence of the lack of competition in the broad- entrepreneurship and innovation. Information technology– band market. This situation needs to be remedied, as potential enabled services (ITES) and business-process outsourcing employment gains (estimated at 2.5 to 4 additional jobs for (BPO) are other sources of employment that meet demand each broadband job) could result from effective broadband for services from European countries with shrinking labor development (Kelly and Rossotto 2012). Progress in broadband pools. The development of easy-to-use software services can connectivity is doubly important because it creates opportuni- dramatically reduce the barriers to employment by enabling ties for new services to emerge and for existing services, such microtasking and crowdsourcing. Encouraging the develop- as business-process outsourcing, to expand. ment of Web content in Arabic is particularly important for spreading the benefits of ICTs. A broad approach to regulatory Make more effective use of ICT applications, including for reform in ICT should include legislation that ensures freedom delivery of government services. E-government applications of information and expression, supports media plurality and are yet not sufficiently developed in the region to facilitate independence, and promotes open access to government data. BOX 8 YESSER and effective e-government in Saudi Arabia Saudi Arabia’s national e-government program, known as YESSER, is designed to provide better government services and enhance efficiency and effectiveness in the public sector. Complementary regulatory and policy actions are aimed at fostering competitiveness and establishing a business environment supportive to ICT. In its first five years of operation, YESSER made progress on two important fronts: (i) implementing robust shared services that ensure secure flows of government information and the delivery of secure online services, and (ii) providing organizational infrastructure to help government agencies develop and implement their e-government transformation plans, by which traditional services are placed online, with benefits in terms of convenience, timeliness, and lower costs. The Saudi national e-government program is now entering its second five-year phase, with a renewed focus on creating a skilled workforce. By considering and promoting e-government—not just as a set of measures to bring more public services online, but as a transformation tool to improve the relationship among government, business, and citizens—YESSER has developed human resources policies and innovative ways to attract and retain talent. Today, the experience gathered by Saudi Arabia with YESSER can help other parts of the government, as well as other countries. Source: WEF 2010. 28 PART 2. What to do to build a knowledge- and innovation-driven economy Diversification initiatives also have a major role to play in enhancing economic growth in the medium term. These sectors—agribusiness, textiles, and chemicals—are typically labor intensive and account for most industrial jobs in the region. In addition, industries with high technology content, such as automobiles and aeronautical  acilitate the development of F components, may be attractive for certain countries. promising sectors Sector-specific development requires coordinated measures on the various pillars of the knowledge economy. This means The study has outlined a broad set of economy-wide reforms an attractive business climate, adequate training programs, the to make an effective transition to the knowledge- and capacity to catch up with technology and to innovate, and good innovation-based economy. But it will also be important to infrastructure, both for ICTs and in conventional areas such devote specific efforts to sectors that offer a high poten- as transportation. To yield maximum growth benefits, sectors tial to generate growth and create jobs. Moving up the value must be well-positioned in international value chains and chain by absorbing knowledge from the world’s best practices must fully exploit comparative advantages offered by natural could transform existing comparative advantages in the Arab resource endowments and by created conditions and compe- world into competitive advantages. In addition to niches in ICT tencies. Success stories such as that of textiles in Tunisia12 industries, opportunities are to be found in several promis- and ICTs in Jordan13 show the way forward. Morocco’s various ing knowledge-based sectors—such as activities related to sectoral plans constitute a framework for broad implementa- medical and health tourism, the creative industries, and green tion of the knowledge-based economy that can inspire other energy (table 3). Sectors that are already well established countries (box 9).  TABLE 3   Actions needed to promote growth in new and established sectors ­ Sector Actions needed Upgrade the value chain in order to strengthen vertical linkages. Established sectors (such as Design supportive policies to promote R&D in these sectors for better product development, notably in food processing, chemicals, niche products. and textiles) Establish a comprehensive strategy to address the duality of these sectors (informal low-tech enterprises versus formal medium-tech multinationals). Create platforms to match labor supply and demand. Encourage electronic and mobile money transfer services and crowd-funding. ICT-related sectors Create microtasking and crowdsourcing platforms, and develop rural business-process outsourcing (BPO) for the low-skilled workforce. Develop top-end BPO, strengthening linkages between business and universities (incubators for ICT entrepreneurs, co-creation platforms, and so on). Stimulate investments in the media and entertainment sector to add value along the value chain. Harness the potential of new technologies to meet demand for cultural goods (e.g., the book, music, and film industries) that reflect the values of Arab customers. Creative industries Advance legal framework surrounding taxes and intellectual property rights. Improve educational, administrative and technical qualifications to enhance productivity and increase the number of start-up companies. Enhance export promotion strategies to gain market shares by improving hospitality and combining excellent medical services with tourist activities. Health tourism Initiate certification of health facilities that meet international quality standards. Reassess the health-care regulatory mechanism in light of domestic health goals and foreign trade objectives. Foster new green niche industries and green entrepreneurs to accelerate the creation of green jobs. Expand national strategies for environment protection, energy saving, and alternative energies through programs that combine, as appropriate R&D efforts, public procurement, quality certification, and Green growth sectors training. Advance international cooperation by following business models that are in line with the region’s comparative advantage. 12. Tunisia has successfully upgraded the quality of its production through clothing design, finishing, and co-production. The textile sector has taken a qualitative leap by relying on nonconventional assets: creativity, innovation, marketing, and investment in new technologies. On the local level, several research laboratories and units have been involved in textile-related subjects, most located at the University of Monastir. The shift to higher-value-added and innovative activities has saved at least 204,000 jobs and 40 percent of Tunisia’s industrial exports (MEDIBTIKAR and EuroMed 2009). 13. ICTs account for up to 15 percent of GDP in Jordan. One success story of Jordan’s ICT sector has been the acquisition by Yahoo!, the global Internet portal and search engine, of Maktoob, the largest Arabic portal. Jordan has also taken steps to become a regional center of ICT development, with partnerships with Microsoft and Cisco, to provide more attractive job opportunities for highly skilled young graduates. Transforming Arab Economies 29 PART 2. What to do to build a knowledge- and innovation-driven economy BOX 9 Engineering sectoral and spatial diversification: The Moroccan example New plans and programs to boost economic growth are central to Morocco’s new national vision. These plans can be divided into three categories: (i) “functional” plans that directly address one or more of the pillars of the knowledge economy, (ii) sectoral plans with embedded knowledge-economy components, and (iii) regional plans that represent the extension of a previous plan to a specific area of the country. Of the examples described below, Plan Azur is the only one for which results are available—the rest are too new to have generated reportable results. The Pacte National pour l’Emergence Industrielle covers six major sectors: offshoring, automobiles, aeronautics and space, electronics, textiles and leather, and food processing. This 10-year industrial strategy combines actions to support investment, training, exports and so on, and is designed to boost the country’s gross domestic product (GDP) by 91 billion Moroccan dinars, create up to 440,000 jobs, reduce the trade deficit by 50 percent, and increase the country’s growth rate by an increment of 1.6 percent. It is also expected to help the country’s ailing export sector. Plan Vert reorganizes agriculture producers within integrated structures to facilitate commercialization and exports. The program reflects the importance of agriculture for Morocco’s economy and society. The plan includes a new land policy, improved management of water resources, and a package of fiscal incentives. The plan targets a sector that contributes 19 percent of Morocco’s gross national product—15 percent from agriculture and 4 percent from food-processing. The sector employs more than four million rural inhabitants and has created approximately 100,000 food-processing jobs, while providing food security for 30 million consumers. It is expected that the plan will create from 1 to 1.5 million jobs by 2020. The Plan Halieutis creates hubs for the transformation of regional fisheries through the development of pelagic fisheries and high value-added frozen products. The ultimate goal is to convert the fishing industry into a true economic growth factor by 2020 by doubling the sector’s value as a share of GDP and increasing employment from 61,650 currently to 115,000 direct jobs and 510,200 indirect jobs. The original Plan Azur aimed to create six coastal resorts to attract 10 million tourists by 2010. However, the plan was readjusted in 2007. The new Plan Azur 2020 aims to capitalize on the lessons learned from the previous plan and to create 470,000 new jobs, to double the number of tourists, and to increase tourism’s share of GDP by 2 percentage points by 2020. The Maroc Innovation initiative sets ambitious targets for patents and innovative start-ups, enhancing Morocco’s image as a site for research and development, particularly in biotechnology, ICT, materials, nanosciences, and nanotechnologies. Policy priorities include innovation-based competitiveness, production of technology, exploitation of the R&D capacity of universities, and attracting talent to establish a culture of innovation and entrepreneurship. Other steps include creating innovation cities, collaborating with EU innovation programs, and raising R&D funding to as much as 2 percent of GDP by 2020, with 25 percent coming from private sources. Source: Moroccan Ministry of Economy and Finance 2011. Several promising niches can be expanded. Some promis- BOX 10 ing niches identified by foreign investors over the last decade are detailed in box 10. They include service activities such as The job-efficiency ratio: call centers, software development, consulting and business How many jobs will €1 million bring? services, and R&D centers, and manufacturing activities such Estimates of the number of jobs created per million as textiles, automobiles, electronic components, and agribusi- euros invested, based on analysis of some 5,000 foreign ness. The so-called job-efficiency ratio, which expresses the direct investment projects, 1,500 investment feasibil- number of jobs created per million euros invested, ranges ity studies, 1,600 company partnerships, and 20,000 from about 40 to as many as 300. A surprising item is the company press releases over the period 2003–10: R&D center function, which, with 211 jobs created per million 299: Call center (regardless of sector) euros invested, shows an attractive potential that so far has 211: R&D center (information technology and been underexploited in Arab countries. Surprisingly, sectors automotive) such as public works, real estate, utilities, and tourism, and 196: textile manufacturing functions such as franchises, logistics, and headquarters and 136: consulting and business services administrative centers, perform rather poorly in terms of job 103: software (services) efficiency. The jobs created by foreign direct investment (FDI) 103: electronic components manufacturing are too costly to allow one to expect FDI to solve the job problem 77: agribusiness in Arab countries, at least not in the Southern Mediterranean. 63: automotive and aeronautics manufacturing This is why domestic sources of jobs, promoted through an 39: “green-tech” efficient knowledge-economy approach, are crucial, without disparaging the technology, management, and other inputs Source: ANIMA 2011. that FDI can bring in. 30 PART 2. What to do to build a knowledge- and innovation-driven economy of special industrial zones and free export zones by linking Develop dynamic sites and locales  multinational companies that operate there to local indus- tries to facilitate the transfer of technology and management Modern economies develop around dynamic sites where a skills (as planned in Tangiers as a result of partnerships with critical mass of talented and skilled individuals rub elbows Renault-Nissan). with each other and with employers, entrepreneurs, scien- tists, and financiers. Governments endeavor to create such The development of cities, established or new, can be an sites in the form of science and technology parks, often located important source of innovation and high-skill jobs. The mod- within special economic zones in which exceptional regulatory ernization of cities––renovating historic city centers (medinas), or fiscal policies are applied. Such government-sponsored sites adapting transport systems, reducing energy consumption in have proliferated in the Arab world, which presently has some buildings, etc.–– offers considerable opportunities to stimulate 50 technology parks. Some have reached a significant size, innovation though public procurement (if well-administered employing a highly educated workforce, as exemplified by the and open to fair competition, reserving a share for compe- Tunisian site of El Gazala, created ten years ago (figure 28). tent smaller local enterprises). As in the GCC countries, the construction of new cities can fuel technological and social However, a number of those science and technology parks innovation, as well as job creation. do not work as innovation spots but remain, essentially, real estate ventures. The task now is to ensure that these sites Knowledge and innovation can be useful in efforts to diversify are effective and efficient, that business–academic coopera- economic activities in rural areas. Developing rural areas tion takes place actively, and that entrepreneurs are able to requires investments in infrastructure, the organization of find the networks and other support they need—all of which producers’ cooperatives, technical and management training, are necessary if competitive clusters are to form. A rigorous and, possibly, the formation of clusters (for example, in agrifood evaluation of the efforts made to date in the Arab world would industries) that bring together in one location facilities and draw lessons from success stories and take steps to ensure infrastructure for research and development, manufacturing, that management and financial arrangements are effective. It commercialization, and logistics, all of which can help rural is also important to take maximum benefit of the proliferation producers move up the value chain. Figure 28 Development of El Gazala Technopole (Tunis): Number and distribution of employees, 2010 others managers 5% 10% technicians 13% engineers 72% Source: Authors. Transforming Arab Economies 31 PART 2. What to do to build a knowledge- and innovation-driven economy Table 4 summarizes the actions needed to build innovative joint research centers, bilateral cooperation schemes, par- and dynamic sites at different levels. It should be noted that ticipation of highly skilled diaspora and the like).14 This should an often-decisive factor in the successful development of such be systematically factored into policy decisions. sites is foreign support, whatever its forms and channels (FDI,  TABLE 4   Actions needed to build innovative and dynamic sites ­ Develop S&T parks that are efficiently run (with input from the private sector), while also fostering Science and technology solid education and research infrastructure and incentives for cooperation among various players in parks the innovation process (businessmen, researchers, venture capitalists, and so on). Special investment and Make the best possible use of industrial and export zones to facilitate linkages between local industries export zones and foreign investors and to transfer technology and management competence. Industrial and food- Facilitate cooperation among businesses and establish trade and export networks, quality certification processing clusters services, and financial support schemes. Create appropriate knowledge infrastructure (education, R&D) and establish efficient incentives to attract talented foreign investors and partners and to make the new cities hot spots of global New cities innovation. Use large-scale programs of infrastructure development (transportation, building, and so on) to stimulate innovation in local businesses. Deploy complementary policy measures—training programs, business incentives, technical support, Rural development ICT and road infrastructure, and so on—to facilitate the exploitation of local comparative advantages (for example, in agriculture), anchor populations, and prevent excessive urbanization. ³ ° ³ Part 2 has presented the basic elements of a development strategy based on knowledge and innovation. The most difficult question is how to implement policies and actions adapted to each country’s characteristics and circumstances. This is dealt with in Part 3. 14. As illustrated by the Rabat and Casablanca technology parks in Morocco, El Gazala in Tunisia, the Amman IT cluster in Jordan, and Berytech and other incuba- tors in Lebanon, among others. 32 How to implement a knowledge- and innovation- driven strategy In this chapter °± Each country is unique and must chart its own path °± Move with ambition °± Coordinate policies at the highest level of government °± Mobilize the population through a participatory approach °±  dapt the model to the country’s development level and government A capabilities °± Engineer change from micro initiatives to macro changes °± S  timulate regional integration within the Arab world and around the Mediterranean Transforming Arab Economies 33 PART 3. How to implement a knowledge- and innovation-driven strategy Each country is unique and must chart its own path A knowledge-economy-based development strategy needs to participatory process, (iv) to adapt the model to the country’s be adapted to the specific context of each country. The Arab capabilities, and (v) to engineer change gradually (from micro world is highly diverse and comprises countries with different initiatives to macro reforms). In addition, regional integration characteristics (table 5). Nevertheless, it is possible to present processes within the Arab world and within the Mediterranean a set of general principles to guide policy makers in imple- area will play a crucial role in the overall transition. The ques- menting the proposed strategy in the context of the political tions discussed below are related to what is sometimes called economy of the present period of transition. These principles the “fifth pillar” of the knowledge economy, which is concerned are (i) to act with ambition, (ii) to coordinate reform actions with a process that builds broad confidence and trust in the at the highest levels, (iii) to mobilize the population through a new strategy.  TABLE 5   The heterogeneity of countries in the MENA region ­ Labor availability Labor abundanta Resource richb Algeria, Islamic Republic of Iran, Iraq, Syrian Arab Republic, Republic of Yemen Resource poor Djibouti, Arab Republic of Egypt, Jordan, Lebanon, Morocco, Tunisia, West Bank and Gaza Labor importingc and resource rich Bahrain, Kuwait, Libya, Oman, Qatar, Saudi Arabia, United Arab Emirates Population size Algeria, Arab Republic of Egypt, Islamic Republic of Iran, Iraq, Morocco, Saudi Arabia Larged Bahrain, Djibouti, Jordan, Kuwait, Lebanon, Libya, Oman, Qatar, Tunisia, United Arab Emirates, Small West Bank and Gaza, Republic of Yemen Income Low income Djibouti, Republic of Yemen Lower-middle income Arab Republic of Egypt, Iraq, Morocco, Syrian Arab Republic, Tunisia Upper-middle income Algeria, the Islamic Republic of Iran High Kuwait, Oman, Saudi Arabia, United Arab Emirates Geography or colonial heritage Maghreb Algeria, Libya, Morocco, Tunisia Mashreq Arab Republic of Egypt, Iraq, Jordan, Lebanon, Syrian Arab Republic, West Bank and Gaza Members of the Gulf Cooperation Bahrain, Kuwait, Oman, Qatar, United Arab Emirates Council a. Refers to net inflows of worker’s remittances. b. As defined by the World Bank (2004), “resource-rich countries” are those in which extractive industries account for, or are expected to soon account for, more than 50 percent of government revenue. c. Refers to net outflows of workers’ remittances. d. Population over 20 million. Source: Gatti and others 2013. 34 PART 3. How to implement a knowledge- and innovation-driven strategy Move with ambition In implementing the knowledge- and innovation-based faster economic growth, as compared to the business-as- development strategy, national leaders and policy makers usual attitude. The necessary approach is inspired by ambition, should be inspired by the experience of countries that have speed, and mobilization of the population around the new vision, used the knowledge- and innovation-based approach to achieve as illustrated by country examples (box 11). BOX 11 The path followed by the knowledge-economy success stories A sustainable, reliable process of policy advancement and implementation is key to building a knowledge economy. That is the lesson gleaned from studies of several countries that have pursued knowledge-based growth—among them Finland, Republic of Korea, Malaysia, and Singapore, and Ireland, despite recent crises (World Bank 2007a). The same studies suggest that a multistakeholder process leading to a clearly defined, national commitment yields higher levels of growth than does business as usual. Content: The knowledge-economy pillars The governments of these successful countries focused their efforts on the four knowledge-economy pillars, implement- ing ambitious reforms on all or most fronts: ­ • They raised the quality of their education system—from early childhood education through lifelong learning systems— often setting the standard for the rest of the world in the process (Finland, Korea, Singapore). ­ • They took bold steps to develop a lively “innovation ecology,” using various routes to get there—a research and devel- opment (R&D) boost for Finland; and high-tech foreign direct investment (FDI) for Ireland. ­ • They improved their business environment by reducing transaction costs, promoting entrepreneurship, and some- times even turning their cities into magnets for talent by ensuring attractive living and working conditions. In effect, they transformed their economy into a vibrant home-base for firms from all over the world, from multinationals to start-ups (Ireland, Luxembourg, Singapore). ­ • They made major investments in ICT infrastructure and in catalytic applications such as advanced e-government (Estonia, Korea, Malaysia, the Nordic states). Process: Ambition, speed, and mobilization ­ • Ambition. The government itself provided a bold vision, became the top change agent, and mobilized the entire nation around an ambitious national effort, starting with a few key policy measures. Finland quadrupled public spending on R&D when fiscal austerity would normally have been advised. Ireland lowered the corporate tax rate and attracted knowledge-economy-boosting FDI. Korea rapidly boosted its broadband density and usage to the point where it is now a world leader on these indicators. ­ • Speed. In each case, the process adopted by the governments of these successful countries emphasized immediate action, by contrast with the more traditional approach of writing voluminous reports or master plans and trusting that this would somehow lead to needed changes on the ground. ­ • Mobilization. Many successful countries established a mechanism to mobilize relevant stakeholders and agents of change. Source: Rischard 2009. Transforming Arab Economies 35 PART 3. How to implement a knowledge- and innovation-driven strategy Coordinate policies at the highest level of government A knowledge-economy strategy is fundamentally a cross- mation. Korea and Finland (box 12) offer two striking examples cutting one, in which key policies are implemented within a with particular relevance for the Arab world, as their integrative coherent and integrative framework. Those countries that have approach was undertaken in response to crisis– Korea in the late pushed this logic to its ultimate implications have been particu- 1990s (the Asian financial crisis), and Finland in the early 1990s larly successful in accelerating their development and transfor- (after the breakup of the Soviet Union, a strong trading partner). BOX 12 Key coordinating bodies for knowledge- and innovation-driven development strategies: Republic of Korea and Finland Republic of Korea In 1998, in the wake of the Asian financial crisis, Korea launched a national strategy to move toward a knowledge economy (in the broad understanding of the term adopted in this study). The initial impetus came from the Maeil Business news- paper, which promoted its “Vision Korea Project” in a national campaign in February 1997 and developed the first Vision Korea Report. The government’s Ministry of Finance and Economy eventually championed the knowledge-economy policy agenda. The Korean Development Institute, a so-called “system integrator,” coordinated the work of a dozen think tanks. A joint World Bank and OECD report in 2000 provided a framework by outlining concrete steps for reforms in various policy domains. Korea’s knowledge strategy of April 2000 evolved into a three-year action plan. To implement the action plan, the government established five working groups (involving 19 ministries and 17 research institutes). The Ministry of Finance and Economy acted as coordinator. Each minister submitted a quarterly self-monitoring report to the Ministry of Finance and Economy, which in turn published an integrated report detailing progress. Mid-term results and adjustments to the three-year action plan were regularly implemented. Now, Korea has a Ministry of Knowledge Economy, which strives to assemble traditional industrial know-how, cutting edge research and development (R&D), and strong pro-business policies. The MKE comprises the former ministries of information and communication; science and technology; and commerce, industry, and energy. This combination provides a vast array of experts to create synergies, spur innovation, and upgrade the nation’s economy. The MKE also pushes for development of new growth engines by supporting ICT and high-end manufacturing. Finland The focus was more on the innovation pillar than on the whole knowledge-economy framework, but the philosophy is the same. To cope with the challenges of the late 1980s, a Science and Technology Policy Council was established in 1990, chaired by the prime minister and composed of key ministers, including the minister of finance, and high-level representa- tives of the business community and trade unions. It was the world’s first body explicitly to embrace the notion of a national innovation system to define and analyze policy. The council was renamed the Innovation Policy Council in the early 2000s. At the same time, the Finnish parliament’s Committee for the Future initiated broad public discussions about upcoming trends and future challenges, particularly those related to technology. SITRA, a parliamentary agency established in the 1960s to promote innovative initiatives for the benefit of the economy and of society, scaled up high-level training sessions in economic policy for members of parliament and key decision makers (such as top business managers and trade union chiefs), thereby promoting wider understanding of what was needed for sound economic development. The government also established a powerful innovation agency, TEKES, to support new technology-based firms in order to stimulate innovative R&D, notably by inducing universities and industries to work together on specific projects via matching funds. Source: Authors. 36 PART 3. How to implement a knowledge- and innovation-driven strategy Mobilize the BOX 13 population through a participatory The Nabni 2012 Initiative: 100 measures for a new Algeria suggested by the diaspora approach Nabni is a participative Web-based think tank created in April 2011 to prepare an action plan for a new Algeria released on July 5, 2012, marking the 50th anniversary of The ways in which knowledge-based development strategies the former colony’s independence from France. Nabni is are implemented is crucial for their success. The transition nurtured by dozens of members of Algerian civil society, including members of the Algerian diaspora. to a knowledge- and innovation-based economy depends on the participation of people at all levels and in every corner of They have come up with 100 measures, implementable society. This agenda cannot and should not be the government’s in the short term, aimed at improving the daily life of alone; instead, it requires consultation with and participa- citizens, restoring trust, and preparing for the future. The tion of stakeholders from the private sector and civil society, measures cover a diverse set of themes: access to public including academia, think tanks, and, importantly, the media. services, health and social development, living conditions for students and young people, enterprise and employment, In a sense, it is necessary to work on the four pillars through access to finance, access to housing, land management, a combination of top-down reforms and bottom-up initiatives, education and research, infrastructure, and governance buttressed by a well-communicated vision. The active participa- and reform. tion of people through bottom-up engagement is an essential component of the new social contract that needs to be put in More than half of the proposed measures relate directly place for successful transitions in the Arab world.15 to the pillars of the knowledge economy: simplifying the process of starting a business, reducing bureaucratic As people’s energy emerges, it spawns new economic hurdles, providing stipends for students to facilitate mobility and internships, rewarding excellence in research, grant- activities that have the potential to create wealth and jobs, ing four mobile 3G licenses, establishing free access to pushing to the forefront groups of reformers, change agents, government information, and so on. A brief fact sheet is and other proponents of sustainable transformation. The available for each of the 100 proposed measures, including imperative of nurturing this vital process of social renewal the rationale for the measure, details on key points, and points to the importance of effective policies of decentralization identification of the government institutions best positioned or deconcentration of power, possibly inspired by those recently to implement the measures. adopted Morocco. Encouraging the flowering of productive Source: Nabni2012.org. energy helps foment a dynamic for change throughout society, while also building a critical mass of new initiatives. Together these effects improve the climate for reform. Among the change agents who are capable of catalyzing these helping to create jobs, improve living conditions, and protect changes are members of the diaspora, especially those with the environment. Social media are emerging as a very pow- advanced qualifications (scientific, entrepreneurial, or other), erful tool for propagating such information, notably among who have a key role to play by lending their commercial, finan- young people. cial, and technical support. Nowhere is this role clearer in the region than in Lebanon. Diaspora members can also contribute Learning from the experience of other countries. In light of to the national conversation on improving governance and the the region’s recent and continuing reforms and its ambitions to business environment, as one sees today in Algeria (box 13). realize faster growth, it is important for each country’s leaders and interested stakeholders to evaluate where they stand on There is also the key question of the status and role of women. their journey and how they can take maximum advantage of Participation in the modern world and active engagement in the other countries’ experiences in using knowledge and inno- knowledge economy require the talents of the entire country. vation for growth and employment. Singapore, Finland, the In several of the countries of the region, women’s educational Republic of Korea, and other success stories of our time, it achievements outpace men’s. Their full, unfettered entry will be remembered, advanced by forging of a consensus on into the labor force would do much to benefit every country’s economic direction; by constantly learning from global devel- economy, while also boosting women’s status in economic opments, with innovation as its equally deliberate by-product; life and in society at large. and by harnessing the power of urban networks and creative cities that are the main loci of change and transformation in The role of the media should not be overlooked. Television the global economy. It is important to remain open to such networks that cover the Arab region have an important role experiences, and to learn from them, in view of the dynamism to play in stimulating pride and interest in innovative devel- of these economies on the global stage as a source of knowl- opments in cities, firms, schools, and laboratories that are edge, technology, investment, and markets. 15. See contributions made at the CMI Rencontre Valmer, November 27, 2012 (http://cmimarseille.org/E-letter_18-6.php). Transforming Arab Economies 37 PART 3. How to implement a knowledge- and innovation-driven strategy Adapt the model to the generally cannot be implemented across the board in all their aspects. Indeed, they may even have to be limited to specific country’s development areas (such as special economic zones). On the education front, in countries at an early stage of development or with level and government serious weaknesses in the fundamentals of education, it will be important to give priority to basic literacy and technical capabilities training, along with selected efforts in higher education. On the innovation dimension, it will be necessary to focus on tapping into global knowledge and technology and adapting While fully embracing the principle of speed and ambition, it to local needs rather than on building advanced structures for Arab policy makers must focus on what is feasible and well- research and development (R&D). On the pillar of information suited to the needs and capabilities of their country. Several and communication technologies (ICTs), it will be necessary Arab countries are either in difficult governance conditions or to universalize Internet access and promote its use through at a relatively low level of economic and knowledge-economy cheap and user-friendly applications and services for citizens, development. In such contexts, a gradual approach is appro- small businesses, and others, while developing information priate, as illustrated by low- and medium-income countries technology literacy. But no matter how circumscribed the that have successfully embarked on sustainable high-growth focus of the knowledge-economy effort, it remains essential regimes.16 In low-income countries with limited government to demonstrate strong national determination to succeed with capabilities, reforms of the business environment, for example, the new development model.  TABLE 6   Appropriate policy measures for countries at various stages of advancement toward ­ a knowledge economy Likely employment impacts indicated by shading (see note) Stage I: Beginners Stage II: Adopters Stage III: Advanced Low Knowledge Economy Index (KEI); Mid-range KEI; evolving toward a High KEI, with gaps embryonic knowledge-economy policies knowledge-based economy and full-scale reforms Develop niche activities based on Expand sector programs by entering more Diversify additional competitive sectors comparative advantage, particularly in competitive areas (more complex value and build new ones (services) to become nontraded services chains) world leaders Improve economic and institutional Extend EIR reforms and consolidate Revisit governance; build indigenous regime (EIR) in enclaves or in selected governance reforms; revisit trade delivery capability; widen trade policy areas (e.g., business creation) and agreements begin fundamental governance reforms Make ICT as widely available as possible Build ICT services and promote ICT-based Build an advanced information and and carry out demonstration projects (for activities (business process outsourcing); knowledge society that serves as a model small businesses, community services, accelerate achievement of nationwide for the larger Arab community etc.) broadband Build innovation capabilities by Develop R&D structures and build Build top-level R&D structures that are tapping foreign knowledge; conduct innovation systems on indigenous fully plugged in to global networks demonstration projects at the micro level competencies Make basic reforms in education systems Pursue reforms of education systems, Develop top-level education structures as and introduce selected changes and pilots generalizing progress across layers global platforms in higher education Source: Authors. Note: The unshaded cells indicate little or no impact on jobs. Pale blue shading indicates a moderate impact in terms of new jobs created or existing jobs saved. Dark blue shading indicates a high impact on jobs. 16. For more information, see annex 2 of the full report (World Bank 2013, available at www.cmimarseille.org/ke). 38 PART 3. How to implement a knowledge- and innovation-driven strategy Countries of the Arab world are at various stages on the path toward the knowledge economy, and policies should Engineer change from be adapted accordingly. Some countries have already made progress in building a knowledge economy, while others have micro initiatives to yet to make the decision to begin. A scheme consisting of three stages, each lasting three to five years, is suggested in macro changes table 6. At each stage, key policy measures are highlighted for each of the knowledge-economy pillars, including the promotion of growth sectors. Reflecting the regional impera- A gradual approach leading from micro reforms to macro tive of job creation, the table provides rough indications of changes can help in implementing a knowledge- and the impact (direct and indirect) of the actions implemented innovation-based strategy. The objective in the early phases for each pillar, if carried out successfully. It is impossible to of the reform process is to change mindsets and behaviors. As supply precise figures on the employment impact of policy mentioned, major reforms and employment effects cannot to be measures. On the basis of the rough estimates provided in expected in the short term. The first or pilot phase must there- Part 1 a “moderate impact” would concern up to 20 percent fore include workable and convincing microprojects that have of the labor force, and a “high impact” more than 20 percent. demonstration value—that is, that have rapid, visible effects, particularly for job creation, such as training programs for a new Resource-rich countries obviously are in a better position industry in demand, dynamic incubating structures for rapidly to engage in bold projects developed at a quick pace—as growing enterprises, research centers that are contracted by some of the Gulf Cooperation Council (GCC) have done foreign firms for development work, and so on. The second phase with a degree of success. The critical point, however, is to consists of a series of such projects organized into well-designed adjust ambitions and engagements to what the country is programs with critical mass. It is in this phase that the overall able to deliver. From this viewpoint, most Arab countries, perspective of the policy-making community and the popula- even those that are resource rich, have limitations and tion begins to evolve, preparing them, in the third phase, for constraints. Except for the small GCC states, Tunisia, and broader and deeper reforms that can lead to major changes on Morocco—which have good track records in designing and a national scale. The whole process can take a decade or more, implementing knowledge-economy strategies—substantial but an efficient, well-managed, and transformative national efforts are needed to build administrative and management strategy has a high likelihood of success (figure 29). A number capabilities in most Arab countries to carry out knowledge- of Arab countries are ripe for this third stage of major reforms economy plans. and institutional changes. Figure 29 A pragmatic agenda: From micro reforms to major changes Top-down initiatives Adoption of Moving Scaling Critical mass major reforms Pilot projects full up of projects & institutional force changes Bottom-up initiatives Immediate Medium-term Long-term agenda agenda agenda Source: World Bank 2007a. Transforming Arab Economies 39 PART 3. How to implement a knowledge- and innovation-driven strategy Examples from the five CMI member countries illustrate ­ • Jordan has developed a series of reforms inspired by the how the knowledge-economy development strategy can be knowledge economy over the last decade, notably in edu- adapted to the national context. cation and the business environment. These have begun • Morocco ­ has moved quite far with a series of nationwide to bear fruit, as witnessed by the growth of a vibrant IT plans to stimulate the sectoral and spatial diversification sector. Political issues, as well a complex administrative of the economy (see box 9). These plans have mobilized context with overlapping agencies, seem to hinder further various sectors of the government and also some local moves. In such a context, it is advisable to focus on releas- powers. While their implementation and impact on eco- ing the innovative potential of a few sectors in which the nomic activities, job creation, etc., must still be closely country has a competitive advantage. The government has monitored, it is time to expand the communities of change established a National Innovation and Competitiveness agents beyond the initial nucleus of reformers and govern- Council that plans to conduct a series of detailed audits ment agencies who initiated the plans. A broad mobilization of sectoral innovation.18 of the population as a whole— via “intermediary bodies” ­ • Lebanon, at the epicenter of geopolitical tensions, also such as business associations, trade unions, and the edu- faces a very challenging context. A very dynamic private cation community—should stimulate a more coordinated sector, supported by solid education infrastructure and engagement in the knowledge- and innovation-based path a vibrant diaspora, has helped to maintain economic and of development. In particular it should facilitate major social development. All types of measures that can further improvements that are still needed in the overall business exploit or consolidate the country’s innovative potential and governance climate to create trust and confidence. A are welcome. In this perspective, a World Bank program background study on the knowledge economy in Morocco has been put in place to support innovative start-ups has also been prepared by the CMI (Djeflat 2012). and mobilization of venture capital (Bell 2011). Another • Tunisia ­ is experiencing a difficult evolution to a democratic key program is focusing on ICT applications, especially regime after having inspired the larger series of Arab Spring mobile applications. When the political situation stabilizes, revolts. This has come with a serious reduction of economic the country should be in position to proceed to broader activity, notably as a result of falling trade and tourism reforms and a full-fledged development strategy based flows. Job creation is the overall economic and social prior- on the knowledge economy. ity, with some 650,000 people unemployed, including some 215,000 with postsecondary education. Tunisia benefits from solid experience in engineering knowledge-economy- based policies as part of in its former national five-year plans beginning in 2007. The country also has a large cadre of informed, efficient civil servants, and a business com- munity with demonstrated competitive capabilities, even Stimulate regional in highly competitive sectors such as textiles and clothing. These are considerable assets to build on, notably in com- integration within the pleting plans that were established to develop industrial clusters in various areas and picking low-hanging fruit in sectors such as information technology (business-process Arab world and around outsourcing, call centers, etc.) with appropriate programs for training and investment. the Mediterranean • Egypt ­ is also undergoing a difficult political transition, with the establishment of a new constitution and new powers. Deeper economic and political integration within the Arab The country has undertaken reforms of the business envi- world would considerably facilitate the transition to the new ronment in the past, as shown by World Bank assessments economic model. It would ease job tensions through more- (World Bank 2007b). The business sector has performed integrated regional labor markets; it would expand markets for well in several areas, notably those related to information products and services; it would connect education, scientific technology. There is also notable R&D capacity in universities and engineering resources to creative organizations; and it and research centers that can be mobilized through efficient would provide finance for large infrastructure projects. Full programs (box 7). A key issue is to generate a “mindset” integration in the Arab region remains a distant goal. But some shock of a sufficient scale within a relatively short period form of the “Lisbon Agenda,” akin to the one that Europe has in order to put the country on a new development path.17 embraced, would be a significant symbolic step. 17. In line with this approach, some Egyptian reformers, such as those in charge of the Renaissance Plan and who are advising the Egyptian president, have pro- posed the following measures: (i) major reforms to break the concentration of economic powers currently held by a few groups, (ii) creation of a series of special economic zones to attract foreign firms, and (iii) a massive effort to develop technical and vocational training. (Session at the 8th Rendez-vous de la Méditerranée organized by the Institut de la Méditerranée and the Cercle des économistes as part of the Mediterranean Economic Week in Marseille, October 20, 2012.) 18. As advised by the World Bank during its work in 2010-12. The National Innovation and Competitiveness Council (NICC) has expanded its membership to eight ministers and secretaries general and 27 nonministerial members under the chairmanship of the prime minister. The council consists of six sectoral subcommit- tees on logistics, medical services and pharmaceutics, tourism, clean energy, ICT, and manufacturing that are aligned with the high-potential sectors identified in the USAID program on innovation clusters. Also included is an “Innovation and Development” subcommittee focusing on nonsectoral, cross-cutting reforms. 40 PART 3. How to implement a knowledge- and innovation-driven strategy A knowledge-based development strategy takes advantage support and FDI) have proven to be decisive in the formation of the dramatic reduction in the cost of sharing and trading and development of successful technological and industrial goods and services, finance, and information. To fully exploit clusters in the countries of the Middle East and North Africa. these opportunities, however, Arab countries will have to do more in the areas of regional integration and international Integration within the Mediterranean basin would bring cooperation. Indeed, economic integration through increased considerable benefits to the countries of the southern and trade and foreign direct investment (FDI) may be the best way eastern rims by enlarging possibilities for market growth to put the countries of the region on a path to faster and more and employment in the north. Several ambitious projects have sustainable economic growth and greater employment. already begun, such as the Desertec solar energy project; other worthy initiatives should be scaled up. European and The absence of a single market limits trade within the region, Arab governments alike should give such initiatives a closer which is three times lower than trade among the develop- look. Much can be accomplished through the consolidation ing countries of Asia. Thus even small steps toward trade of existing regional networks of academics, entrepreneurs, integration would be beneficial. With respect to education, financiers, city managers, and others­ —networks that have research, and innovation, joint programs would make it easier engendered a wide range of promising initiatives in the form for Arab countries to build and benefit from the necessary of joint R&D, education, and other programs, as well as in joint critical mass of resources, talent, and markets. In the realm learning activities (table 7). of infrastructure, large-scale cooperative projects in water, transportation, and other areas would allow for the introduc- Euro-Mediterranean cooperation is particularly important tion of innovations, while also creating many jobs. to support the modernization of higher education in the Arab world. Some countries such as Morocco, Tunisia, Algeria, Deeper integration within the Mediterranean space would Lebanon, and Egypt have adopted the LMD degree ladder—LMD speed development of the Arab world and benefit Europe. stands for license (bachelor), master, and doctorate—around Greater pan-Mediterranean integration would facilitate tech- which European academic programs and degrees have been nology transfer between the two rims, creating a common standardized. On the research side of academia, multicountry research and innovation space and helping to rally diasporas R&D platforms serving common goals supported by EU funding to innovative and entrepreneurial undertakings. It would stimu- have proven their utility, as have international programs that late large-scale projects, such as those already under way in match funds provided by Arab countries. The latter have been solar energy and logistics. It would create, more generally, particularly useful for the promotion of innovative projects an area of enhanced economic growth, which both sides of involving research, technology incubators, and venture capital. the Mediterranean so urgently need. As noted above (Part II, Regional efforts in ICT can also strengthen cooperation in the section on local initiatives), foreign inputs (such as diaspora development of telecommunication infrastructure.  TABLE 7   Areas for improvement and selected actions to advance Mediterranean integration ­ Objective Selected actions Strengthen integration in Develop joint qualification and certification mechanisms education Scale up scholarship programs (ERASMUS) Expand networks of engineering and management schools Develop learning and evaluation mechanisms for university management (governance), training programs, etc. Build the Euro-Med innovation and Mobilize actors through sector task forces and online platforms research space Develop networks of incubator managers, business angels, and R&D program leaders to share good practices Establish multicountry and multipartner R&D platforms and programs through co-design and co-ownership between partners on the north and south rims of the Mediterranean Stimulate FDI and strengthen linkages for technology transfer, business management practices, etc. Mobilize diasporas through efficient networks and good policy practices inspired by international experience Promote the information society in Cooperate to develop ICT applications (e-government, e-business, etc.) the Mediterranean Assist in efforts to liberalize telecommunication markets and improve regulatory frameworks Promote industrial and local Reinforce cooperation in the development of growth sectors through joint projects (solar, development in the Mediterranean energy saving, water management, transport, etc.) Stimulate city networks for exchanges of good practice and mutual assistance in innovative urban development and related policy measures (technology parks, city planning, smart cities, etc.) Transforming Arab Economies 41 PART 3. How to implement a knowledge- and innovation-driven strategy There is a role for regional and international organi- a similar vein, regional organizations such as the Islamic zations as well. Organizations such as the European Development Bank, the Islamic Educational, Scientific, and Bank for Reconstruction and Development, the European Cultural Organization, and the African Development Bank Investment Bank, the European Commission, United Nations can do much to facilitate the progress of knowledge-econ- Development Programme, and the World Bank, for example, omy strategies in the region. The Center for Mediterranean have a crucial role to play in accelerating the implementation Integration (CMI), based in Marseille, is also called upon to of knowledge-based development strategies in Arab countries play a major catalytic role in the integration process and and in the integration process in the Mediterranean area. In reform initiatives (box 14). BOX 14 The Center for Mediterranean Integration The Center for Mediterranean Integration (CMI) was created by a group of Mediterranean governments—Egypt, France, Jordan, Lebanon, Morocco, and Tunisia—along with the European Investment Bank (EIB) and the World Bank. It supports development and integration of practices in the Mediterranean region by: (i) providing a space for evidence-based policy dialogue; (ii) producing and disseminating knowledge products; and (iii) supporting cross-sectoral, multipartner regional efforts. Launched on October 9, 2009, the CMI aims to contribute to the building of a new economic and social develop- ment paradigm that reflects the expectations of the democratic movements in Arab countries. Its programs are organized around three integrating themes: ­ • Integrated economies. Increased employment is the overarching economic objective in the region. Raising productivity, instituting knowledge- and innovation-based reforms, and exploiting linkages through trade, investment, and infra- structure are common elements of current deliberations aimed at shaping new economic models and reform paths. ­ • Sustainable growth. The Mediterranean region—unequally rich in energy resources, universally poor in water resources, and ubiquitously vulnerable to environmental risk—cannot afford, even in constrained socioeconomic times, to forgo the addition of a strong green dimension to its growth and development strategies. • ­ Participatory governance. At the heart of the radical changes in the region is the aspiration of citizens for a sustained process of transformation toward participatory economic and political governance. The CMI ’s work—networking, outreach, and advocacy for reforms—embraces a range of stakeholders from the public and private sectors and from civil society. The Center encourages a dialogue between government and independent practitioners by: ­ • Developing knowledge in the form of studies, policy notes, and tools for sector work at the regional, national, and local levels and providing evidence-based analysis to facilitate public policy debate. ­ • Providing a venue in which new leaders, decision makers, and practitioners across the Mediterranean can come together in conferences, workshops, and policy dialogues to discuss pressing issues, reflect with their peers, review best practices and lessons learned, and benchmark progress. ­ • Developing a knowledge platform on the CMI Web site to disseminate knowledge and create virtual meeting spaces for communities of practice and mutual interest. Source: Authors. For more information, go to www.cmimarseille.org. ³ ° ³ This study presents an appraisal of the Arab world’s position in the global knowledge economy. It highlights that the move to the proposed new development model based on knowledge and innovation means that government, private sector, and civil society in countries across the Arab world must work together outside of their “silos” in a more integrated and cohesive way. The creation of a vibrant innovation climate, the improvement of education systems, and the building of a competitive economy all require a new partnership between the public and private sectors and civil society working together to design and implement economic policies and reforms, which may bear fruit only in the medium- or long-term. Making this happen means a new role for the government, not as a controller and enforcer of policies, but as an architect and facilitator of a new development path and guarantor of the rule of law. The private sector needs to move from the system of privilege in which it has operated for many years to one of competition. A more active private sector will also contribute to increased economic integration of the region. Civil society, including youth and the media, also have a key role to play. The Arab Spring, propelled by the fruits of the ICT revo- lution, has clearly demonstrated popular demand, especially among the young, for greater justice and dignity. It is important to bring young people into the national conversation. The media should be free, should be mobilized around the knowledge-based strategy, and should responsibly showcase the successes that are taking place at the national, regional, and local levels. Only then will consensus be built around reforms, and their credibility and effectiveness reinforced. 42 References and bibliography eferences and bibliography ANIMA. 2011. “Mediterranean Niches and Sectors with High Nallari, Raj, Shahid Yusuf, Breda griffith, and Rwitwika Potential for Job Creation and Growth.” Unpublished Bhattacharya. 2011. Frontiers in Development report prepared for the Center for Mediterranean Policy: A Primer on Emerging Issues. Washington, Integration, Marseille. June. DC: World Bank. Bannayan, Haif, Juliana guaqueta, Osama Obeidat, Harry OeCD (Organisation for economic Co-operation and Anthony Patrinos, and emilio Porta. 2012. “The Development). 1996. The Knowledge-Based Jordan Education Initiative: A Multi-Stakeholder Economy. Paris. www.oecd.org/datao- Partnership Model to Support Education Reform.” ecd/51/8/1913021.pdf. Policy Research Working Paper 6079, World Bank, Washington, DC. Qiang, Christine Zhen-Wei, Carlo M. Rossotto, and Kaoru Kimura. 2009. Economic Impacts of Broadband. In Bell, Simon C. 2011. “iMENA: An Innovation Agenda for Jobs.” World Bank, Information and Communications for MNA Knowledge and Learning Fast Brief 89, World Development 2009: Extending Reach and Increasing Bank, Washington, DC. Impact. Chapter 3. Washington, DC. Chauffour, Jean-Pierre. 2013. From Political to Economic Rischard, Jean-François. 2009. MENA Countries in the 21st Awakening in the Arab World: The Path of Economic Century: Building Knowledge Economies for Job Integration. Washington, DC: World Bank. Creation, Increased Competitiveness, and Balanced Development. Washington, DC: World Bank. Chen, Derek H. C., Ndiamé Diop, and Sophie Muller. 2012. “Knowledge, Economic Growth, and Employment Rossotto, Carlo Maria, Ilari Lyndi, victor Mulas, and Cecilia M. Creation: The MENA Experience.” Unpublished back- Paradi-guilford. 2011. “ICT for Inclusive Economic ground report. World Bank, Washington, DC. June. Growth in MENA.” Unpublished report. World Bank, Washington, DC. Djeflat, A. 2012. “Morocco’s Effort on the Knowledge Economy.” Unpublished background note, CMI, Marseille. Rossotto, Carlo Maria, Siou Chew Kuek, and Cecilia Paradi- January. guilford. 2012. “New Frontiers and Opportunities in Work: ICT is dramatically reshaping the global job Drucker. Peter F. 1992. Managing for the Future. New York: market.” ICT Policy Notes. World Bank. Washington, Penguin. DC. June. gatti, Roberta, Matteo Morgandi, Rebekka grun, Stefanie UNeSCO (United Nations educational, Scientific and Cultural Brodmann, Diego Angel-Urdinola, Juan Manuel Organization). 2012. UNESCO Institute of Statistics Moreno, Daniela Marotta, Marc Schiffbauer, and Database. elizabeth Mata Lorenzo. 2013. Jobs for Shared Prosperity: Time for Action in the Middle East and UNIDO. 2011. Industrial Development Report 2011. Vienna. North Africa. Washington, DC: World Bank. World Bank. 2004. Jobs, Growth and Governance in MENA: Kelly, Tim, and Carlo Maria Rossotto (eds.). 2012. Broadband Unlocking the Potential for Prosperity. Washington, DC. Strategies Handbook. Washington, DC: World Bank. ∤ 2006. Where Is the Wealth of Nations? Measuring Capital for the 21st Century. Washington, DC. Kuznetsov, Yevgeny, Carl Dahlman, and Abdelkader Djeflat. 2012. “How to Facilitate High-Productivity Employment in MENA Economies? Sequencing Interventions to ∤ 2007a. Building Knowledge Economies: Advanced Strategies for Development. Washington, DC. Promote Innovation.” Unpublished background report. ∤ 2007b. Doing Business 2008. Washington, DC. World Bank, Washington, DC. April. ∤ 2008. The Road Not Traveled: Education Reform in the Middle East and North Africa. Washington, DC. MeDIBTIKAR and euroMed Innovation and Technology Programme. 2009. “Improving Innovation in Textile and Clothing. Final Report of Textile Sector Study.” ∤ 2009a. From Privilege to Competition: Unlocking Private-Led Growth in the Middle East and North MED/2003/070-567. Brussels. Africa. Washington, DC. Transforming Arab Economies 43 References and bibliography ∤ 2009b. “Knowledge Assessment Methodology 2009.” Washington, DC. ∤2012d. World Development Indicators 2012. Washington, DC. ∤ 2010a. “Stepping Up Skills for More Jobs and ∤ 2013. Transforming Arab Economies: Traveling the Knowledge and Innovation Road (Full Report). Higher Productivity.” Human Development Network, World Bank, Washington, DC. Prepared by the CMI (Center for Mediterranean ∤2010b. “Early Child Development in the Middle East and North Africa.” Internal document, Integration) with the World Bank, EIB (European Investment Bank), and ISESCO. Washington, DC. http://www.cmimarseille.org/ke. Washington, DC. ∤ 2010c. Innovation Policy: A Guide for Developing Countries. Washington, DC. Yusuf, Shahid, and Kaoru Nabeshima. 2012. Some Small Countries Do It Better. Washington, DC: World Bank. ∤ 2011a. Learning for All: Investing in People’s Knowledge and Skills to Promote Development: World Economic Forum. 2010. Global Competitiveness Report 2010–2011. Davos, Switzerland. World Bank Group Education Strategy 2020. Washington, DC. ∤ 2011. Global Competitiveness Report, 2011–2012. Geneva. ∤ 2011b. Skills and Research for Productivity and Growth: Higher Education in East Asia. ∤ 2012. Global Competitiveness Report 2012–2013. Geneva. Washington, DC. ∤ 2011c. Project Performance Assessment Report for the Hashemite Kingdom of Jordan: Higher World Economic Forum and OECD (Organisation for Economic Co-operation and Development). 2011. Arab World Competitiveness Report, 2011– Education Development Project and Education 2012. Geneva. http://www.weforum.org/reports/ Reform for Knowledge Economy I Program. IEG arab-world-competitiveness-report-2011-2012. Report 62732, Washington, DC. ∤ 2012a. “Knowledge Assessment Methodology 2012.” Washington, DC. www.worldbank.org/kam World Economic Forum and INSEAD. 2011. The Global Information Technology Report 2010-2011: ∤ Transformations 2.0. World Economic Forum, 2012b. World Development Report 2013: Jobs. Geneva. http://www3.weforum.org/docs/WEF_ Washington, DC. GITR_Report_2011.pdf. ∤ 2012c. “MENA Regional Synthesis on the Teacher Policies Survey: Key Findings from Phase 1.” ∤ 2012. The Global Information Technology Report 2012: Living in a Hyperconnected World. World Unpublished report, Middle East and North Africa Economic Forum, Geneva. http://www3.weforum. Region, World Bank, Washington, DC. org/docs/Global_IT_Report_2012.pdf. 44 Outline of the full report Transforming Arab Economies 45 Appendix 1. The full version of Transforming Arab Economies: Traveling and Latin America. The chapter discusses the performance the Knowledge and Innovation Road (World Bank 2013) has of the various Arab countries on each of the four pillars. three parts. Important differences in performance and achievements can be discerned between resource-rich and resource- Part 1 deals with three fundamental questions surrounding poor countries. Although the nature of the reforms to be the proposed development model based on knowledge and undertaken is not fundamentally different, the means that innovation: (i) Why make the move to a knowledge- and can be mobilized for related investments—be they in edu- innovation-driven economy (chapter 1)? (ii) What would cation, research, or information infrastructure—do differ that move entail (chapter 2)? and (iii) How should it be done considerably in magnitude. (chapter 3)? Chapter 3. Shaping new development strategies for Arab Part 2 delves into policy orientations related to the overall eco- countries. Putting in place the new economic model requires nomic and governance regime (chapter 4), education (chapter bold and speedy initiatives, while at the same time taking 5), innovation (chapter 6), and information and communication due account of countries specificities—in other words, the technology (ICT, chapter 7), and the kinds of policy reforms distance already traveled by each country toward the knowl- and initiatives that may be needed in each area. edge economy and its capacity for further progress—notably Part 3 discusses the promotion of growth sectors (chapter in terms of government efficiency. The chapter discusses 8) and the management of local and regional development the need to link the implementation of a growth and job (chapter 9) as key elements of economic diversification. strategy based on the knowledge- and innovation-driven approach to a new social contract. It indicates the nature of the policy measures needed to carry out reforms and create jobs in relation to the level of economic develop- Part 1. Key issues: ment of countries. Finally it provides views on integration within the Arab world, the European space, and the global Why, what, and how? economy, and on the decisive role that the international community could play. Chapter 1. Deploying knowledge and innovation to trans- form Arab economies. The chapter discusses the limits reached by the economic systems and political regimes that Part 2. Policy pillars preceded the Arab Spring. It shows how a knowledge- and innovation-driven economy responds to the employment and empowerment challenges faced by Arab countries. It Chapter 4. Improving governance and the business envi- provides estimates of the job impact that such a knowledge ronment. The success of the knowledge economy strategy economy might have, estimates based on past trends in in a given country depends on that country’s economic and Arab countries themselves. These effects could be greatly institutional regime, because that regime influences the increased by redoubling knowledge-economy efforts, efficiency and effectiveness of investments made in other reducing skill mismatches through better education and pillars—education, innovation, and information. The chapter training, and creating economic structures that produce discusses several key issues: the need to articulate and the maximum number of jobs from economic growth. The monitor new strategies through truly participatory pro- employment effects of a knowledge- and innovation-driven cesses; questions related to the rule of law, the freedom economy would be particularly significant in oil-importing of expression, and voice and accountability; the opening of (resource-poor) countries. societies, notably in favor of youth and women; and improve- ments in the business environment and trade relations. Chapter 2. Catching up with global knowledge-economy Indicators of relative performance vis-à-vis competitors and trends. A knowledge economy has four fundamental pillars: comparator countries make it possible to measure progress. a well-functioning economic and institutional and regime, a well-educated and skilled work force, an efficient inno- Chapter 5. Educating people for better jobs in a new vation system, and a dynamic information infrastructure. economy. Raising the skills and competencies of popula- Using standard indicators to measure progress made by tions for knowledge-based development requires profound Arab countries on these pillars, and benchmarking them changes in the education system at all levels. Arab countries against more than 140 countries, the chapter shows that have made immense progress in providing equitable access the Arab world needs to increase their knowledge-economy to formal education, fighting illiteracy, and reducing gender efforts to match those of close competitors and compara- disparities. These impressive quantitative achievements tors, such as the countries of Eastern Europe, Central Asia, have improved the quality of life for citizens through longer 46 Appendix 1. life expectancy and lower fertility and infant mortality rates. However, despite these successes—and the considerable Part 3. Diversification resources invested in education—education reforms in the Arab region have not yet fully delivered on their promise. The initiatives relationship between education and economic growth has remained weak, the divide between education and employ- ment has not been bridged, and the quality of education Chapter 8. Promoting growth sectors. In line with countries continues to be disappointing. This calls for strengthening that have pursued active and efficient industrial policies to boost the governance of the education system and aligning its their transition to a knowledge-based development model, and governance, management, financing, and performance- with a view to plucking low-hanging fruit in terms of job and incentive mechanisms to produce better learning outcomes. wealth creation, this chapter provides some suggestions of Every country in the region also needs to adopt national policies that could be implemented in a series of sectors by performance standards and to continuously monitor learn- exploiting the comparative advantages of the region. These ing achievement. The chapter provides examples of some include, in established sectors, the food-processing and textile exemplary initiatives being undertaken by Arab countries. industries, which need to enhance their value chains; ICT- related industries, which need to expand their success in off- Chapter 6. Fostering innovation and technological upgrad- shoring activities; tourism, where medical and health tourism ing. The promotion of innovation, as shown by the experience show particular promise; creative and media industries; and of developed countries, is a task that requires actions by green growth, including energy efficiency and environmental many government agencies and departments, while being stewardship. In all sectors, efficient programs require sets of focused on very specific objectives. There is, among other complementary measures that combine regulatory actions, things, a need to support innovators along technical, com- financial mobilization, training programs, R&D efforts, and mercial, and financial lines; to improve the functioning of export promotion campaigns, among other things. The role research and development (R&D) structures, notably by of the government is not to undertake all these tasks, but to developing better linkages between universities and indus- create the right conditions for the private sector to step in–by try; to tap efficiently into global stocks of knowledge and changing government’s role to one of a facilitator and catalyst. technology by taking advantage of levers such as foreign direct investment and by mobilizing diasporas; and to set Chapter 9. Managing local and regional development. Modern up and facilitate the development of innovation sites such as economies develop where there is an accumulation of talents, technology parks and industrial clusters. Several countries knowledge, and entrepreneurship. Following global trends, Arab in the region have already accumulated significant experi- governments have tried to facilitate the emergence and growth of ences in such programs and offer interesting examples that such innovative sites by measures such as science and technology can be emulated throughout the region. parks, industrial and export zones, and new cities (in resource- rich countries). The chapter examines these efforts and provides Chapter 7. Moving to the information society. Arab coun- policy orientations accompanied by illustrative examples. It also tries have made great strides in ICT diffusion since the mid discusses rural development issues and policies. Efficient spatial 1990s, thanks to a host of liberalization reforms and the diversification requires long-term regional planning and effec- global development of ICTs, which have driven down costs tive measures of decentralization and devolution of power—a and made access easier. Owing to accelerated liberalization challenge for most countries throughout the region. over the past 10 years, the Arab world has experienced a high rate of growth in telecommunications services. This, along with the development of the Internet, has encouraged and enabled the population in some countries to mobilize for political change. There is a great opportunity to further Annexes reform the ICT sector, to increase competition, to remove Internet restrictions, and to provide new opportunities to Annex 1 reviews the literature on the relationship between the increase employment, foster entrepreneurship, and enable knowledge economy, growth and employment and develops a better transparency and governance using ICT applications. methodological approach to link the knowledge economy to Accelerating the use of the Arabic language on the Web job creation in the Middle East and North Africa region. could have important effects in advancing the knowledge economy across the region. Annex 2 provides insights on a series of country experiences from across the world in developing knowledge-based devel- opment strategies. Annex 3 surveys knowledge-economy issues in several Arab countries and highlights policy initiatives that are adapted to their specific country circumstances. Transforming Arab Economies 47 Knowledge, innovation, and economic growth Transforming Arab Economies 49 Appendix 2. A neoclassical model of long-term economic growth was scores as a proxy for the quality of educational systems, they first developed by Robert Solow in a seminal 1956 paper, found that educational quality had a positive effect on economic “A Contribution to the Theory of Economic Growth,” in which growth. A study covering 92 countries between 1960 and 2000 technological progress was considered an exogenous factor. by Chen and Dahlman (2004) showed that an increase of 20 A major critique is that the theory is based on a decreasing percent in the average years of schooling of a population tends return to scale (that is, an increase in the factors of production to increase the average annual economic growth by 0.15 per- will result in a less-than-proportionate increase in production). centage point. On a cross-country macroeconomic study done But a declining return is not always observed, especially in by Barro (2000), the return on education is estimated to be an knowledge-intensive sectors. In response, economists have additional 0.44 percentage point of growth in the country’s per sought to endogenize technological progress—also called capita GDP for each additional year of schooling completed. total factor productivity—in their economic growth models. In this view, progress is no longer considered a natural phe- Research and development (R&D) and growth. Various studies nomenon spurred by agents’ behavior and extra-economic have shown that innovation and the generation of technical incentives, but an economic one subject to specific choices. This knowledge have substantial positive effects on economic also calls into question the decreasing marginal productivity growth—and growth in productivity. For example, Lederman of production factors, mainly because positive externalities and Maloney (2003), using regressions on data panels of five- may result from the interaction of firms—or from the public year averages between 1975 and 2000 for 53 countries, found goods at their disposal. In Paul Romer’s canonical model of that a 1 percentage point increase in the ratio of total R&D 1986, externalities appear because firms’ investments not expenditure to GDP increased the growth rate of GDP by 0.78 only benefit specific agents, but also enhance global produc- percentage points. In the study previously noted, Chen and tivity by raising the level of technological development in the Dahlman (2004) demonstrated that a 20 percent increase in economy as a whole. Introducing the notion of human capital, the annual number of patents granted by the U.S. Patent and in 1988 Robert Lucas pointed out the positive externalities that Trademark Office (USPTO) was associated with an increase of may result from the simple interaction of skilled agents and 3.8 percentage points in annual economic growth. Cincera and their competent counterparts. Grossman and Helpman (1993) van Pottelsberghe (2001) investigated the long-term effects of further highlighted the importance of innovation incentives to various types of R&D on multifactor productivity growth, using growth and both the endogenous supply of human capital and Organisation for Economic Co-operation and Development the residual supply of unskilled labor. (OECD) panel data for the period 1980–98.19 They found that business, public, and foreign R&D all had statistically sig- Education and growth. Recent studies of international differ- nificant positive effects on productivity growth. Adams (1990), ences in output per worker and economic growth rates have using numbers of academic scientific papers in various sci- focused on the role of human capital in economic development. entific fields as a proxy for the stock of knowledge, found that Indeed, most empirical, cross-country studies of long-term technical knowledge contributed significantly to the growth in growth now include some measure of human capital. Barro total factor productivity of U.S. manufacturing industries for (1991), using data for 98 countries for 1960–85 and school the period 1953–80.20 Evidence also shows that R&D—notably enrollment rates at the primary and secondary levels in 1960 in the business sector—can spur economic growth. Khan and as proxies for initial human capital, found that enrollment rates Luintel (2006) show that the strength of this connection varies had statistically significant positive effects on the growth of across the OECD, and point out several determinants (such real GDP per capita. Similarly, Cohen and Soto (2001), using as human capital, infrastructure, foreign direct investment, cross-country time-series data on educational attainment (or and high-tech exports and imports) that have significant coun- average years of school completed), found that education had try-specific effects on productivity. Notably, private sector statistically significant positive effects on economic growth. knowledge stocks21 do much more to absorb international Hanushek and Kimko (2000) focused on the effects of educa- technologies and create knowledge spillover effects than do tional quality on economic growth. Using international test knowledge stocks from the public sector. 19. Cincera and van Pottelsberghe (2001) define public R&D as R&D performed by government and higher education sectors, and foreign R&D as business R&D performed in other OECD countries. 20. Adams (1990) uses worldwide annual counts of publications in nine sciences: agriculture, biology, chemistry, computer science, engineering, geology, math- ematics and statistics, medicine, and physics. 21. Measured based on the flow of R&D expenditures in real terms. 50 Appendix 2. Information and communication technologies and growth. small contribution, organizational changes and product and A growing body of evidence shows that information and com- process innovation in services—rather than capital deep- munication technologies contribute to a country’s overall ening as a result of the introduction of ICT—lie behind the economic growth. The World Bank reported in 2009 that in divergence in performance between the United States and low- and middle-income countries, every 10 percentage-point Europe. In short, the United States gets a bigger productivity increase in broadband penetration accelerated economic kick out of ICT than does Europe. growth by 1.38 percentage points. The study further found that the development impact of broadband was greater in In addition, vast empirical literature investigates innovation’s emerging economies than in high-income countries, which role in productivity and growth across enterprises or sectors “enjoyed a 1.21 percentage point increase in per capita GDP of an economy. Hall, Mairesse, and Mohnen (2009) and Hall growth” for each 10 percent increase in broadband penetra- (2011) estimate the return on investments in R&D from those tion (World Bank 2009). The study also demonstrated that that link innovation to productivity growth through qualitative broadband has a potentially larger growth effect than other measures of product and process innovation. The distinction ICTs, including wireline telephony, mobile telephony, and the is important because measures of investment in innovation, Internet (Kelly and Rossotto 2012). Other studies support such such as R&D spending, might not fully capture the nature of findings. McKinsey and Company has estimated that “a 10 innovation in service industries such as retail or finance, which percent increase in broadband household penetration delivers have been important in driving productivity growth differences a boost to a country’s GDP that ranges from 0.1 percent to 1.4 between Europe and the United States. The conclusion from percent” (Buttkereit and others 2009). Additionally, a study the empirical literature confirms the intuition behind recent of OECD countries by Booz & Company found, among high- endogenous growth literature: innovation is positively associ- income countries, a strong correlation between average annual ated with higher firm productivity and growth, and the social GDP growth and broadband penetration, wherein “countries rate of return on innovation exceeds the private rate of return in the top tier of broadband penetration have also exhibited because of positive spillovers from growth in the available 2 percent higher GDP growth than countries in the bottom stock of knowledge.” tier of broadband penetration” (Friedrich and others 2009). Meanwhile, a report on ICTs and economic growth in transition Innovation and employment. Using a data set of 14,313 economies indicates strongly that ICTs are a major contribu- manufacturing establishments from 21 countries (OECD, tor to productivity, profitability, and growth at the level of the “enhanced engagement,” and developing countries22), Dutz firm (infoDev 2006). and others (2011) show that enterprise innovation is a very strong positive factor in employment growth, in product Innovation and productivity. As discussed in a World Bank report (2012), “considerable empirical literature supports and process innovation, and in the growth of total factor the importance of structural change and innovation for pro- productivity. No offset to other enterprises’ employment ductivity growth. Van Ark, O’Mahony, and Timmer (2008) growth shows up significantly in these data. Across the decomposed economic growth in the United States and entire sample, there are many significant correlates with Europe into the contribution of several inputs to under- employment growth: innovation, export activities, invest- stand the productivity gap between the United States and ment capital from commercial banks, business use of the the EU15 since 1995. The authors find that the key factor Internet, ISO certification, formal training programs, and no is the different rate of multifactor productivity growth in government ownership stakes greater than 10 percent. In the market services, such as retail trade, finance, and busi- Middle East and North Africa region, a study by Stone and ness. Jorgenson and Timmer (2011) further show that the Badawy (2011) showed that innovating small and medium United States has benefited from much faster TFP growth enterprises grow fastest. Characteristics of such innovation in distribution and personal services than has the European include offering workers formal training and receiving an Union. While the different rate of investment in ICT made a international quality certification. 22. These are Brazil, Chile, China, Czech Republic, Estonia, Germany, Greece, Hungary, India, Indonesia, Ireland, Mexico, Poland, Portugal, the Russian Federation, Slovakia, Slovenia, South Africa, South Korea, Spain, and Turkey. Transforming Arab Economies 51 Appendix 2. References and Hall, B., J. Mairesse, and P. Mohnen. 2009. “Measuring the Returns to R&D.” NBER Working Paper bibliography 15622, National Bureau of Economic Research, Cambridge, MA. Hanushek, Eric A., and Dennis D. Kimko. 2000. “Schooling, Labor- Force Quality, and the Growth of Nations.” American Economic Review 90(5): 1184–1208. December. Adams, James D. 1990. “Fundamental Stocks of Knowledge infoDev. 2006. “ICT, Innovation, and Economic Growth in and Productivity Growth.” Journal of Political Transition Economies: A Multi-Country Study of Economy 98 (4): 673–703. Poland, Russia, and the Baltic Countries.” World Barro, Robert J. 1991. “Economic Growth in a Cross Section Bank, Washington, DC. of Countries.” NBER Working Paper 3120, National Jorgenson, D., and M. Timmer. 2011. “Structural Change in Bureau of Economic Research, Cambridge, MA. Advanced Nations: A New Set of Stylised Facts.” The ∤2000. Education and Economic Growth. Paris: OECD. Scandinavian Journal of Economics 113 (1): 1–29. Buttkereit, Soren, Luis Enriquez, Ferry Grijpink, Suraj Moraje, Khan, M., and K. B. Luintel. 2006. “Sources of Knowledge Wim Torfs, and Tanja Vaheri-Delmulle. 2009. And Productivity: How Robust is the Relationship?” “Mobile Broadband for the Masses: Regulatory Working Paper: Statistical Analysis of Science, Levers to Make It Happen.” McKinsey and Company, Technology and Industry, OECD. London, February. Kelly, Tim, and Carlo Maria Rossotto (eds.). 2012. Broadband Chen, Derek H. C., and Carl J. Dahlman. 2004. “Knowledge Strategies Handbook. Washington, DC: World Bank. and Development – A Cross-Section Approach.” Policy Research Working Paper 3366, World Bank, Lederman, Daniel, and William Maloney. 2003. “R&D and Washington, DC. Development.” World Bank Policy Research Working Paper 3024. Washington, DC. Cincera, Michele, and Bruno Van Pottelsberghe de la Potterie. 2001. “International R&D Spillovers: A Survey.” Lucas, Robert. 1988. “On the Mechanics of Economic Brussels Economic Review/Cahiers Economiques Development.” Journal of Monetary Economics de Bruxelles 169: 3–31. Department of Applied 22 (1): 3–42. Economics, Free University of Brussels. Romer, Paul. 1986. “Increasing Returns and Long-Run Growth.” Cohen, Daniel, and Marcelo Soto. 2001. “Growth and Journal of Political Economy 94 (5): 1002–37. Human Capital: Good Data, Good Results.” CEPR Discussion Papers 3025, Centre for Economic Solow, Robert. 1956. “A Contribution to the Theory Policy Research, London. of Economic Growth.” Quarterly Journal of Economics 70 (1): 65–94. Dutz M., I. Kessides, S. O’Connell, and R. Willig. 2011. “Inclusive Growth from Competition and Innovation.” OECD- Stone, A. and L. T. Badawy. 2011. “SME Innovators and Gazelles World Bank Conference on Challenges and Policies in MENA – Educate, Train, Certify, Compete!” World for Promoting Inclusive Growth, March 24­ –25, Paris. Bank MENA Knowledge and Learning Quick Notes Series 43. World Bank, Washington, DC. Friedrich, Roman, Karim Sabbagh, Bahjat El-Darwiche, and Milind Singh. 2009. “Digital Highways: The Role of Van Ark, B., M. O’Mahony, and M. Timmer. 2008. “The Government in 21st Century Infrastructure.” Booz & Productivity Gap between Europe and the United Company, New York. http://www.booz.com/media/ States: Trends and Causes.” The Journal of uploads/Digital_Highways_Role_of_Government.pdf. Economic Perspectives 22 (1): 25–44. Grossman G., and E. Helpman. 1993. Innovation and Growth World Bank. 2009. Information and Communications for in the Global Economy, Cambridge, MA: MIT Press. Development 2009: Extending Reach and Increasing Hall, B. 2011. “Innovation and Productivity.” NBER Working Impact. Washington, DC. Paper 17178, National Bureau of Economic Research, Cambridge, MA. ∤ 2012. Golden Growth: Restoring the Lustre of the European Economic Model. Washington, DC. 52 Data on the knowledge economy in the Arab world Note: The data contained in this appendix are drawn from various sources, including the 2012 Knowledge Assessment Methodology (KAM, www.worldbank.org/kam) and the World Bank’s World Development Indicators for 2012. The complete data sources are provided in the list of statistical references that follows the tables. Transforming Arab Economies 53 54  TABLE A1   Socioeconomic Indicators ­ Employment Value added (% of GDP) Appendix 3. GDP (millions of Total labor Trade (% of total employment) US$) Score, KEI Rank, HDI force (millions) (% of GDP) Agriculture Manufacturing Services Agriculture Manufacturing Services 2011 2012 2011 2010 2010 2008 2010 2010 2010 2008 2008 2008 Arab countries                         Algeria 188,681 3.79 96 11 52 69 7 62 31 —  —  — Bahrain — 6.9 42 1 — 171 — — — — — — Djibouti  — 1.34 165 0.2  —    —  —  —  — —  — Egypt, Arab Rep. 229,531 3.78 113 27 47 72 14 38 48 32 23 45 Iraq 115,388 — 132 8 — —   — —  —  23 18 58 Jordan 28,840 4.95 95 2 117 144 3 31 66 3 19 78 Kuwait 176,590 5.33 63 1 86 93 — —  —   — —   — Lebanon 42,185 4.56 70 1 65 78 6 21 72 — — — Libya —  — 64 2 — 95  — —  —   —  — —  Morocco 100,221 3.61 130 11 76 88 15 30 55 41 22 37 Oman 71,782 6.14 89 1  — 96  — —  — —  —  — Qatar 172,982 5.84 37 1 — 79 — — — — — — Saudi Arabia 576,824 5.96 56 10 97 105 2 60 38 4 20 76 Syrian Arab Republic — 2.77 119 5 71 74 — — — 17 30 53 Tunisia 45,864 4.56 94 4 103 114 8 32 60       United Arab Emirates 360,245 6.94 30 5 147 149 1 56 44 4 24 71 West Bank and Gaza —  — 114 1  —  —  — —  —  13 26 61 Yemen, Rep. 33,758 1.92 154 6 65 81 8 29 63 — — — Comparators                         Finland 266,071 9.33 22 3 79 90 3 29 68 5 25 70 China 7,298,097 4.37 101 800 55 62 10 47 43 40 27 33 India 1,847,982 3.06 134 473 50 52 18 27 55 — — — Korea, Rep. 1,116,247 7.97 15 25 102 107 3 39 58 7 25 68 Regions                         a Arab world 2,401,696 — — 114 85 97 7 49 44  — — —  E. Europe & Central Asia 3,615,905 — — 192 61 67 7 32 61 16 27 57 Latin America & Caribbean 5,650,157 — — 278 44 48 6 31 62 14 23 62 Middle East & North Africa — — — 105  — — —  — — 27 26 47 Source: World Bank 2012, except for column 2 (KAM 2012) and column 3 (UNDP 2011). Note: KEI = Knowledge Economy Index; HDI = Human Development Index. a. The Arab world includes, in addition to the Arab countries listed above, Comoros, Mauritania, Somalia, and Sudan. Membership of other regions is as defined by World Bank, www.worldbank.org. —  Data not available.  TABLE A2   Institutional and Governance Indicators ­ Tariff and nontariff Democracy Index barriers Regulatory quality Rule of law (1–167, see note) 2012 2011 2009 2011 2009 2011 Arab countries Algeria 73 –1.16 –1.04 –0.83 –0.77 130 Bahrain 83 0.80 0.76 0.35 0.50 144 Djibouti — –0.53 –0.62 –0.75 –0.65 147 Egypt, Arab Rep. 74 –0.33 –0.19 –0.42 –0.06 115 Iraq — –1.10 –1.01 –1.50 –1.78 112 Jordan 80 0.25 0.30 0.23 0.29 118 Kuwait 82 0.08 0.15 0.50 0.55 122 Lebanon 80 0.02 –0.04 –0.68 –0.66 94 Libya 85 –1.52 –1.11 –1.16 –0.86 125 Morocco 76 –0.09 –0.05 –0.21 –0.22 119 Oman 84 0.39 0.58 0.63 0.68 134 Qatar 83 0.44 0.65 0.78 0.93 138 Saudi Arabia 82 0.00 0.16 0.07 0.08 161 Syrian Arab Republic 72.8 –0.97 –0.98 –0.66 –0.47 157 Tunisia 58 –0.18 0.02 –0.10 0.19 92 United Arab Emirates 83 0.40 0.50 0.46 0.46 149 West Bank and Gaza — 0.28 –0.17 –0.43 –0.35 99 Yemen, Rep. 82 –0.79 –0.61 –1.50 –1.25 150 Comparators     Finland 87.1 1.77 1.78 1.96 1.97 9 China 71.6 –0.20 –0.19 –0.46 –0.34 141 India 64.1 –0.34 –0.32 –0.08 0.00 39 Korea, Rep. 72.6 0.95 0.82 1.01 0.98 22 Regions           a Arab world — — — — — — E. Europe & Central Asia — — — — — 5.5 b Latin America & Caribbean — — — — — 6.35 Middle East & North Africa — — — — — 3.62 Transforming Arab Economies Source: Heritage Foundation 2012 (column 1); World Bank 2011 (columns 2 and 3); EIU 2011 (column 4) Note: EIU Democracy Index: democracy 1–25; flawed democracy 26–78; hybrid 79–115; authoritarian 116–167. a. The Arab world includes, in addition to the Arab countries listed above, Comoros, Mauritania, Somalia, and Sudan. Membership of other regions is as defined by World Bank, www.worldbank.org. b. Eastern Europe only. 55 Appendix 3. —  Data not available. Appendix 3.  TABLE A3   Innovation and Scientific Research ­   Royalty payments and Scientific Patents granted   receipts (US$/ and technical by USPTO per Research and development High-technology exports pop.) journal articles million people expenditure (% of GDP) (% of manufactured exports) 2010 2009 2005–09 2007–09 2004–06 2010 2005 Arab countries               Algeria 2.74 607 0.01 — 0.12 0.50 1.48 Bahrain — 36 0 — — 0.11 0.07 Djibouti — 2 0 — — — — Egypt, Arab Rep. 3.12 2,247 0.07 0.24 0.26 0.88 0.40 Iraq — 70 — — — — — Jordan — 383 0.14 0.42 — 2.86 1.39 Kuwait — 214 3.55 0.09 0.11 — — Lebanon 3.4 256 0.77 — — 12.80 2.83 Libya — 34 — — — — — Morocco 1.3 391 0.08 — 0.64 7.69 9.64 Oman — 114 0.51 — — 0.58 0.28 Qatar — 64 1.29 — — — 0.01 Saudi Arabia — 710 0.92 0.06 0.05 0.73 0.67 Syrian Arab Republic 2.05 72 0.04 — — — 2.08 Tunisia 1.79 1,022 0.1 1.12 1.03 4.89 4.51 United Arab Emirates — 265 1.6 — — — 1.87 West Bank and Gaza 0.3 — — — — — — Yemen, Rep. 0.46 25 — — — — 0.24 Comparators               Finland 245 4,949 138.1 3.72 3.47 10.80 25.06 China 10.34 74,019 1.05 1.43 1.31 27.51 30.84 India 2.37 19,917 0.51 0.76 0.76 7.18 5.80 Korea, Rep. 183.2 22,271 151.18 3.29 2.83 — 32.48 Regions Arab world a 1.54 6,578 — — — — 1.44 E. Europe & Central Asia 116.7 29,089 31.44 b 0.89 0.81 6.70 6.07 Latin America & 11.2 23,968 0.63 b 0.65 0.61 10.92 12.41 Caribbean Middle East & 4.1 11,421 3.66 b — — 3.21 2.66 North Africa Source: Authors’ calculations based on World Bank 2012 (column 1); KAM 2012 (column 2); National Science Foundation 2012 (column 3); UNESCO Institute of Statistics 2012 (column 4); United Nations 2012 (column 5). USPTO = U.S. Patent and Trademark Office. a. The Arab world includes, in addition to the Arab countries listed above, Comoros, Mauritania, Somalia, and Sudan. Membership of other regions is as defined by World Bank, www.worldbank.org. b. All income levels. —  Data not available. 56 Appendix 3.  TABLE A4   Education and Labor Market ­ Stock of emigrant Youth Overall labor force Average years of Gross secondary Gross tertiary unemployment unemployment (% of labor force) schooling enrollment rate enrollment rate Latest Latest Latest 2010 2009 2009 Arab countries             Algeria 46 10 10 7.7 96.48 30.62 Bahrain 21 5 2 9.59 96.43 51.21 Djibouti 38 41 2 — 30.46 3.47 Egypt, Arab Rep. 26 8 9 7.08 67.2 28.45 Iraq 45 30 5 — — — Jordan 39 11 4 9.23 88.22 40.65 Kuwait 23 3 3 6.29 89.89 17.56 Lebanon 21 12 31 — 82.14 52.52 Libya 27 7 3 — — — Morocco 16 10 17 5 55.85 12.88 Oman 20 7 0 — 91.32 26.44 Qatar 17 1 0 7.45 85.22 10.24 Saudi Arabia 26 5 0 8.48 96.81 32.78 Syrian Arab Republic 20 21 15 5.28 74.74 — Tunisia 27 14 15 7.32 90.21 34.44 United Arab Emirates 6 2 1 9.5 95.2 30.4 West Bank and Gaza 33 25 2 — — — Yemen, Rep. — — 16 3.68 45.61 10.23 Comparators             Finland 20 8.40 — 9.97 108.96 90.92 China — 4.30 — 8.17 78.19 24.53 India — — — 5.12 60.02 13.48 Korea, Rep. 9.8 3.70 — 11.85 97.22 100.02 Regions             Arab world a — 9.60 — — — — E. Europe & Central Asia 18.27 9.65 — — — — Latin America & 14.83 7.97 — — — — Caribbean Middle East & — — 22.55 10.64 — — North Africa Source: ILO 2011 (columns 1 and 2); Chaaban 2010 (column 3); Barro and Lee 2010 (column 4); UNESCO 2012 (column 5 and 6). a. The Arab world includes, in addition to the Arab countries listed above, Comoros, Mauritania, Somalia, and Sudan. Membership of other regions is as defined by World Bank, www.worldbank.org. —  Data not available. Transforming Arab Economies 57 Appendix 3.  TABLE A5   Information and Communication Technologies ­ Networked Readiness Index Total telephones per Computers per 1,000 Internet users per (rank of 142) 1,000 people people 1,000 people 2012 2009 2008 2009 Arab countries         Algeria 118 1,010 100 130 Bahrain 27 2,290 750 820 Djibouti — 170 40 30 Egypt, Arab Rep. 79 790 40 200 Iraq — — — — Jordan 47 1,090 80 290 Kuwait 62 1,270 340 390 Lebanon 95 540 100 240 Libya — — — — Morocco 91 900 60 320 Oman 40 1,510 170 430 Qatar 28 1,950 160 280 Saudi Arabia 34 1,930 690 390 Syrian Arab Republic 129 640 90 190 Tunisia 50 1,050 100 340 United Arab Emirates 30 2,660 330 820 West Bank and Gaza — — — — Yemen, Rep. 141 210 30 20 Comparators         Finland 3 1,710 790 840 China 51 800 60 290 India 69 480 30 50 Korea, Rep. 12 1,380 580 810 Regions         Arab world a — — — — E. Europe & Central Asia — — — — Latin America & — — — — Caribbean Middle East & — — — — North Africa Source: World Economic Forum and INSEAD 2012 (column 1); KAM 2012 (columns 2–4). a. The Arab world includes, in addition to the Arab countries listed above, Comoros, Mauritania, Somalia, and Sudan. Membership of other regions is as defined by World Bank, www.worldbank.org. —  Data not available. 58 Appendix 3. Statistical references Barro, R. J., and J. W. Lee. 2010. “A New Data Set of National Science Foundation. 2012. Science and Engineering Educational Attainment in the World, 1950–2010.” Indicators. http://www.nsf.gov/statistics/. NBER Working Paper 15902. Cambridge, MA: Accessed September. National Bureau of Economic Research. www.nber. org/papers/w15902. UNDP (United Nations Development Programme). 2011. Human Development Report 2011: Sustainability Chaaban, Jad. 2010. “Job Creation in the Arab Economies: and Equity: A Better Future for All. New York. Navigating Through Difficult Waters.” Arab Human Development Report Research Paper Series, UNDP UNESCO (United Nations Educational, Scientific and Cultural Regional Bureau for Arab States. http://www.arab- Organization) Institute for Statistics. 2012. hdr.org/publications/other/ahdrps/paper03-en.pdf. UNESCO Institute for Statistics: Data Centre. http://stats.uis.unesco.org. Accessed September 15. Economist Intelligence Unit. 2011. EIU Democracy Index. hhttps://www.eiu.com/public/topical_report.asp United Nations. 2012. United Nations Commodity Trade x?campaignid=DemocracyIndex2011. Accessed Statistics Database. http://comtrade.un.org/db/. January 21, 2013. Accessed September 10. Heritage Foundation. 2012. 2012 Index of Economic Freedom. World Bank. 2011. World Governance Indicators. World Bank, Washington, DC: Heritage Foundation. http://www. Washington, DC. http://info.worldbank.org/gover- heritage.org/index. Accessed September 5. nance/wgi/index.asp. Accessed September 5. ILO (International Labour Organization). 2011. Key Indicators World Bank. 2012.World Development Indicators database. on the Labour Market, 7th edition. Geneva. http:// Washington, DC. http://data.worldbank.org/data- kilm.ilo.org/KILMnetBeta/default2.asp. Accessed catalog/world-development-indicators. Accessed September 10. December 15. KAM (Knowledge Assessment Methodology). 2012. World World Economic Forum and INSEAD. 2012. Global Bank, Washington, DC. http://www.worldbank.org/ Information Technology Report 2012. Geneva: kam. Accessed October 15. World Economic Forum. Transforming Arab Economies 59 Transforming Arab Economies: Traveling the Knowledge and Innovation Road The imperative of creating millions of good jobs is the first of many daunting challenges confronting the Arab world. To meet those challenges, Arab countries would do well to embrace a model of economic growth based on knowledge and innovation, building on the global move toward the knowledge economy. Over the past decade, some countries of the region have spurred growth and improved their global com- petitiveness by taking the first steps in the direction of the knowledge economy. To go farther, however, Arab societies must deepen their commitment to reforms in four key policy areas: developing more open and entrepreneurial economies, preparing a better-educated and more highly skilled population, improving their capabilities for innovation and research, and expanding information and communication technologies and their applications. The success of a knowledge-economy strategy depends on coordinated progress on all four fronts, with bold approaches tailored to each country’s challenges and opportunities. “Recent events in the Arab world have affirmed the need for greater opportunity and dignity for all. Governments across the region are grappling with the challenge of job creation, especially jobs for youth and women. Transforming Arab Economies: Traveling the Knowledge and Innovation Road provides countries of the Arab world with a new approach to development strategies that can help them achieve sustainable growth and create jobs—both key for ensuring social and economic inclusion. This work speaks directly to those in government, business, and civil society across the Arab world who are keen to work in new and different ways, using knowledge, innovation, and technology as key drivers to shape a more inclusive growth path and a better tomorrow.” Inger Andersen, Vice President, Middle East and North Africa, World Bank “CMI is to be congratulated on producing this daring and timely work. Envisioning the future is a bold step and a major challenge at a time when the protagonists of the Arab revolutions are so preoccupied with the present. The creation of wealth and jobs will require considerable changes in the political arena toward greater democracy, a more resolute search for social justice through more inclusive policies, and a new departure toward the knowledge economy at the eco- nomic level. Given the diversity of the countries of the Arab world, the knowledge economy will have the best chance of taking hold if the complementarities between the Gulf states and the countries of the Maghreb and the Mashreq are care- fully exploited. This important work deserves to be widely discussed within the halls of government in the Arab world.” Rachid Benmokhtar Benabdallah, President of the National Observatory of Human Development and member of the Academy of Science and Technology, Morocco “Transforming Arab Economies not only makes a powerful and compelling case for the adoption of a knowledge- and innovation-driven growth scenario for the Arab world, it also underlines the importance of a clear vision to drive the deep reforms needed to make it happen, reforms that cut across sectorial and ministerial silos. Such a vision should ensure that reforms are pursued in a participatory fashion that guarantees broad-based support for implementation. The report also highlights the idea of “growth spots” that would facilitate the adoption of the new economic model. This timely and very important report from the World Bank should be required reading for all decision makers and concerned citizens in the Arab world. Our future is being shaped right now by the actions we take to bend the future to our dreams.” Ismail Serageldin, Librarian of Alexandria, Director of the Bibliotheca Alexandrina, former World Bank vice president CMI Contact The Center for Mediterranean Integration (CMI) is a multi-partner cooperative arrangement to Center for Mediterranean Integration facilitate access to advanced knowledge and best practices while generating support among public Villa Valmer and independent institutions to increase cooperation, enhance sustainable development, and 271 Corniche Kennedy integrate policies in the Mediterranean Region. CMI programs strive to provide solid inputs for 13007 – France evidence-based policy choices and, in so doing, help to improve governments strategies and actions, Phone: + 33 (0)4 91 99 24 51 /56 increase the level of innovative activities and investments in the Region, and stimulate cooperation Fax: + 33 (0)4 91 99 24 79 between countries around the Mediterranean. www.cmimarseille.org