It’s the Economy!

Louise Fox, USAID Chief Economist

In this blog, USAID Chief Economist Louise Fox discusses a new paper which revisits an old topic, the East Asia miracle, but with a twist — a focus on the Middle East and on education policy.

I was ready to cease blogging on youth employment for awhile, but then such an interesting paper landed on my desk that I could not resist doing another blog.

The paper is by Shantayanan Devarajan of the World Bank and Howard Pack of the Wharton School and it is a comparison of economic policy and the employment consequences in the Middle East and North Africa (MENA) region with those in the East Asia region between 1960 and 2000. The paper, “The Lack of Productive Employment in the Middle East and North Africa: A Comparison with East Asia,” notes that in 1960, South Korea, Taiwan, Syria, Tunisia, Morocco, Jordan, and Egypt all had about the same per capita income. By 2000, the East Asian economies were streets ahead of the MENA economies in income per capita, economic and export diversification, and welfare of their citizens. And the clincher? Devarajan and Pack write:

“Importantly, they have all succeeded in creating jobs for their workers during the peak of their working age population in the demographic transition.” (Overview, p. 2)
And the size of the youth bulge in absolute terms was much larger in East Asia in the 1970s and 1980s than it is in the Middle East today (less than 100 million people).
Photo Credit: Patrick Baz, AFP

They go on to write that:

“A consensus has emerged that the proximate sources of rapid growth included the following: (i) export orientation; (ii) openness to imports and foreign direct investment; (iii) quality education; (iv) infrastructure investment; (v) innovation and technology transfer; and (vi) macroeconomic stability. In contrast, Arab governments since independence adopted a development model based on a social contract that guaranteed jobs in the public sector for university graduate and provided free health and education as well as subsidized food and fuel.” (p.2)

In other words, Arab governments spent money on subsidies instead of on public infrastructure investment and quality education.

Photo Credit: Nir Keidar, Peres Center for Peace and Innovation

Importantly, the authors argue that what made economic policy better in East Asia was the package, not any particular reform. You cannot pursue quality education by itself. You have to keep upgrading your technology through Foreign Direct Investment, imports, openness to new products and innovation (including importing people who have mastered the technology abroad to teach your labor force), and maintaining competitiveness. If you just do education, without upgrading your technology, your graduates will not be able to use their skills in the workplace. They will be frustrated and angry, as will their families who may have paid for the education.

In addition, if you are not open to importing technology, your educated labor will waste its time trying to re-invent the technology available abroad, and you will grow more slowly.

While I am not surprised by the analysis of Devarajan and Pack, I might have also noted that the East Asia employment challenge was made easier by a faster decline in population and labor force growth (see figure). Nonetheless, the contrast is stark.

Trouble seeing this graph? Click here to view this graph and data for other subregions.

There is one puzzle remaining for me, however. When economic policy is not so great, what should we advise countries to do about education? I have always argued that people are in the labor force for 40 or more years, and live even longer after leaving school as parents and members of the community, so money spent effectively and efficiently on education was a good investment. Hopefully, economic policy would eventually catch up. Does the analysis of Devarajan and Pack invalidate that? I don’t know. Certainly the Arab Spring uprisings — dissatisfied educated youth were pretty costly events.

What do you think? Please share your thoughts.

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