Skills and Development: Beyond the Crisis Shahid Yusuf World Bank Institute June 8 th, 2009

Post Crisis Scenarios and Questions For some, a reading of the tea leaves suggests that recovery from the current crisis could be a slow process. Others see green shoots and believe that the world economy could revert to recent trend rates of growth within the next 18 months. Is such a rebound likely? Even if it does occur, how might it affect the demand for skills? Could skill shortages constrain growth? If growth is slow, can investment in skills stimulate economic performance?

International Economic Performance: and

What Accounts for the "Golden Age of Growth" High levels of investment. New general purpose technologies (computerization, the Internet). Low energy, food, and resource costs. Trade liberalization and global market integration. Rapid growth of manufactured goods trade, especially that of electronics and electronic components. Cycles of outsourcing production (of goods and services) from the advanced countries starting in the 1970s. Strong demand from the U.S. and the EU, in recent years supported by high rates of credit creation.

Anti-growth Factors: Short term and Long Adjustment and higher rates of saving in the U.S. and more inward oriented development in China and possibly India. Excess production capacity in many industries. 'Murky' trade restrictions and a retreat of globalization. Costs of slowing global warming and coping with shocks associated with climate change. Energy and food price hikes. Water scarcities. No apparent “high growth” export goods and services. Could the shortages of skills become an additional constraint?

Is the Developing World Moving towards More Skill Intensive Production Systems? * denotes data is for year 2006 Manufacturing, value added (% of GDP)

Are Exports from Low and Middle Income Countries Becoming More Skill Intensive? Top 5 Exports of Pakistan: 1995 and 2007

Are Exports from Low and Middle Income Countries Becoming More Skill Intensive? Top 5 Exports of South Africa: 1995 and 2006

Are Exports from Low and Middle Income Countries Becoming More Skill Intensive? Top 5 Exports of Bangladesh: 1995 and 2007

Are Exports from Low and Middle Income Countries Becoming More Skill Intensive? Top 5 Exports of Brazil: 1995 and 2007

Are Exports from Low and Middle Income Countries Becoming More Skill Intensive? Top 5 Exports of Egypt: 1995 and 2007

Are Exports from Low and Middle Income Countries Becoming More Skill Intensive? Top 5 Exports of Kenya: 1995 and 2007

Are Exports from Low and Middle Income Countries Becoming More Skill Intensive? Top 5 Exports of Malaysia: 1995 and 2007

Are Exports from Low and Middle Income Countries Becoming More Skill Intensive? Top 5 Exports of Tanzania: 1997 and 2007

Are Exports from Low and Middle Income Countries Becoming More Skill Intensive? Top 5 Exports of Thailand: 1995 and 2006

Are Exports of the Leading East Asian Tiger Economies Becoming More Skill Intensive? Top 5 Exports of Korea: 1985 and 2006

Are Exports of the Leading East Asian Tiger Economies Becoming More Skill Intensive? Top 5 Exports of Taiwan: 1990 and 2007

Are Exports of the Leading East Asian Tiger Economies Becoming More Skill Intensive? Top 5 Exports of Singapore: 1985 and 2006

Is the Demand for Skilled Workers Rising in the United States?

Is Manufacturing Becoming More Skill Using? Not low-end light manufacturing or assembly operations. Even processing industries are marking time. Higher end manufacturing is becoming more skill and in particular IT and tacit knowledge intensive. But there is relatively little hard data to validate this. Not much of such advanced manufacturing has yet moved to developing countries - with the possible exception of China. Skill and Technology intensive manufacturing industries (and manufacturing more generally) registering steady gains in productivity and generating few jobs. In fact, the number of jobs in manufacturing is declining.

Are Services Industries Demanding More Skills? Business and medical services have traditionally required a high level of expertise. Services such as retail. wholesale and logistics have absorbed a lot of IT which has increased the demand for people with computer and associated skills but this is also increasing productivity and decreasing the labor coefficient of these activities. Personal services remain relatively low skill and labor intensive. Growth of business and commercial services will raise demand for skills, however, IT has the potential of curbing the growth of demand for workers.

Are Skill Shortages and Mismatches a Brake on Growth? Evidence from ICAs suggests that employers view skill shortages as a problem. However, the problem does not go away, nor is there rigorous evidence that it is holding back growth. Could this be a box all employers will routinely tick just like access to financing? Continuing net brain drain from many low and middle income countries suspends a question over the extent of shortages. Why are labor markets and training institutions so slow to adjust?

Could an Increase in Human Capital Raise Growth Rates? This is not happening in the OECD countries. The long-run growth rate of the U.S. has been surprisingly stable at 1.8% p.a. even with the increase in education attainment. Similarly for Korea. Findings from growth economics are mixed: Results depend upon the measure of human capital, sample of countries and time period, stage of development of countries, quality of graduates and other considerations. Results subject to nonlinearities. Growth Commission presents an equivocal message on human capital. “Investments in human capital will generate opportunities for growth, but these do not translate mechanically to growth. Other factors can intervene.”

Per Capita GDP Growth and Labor Force with Tertiary Education, US

Per Capita GDP Growth and Labor Force with Tertiary Education, Korea

Quality Might be More Important than Quantity Causality running from quality of secondary education to growth strongly supported by some research. Quality likely to influence productivity, the upgrading of products, technology absorption and innovation.

How Can the Quality of Education and Training be Raised? There are two not mutually exclusive approaches; – Tackle the entire education production system from early childhood nutrition through schooling to tertiary education, by strengthening each link in the chain. This is an expensive and time consuming. Few success stories. – Adopt a highly selective and tiered approach starting with upper secondary schooling and university education. Devote resources to raise quality through a coordinated application of policies, e.g. public provision of only STEM skills at tertiary level, autonomy of institutions, competition between institutions, teacher incentives, smaller class size, partnerships with employers and design of curricula in consultation with employers etc. Will this be easy? No. And politically, limiting access to public institutions is a hard sell. However, is there a viable alternative given resource constraints in all countries and also the fact that social returns are no higher than private returns for tertiary education? Diversified upper secondary and tertiary education sector provided by the private sector is one option to accommodate the rising demands for education services.

Thank You