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

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The Knowledge-based
Economy and the
Arab Dream:
What Happened?
Wesley Schwalje
wes.schwalje@tahseen.ae

2. 1
Many of the Arab countries may be pursing
knowledge-based economic development
strategies based on flawed practices from countries
perceived to have made successful transitions to
knowledge-based economies. Several countries
presented as archetypal models of the knowledge-
based economy transition face substantial
economic development problems, such as record
high youth unemployment rates, with tremendous
societal implications.
The importation of the knowledge economy concept
to the Arab region was accompanied by an
emphasis on the welfare of individuals being tied
directly to their success in gaining and maintaining
higher qualifications and skills which could be sold
in the labor market to match high wage
employment opportunities expected to be
generated by emerging high skill, knowledge-based
industries. However, the high wage, high skills jobs
associated with knowledge-based industries have
not materialized in the region and are increasingly
subject to competition from the emergence of low
wage, high skill workers in other developing
countries.
Executive Summary
Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened?
Highlights
 Seventeen of the twenty-two countries in the Arab World have
knowledge-based economy as a long-term policy objective
 Credentialism and a sink or swim orientation of skills formation
policy guided by the privatization of investment in skills
subsequently sold in the labor market are becoming important
precepts of Arab development policy.
 Decreasing pressure on wages due the globalization of knowledge
industries and growth in high skill, low cost talent in emerging
countries challenges the assumption that more education, higher
levels of skills, and national labor markets can provide prosperity to
Arab citizens and nations.

3. 2Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened?
Inside
Introduction 4
Knowledge-based Economy and the Reinvention of the Arab Dream 6
Broken Promises of the Arab Opportunity Bargain 10
Visions Are Not Seeing Things As They Are, But How they Might Be 12
The Full Employment Fallacy of the Arab Dream 17
Securing a Viable Arab Dream 22

4. 3Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened?
James Truslow Adams (1931)
described the American Dream
as:
“… that dream of a land in
which life should be better
and richer and fuller for
every man, with opportunity
for each according to his
ability or achievement … It
is not a dream of motor cars
and high wages merely, but
a dream of social order in
which each man and each
woman shall be able to
attain to the fullest stature of
which they are innately
capable, and be recognized
by others for what they are,
regardless of the fortuitous
circumstances of birth or
position.”
Since then, the phrase has
become a guiding theme that
describes the underlying
beliefs of the United States and
which is at the heart of national
identity. Yet the concept of the
American Dream is subject to
generational reinterpretation.
Introduction
A recent survey provides some data on
particular life milestones that signify
achievement of the American Dream and
important intergenerational differences in the
interpretation of the concept. The survey
shows that the American Dream is a
particularly important aspiration of
Generation X born between 1965 and 1977
and Generation Y born between 1978 and
1993. Respondents from Generation X and
Y view a college education and a
postgraduate degree as more important to
achieving the American Dream than
previous generations such as the Baby
Boomers. Generation X and Y respondents
were also less likely to associate other life
milestones such as marriage, children,
wealth attainment, and home ownership with
achieving the American Dream than
previous generations (MetLife Study of the
American Dream, 2011). In their review of
trend data from multiple public opinion polls
on the American Dream between 1978 and
2008, Hanson and Zogby (2010) find a
growing focus on spiritual over material
success; a strong but slightly declining belief
in getting ahead by hard work; a sizable
decrease in sentiment regarding the working
class to get ahead by working hard; a large
increase in the belief that a college
education is a necessity to get ahead; and
strong support for government intervention
in helping families achieve the American
Dream.
The trends highlighted by these surveys
suggest the 21st century American Dream
is nuanced from the one articulated by
Adams. Working class segments of the
American population are losing
confidence in the relationship between
hard work and ensured success.
Furthermore, a university education is
viewed as increasingly critical to realizing
opportunity in pursuit of the American
Dream. Brown, Lauder, et al. (2011) refer
to the American reliance on the market
mechanism as an arbiter of social justice
and opportunity based on hard work and
talent as the Opportunity Bargain. From
this perspective, individual and family
opportunity is indelibly linked to obtaining
the highest wages for knowledge, skills,
and abilities in the labor market with jobs
accruing to those who are able to
continuously upgrade their skills to match
the high skill demands attributed to
knowledge-based economic development.

5. Based on the assumption that
knowledge-based economic
development would generate new
high skill, high wage employment
opportunities for Americans, the US
government adopted a free market
approach that relied on creating
personally financed educational
opportunities for citizens to obtain
qualifications and skills for labor
market success in a global economic
environment in which the US was
perceived to maintain its dominance
in new and growing knowledge based
industries (Brown et al., 2011).
Surveys such as those cited above
and a growing body of academic work
question the sink or swim orientation
of American skill formation policy
which is rooted in the belief that
knowledge-based economic
development will produce better and
more high skill, high wage jobs that
reward citizens for private investment
in skills formation once they enter the
labor market. These studies suggest
that many young people in the US are
living daily with unfulfilled hopes and
dreams from a broken opportunity
bargain which increasingly fails to
ensure success for hard work and
educational attainment.
Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 4

6. In so far as a similar global economic development narrative
based on the transition to knowledge-based economies and
accompanying high wage, high skill jobs was perpetuated by the
engagement of international organizations with the Arab World in
the early Nineties, a similar opportunity bargain as that in the US
emerged in the Arab countries. Schwalje (2013) shows that
seventeen of the twenty-two countries in the Arab World have
adopted development of a knowledge-based economy as a
medium to long-term economic policy objective.
Initiated under the patronage of Zine El Abidine Ben Ali, the
former President of Tunisia, the World Bank hosted a conference
in 2009 that led to the ‘Tunis Declaration on Building Knowledge
Economies.’ Referencing the need for the Arab World to create 5
million jobs per year for the next 20 years, the declaration draws
a causal relationship between knowledge-based economic
development and ensuing job creation which will create the need
for increased supplies of high skill workers.
Knowledge-based Economy and the Reinvention of the Arab Dream
The appeal of an economic development
trajectory and policy prescription that
promised high skills, high wage jobs was
perhaps irresistible in a region facing a youth
bulge in which the number of youth 18 – 24
is expected to grow to 88 million by 2030
representing approximately 20% of the
population (Population Division of the
Department of Economic and Social Affairs
of the United Nations Secretariat, 2008).
5Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened?
The declaration implies that, assuming the Arab World can
develop a “solid education base, a dynamic information
infrastructure, an effective innovation system, and a solid
economic and institutional regime (Institute, 2009),”
economic diversification will lead to increased private
sector job creation. Unfortunately for many of the 21
signatory countries, such results have not materialized.
Given the very visible economic decline and labor market
issues that some of the countries which have been ardent
followers of the knowledge-economy paradigm have
experienced, it is increasingly difficult to defend the policy
prescription of knowledge-based economic development
reliant on more education, more innovation, and policy and
institutional reform as a cure all trajectory for the Arab
World. A shrewd observer would have realized an
important line of fine print in the Tunis Declaration’s first
provision which states “countries which make strides
toward building knowledge economy … are in general
[emphasis added] doing better than others in the
competitive world economy (World Bank Development
Institute, 2009).” By adopting the mantra of knowledge-
based economy nearly all of the countries in the region
have expressed an interest in economic and social growth
and a better life for their citizens, at least on paper.

7. In addition to high skill, high wage job creation, however, the
Arabization of the concept of knowledge-based economy
infused economic development with a host of other
development issues such as economic integration and
diversification, innovation, entrepreneurship, education and
training system reform, environmental sustainability, identity,
language, gender equality, and political participation and
democratic reform. As in the US, the importation of the
knowledge economy concept to the Arab region was
accompanied by a similar emphasis on the welfare of individuals
being tied directly to their success in gaining and maintaining
higher qualifications and skills which could be sold in the labor
market to match high wage employment opportunities expected
to be generated by emerging high skill, knowledge-based
industries. For Arab governments, the heavy reliance of the
concept of knowledge-based economy on human capital
development provides a useful empirical connection to a
number of attributed social and economic objectives, such as
higher levels of educational attainment ; increased health;
efficiency of consumer choices; higher levels of savings and
charitable giving; social cohesion; increased self-reliance and
economic independence; reduced crime; growth and
competitiveness; increased productivity; domestic innovation.
6Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened?
With its association to human capital development, the
concept of knowledge-based economy created a convincing
economic development narrative that met the psychological
needs of Arab citizens but, as evidenced by the Arab Spring,
clearly missed the mark on delivering on physiological needs.
Alongside the importation of the knowledge economy
narrative, credentialism and the sink or swim orientation of
American skills formation policy guided by the privatization of
investment in skills subsequently sold in the labor market
became important precepts of Arab development policy. The
Arab Dream became rooted in the reliance on the free
market as an arbiter of social justice and opportunity based
on labor market success similar to the American Dream. The
Arab Dream is progressively based on the principle of access
to better education leading to high skill, high wage
employment complemented by concurrent government
investment in building knowledge-based industries that will
create jobs. In practice, the market as an arbiter of
opportunity and social justice is often facilitated by non-
market forces. The Arab Dream is also nuanced by the
strong preference for public sector employment.

8. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 7
In a similar fashion the international organizations that
imported the concept of knowledge economy to the region
and which reinforced its uptake with contingent aid,
particularly to Egypt, Jordan, and Tunisia, used the Trojan
horse approach to influence Arab leaders to embrace a
variety of political, social, and economic reforms that would
have been a tough sell separately. Due to the association of
knowledge-based economy with socio-economic
development, support for the concept relies on an emperor's
new clothes logic in which lack of embrace of the concept is
akin to being anti-reformist. The European Union has also
leveraged its Neighborhood Policy, which attaches
contingent aid to political, economic, trade, and human rights
reform, to reinforce the adoption of knowledge-based
economy as a mechanism to pave the way for market
access to Arab countries.
In many ways the adoption of knowledge-based economy as
a prescriptive narrative guiding economic development is
similar to an umbrella legislative act with rider provisions that
have nebulous connections to the underlying bill. As shown
by the example of the US, rider provisions can be an
effective way of ferrying through legislation which might be
vetoed, delayed, or receive less funding by attaching
provisions to important issues under consideration by the
legislature. In this way, the concept of knowledge-based
economy is a convenient legislative Trojan horse for Arab
governments with rider reforms that makes the overall
concept seem much more substantive and convincing than
its constituent parts. Structural changes in policy are often
achieved through ambiguous agreement that can unite
divergent visions and interests and acknowledgment of past
policy failure rather than a common, explicit agreement on a
way forward (Streeck & Thelen, 2005). For Arab
governments, the knowledge-economy Trojan horse is a
convenient mechanism to rapidly usher through a variety of
potentially controversial, accompanying socio-economic
development reforms that would ordinarily receive quite
considerable legislative and public debate packaged in an
appealing concept which promises high wage, high skills
jobs for all in addition to the other associated economic and
social benefits.
While the Arab countries were good
students, as evidenced by their embrace,
implementation, and localization of reforms
towards knowledge-based economic
development, the high level of trust shown
for international organizations and advisors
as their teachers may have been misplaced
and encouraged Arab countries to follow a
convincing, but unproven development
trajectory based on false equivalency

9. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 8
The concept of Knowledge-economy has helped to
highlight and promote policy dialogue on key development
challenges that the Arab World faces and brought
coherence to a variety of socio-economic development
discourses. The concept’s early emphasis on science and
technology was particularly appealing in the Arab World
given the ethnocentric appeal that recalls the preeminent
position in science and technology the region once held in
the Abbassid-era and the brain drain of prominent Arabs
abroad. Knowledge-based economy also presents a
convincing national narrative founded on an ideology of
progress that is attractive to Arab leaders since their
economic development progress is benchmarked relative to
rich, developed countries which have purportedly
transitioned to knowledge-based economies rather than
potentially more appropriate developing country peer
benchmarks in South America, Asia, and Africa. Policy
prescriptions to advance towards knowledge-based
economy are grounded in the emulation of developed
country institutions and polices when a more practical
prescription might have been to emulate less resource
intensive but successful practices of countries that focused
on the export of low-cost, high-end knowledge-based
services or the more traditional low-cost export-oriented
manufacturing strategies while making incremental,
evolutionary advances up the value chain.

10. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 9
Broken Promises of the Arab Opportunity Bargain
Although there are few regional public opinion surveys that
can provide an indicator of the effectiveness of Arab
governments to deliver on the opportunity bargain that has
become enmeshed with the Arab Dream, a recent survey of
16,000 citizens across 21 countries in the Arab World shows
several sources of breakdown. Carried out in late 2010 and
early 2011 before the Arab Spring reached its boiling point, the
survey provides a baseline indicator of several seeds of
discontent that point towards unfulfilled promises associated
with the pursuit of knowledge-based economy in the Arab
World and a broken Arab opportunity bargain. The survey
shows a strong social preference for public sector jobs in a
number of countries that has precipitated a crisis in which
regional governments are unable to create
suitable employment opportunities to absorb the youthful
population entering the labor market. The Arab Opinion Index,
a study of 16,000 respondents in 12 countries carried out in
mid-2011, also shows considerable dissatisfaction with the
economic situation at the household and national levels and
negative perceptions of government performance
characterized by a lack of institutional trust. In Egypt and
Tunisia, deteriorating economic conditions were cited as the
primary cause of the Arab Spring. Across the region there is
growing support for more representative systems that rely less
on hereditary rule and more on ensuring political freedom and
civil liberties, equality and social justice, economic opportunity,
and stability. The survey also shows how the broken Arab
opportunity bargain can affect social structure, as educational
level and economic status is frequently cited as a factor in the
approval of marriages in the region (Arab Center for Research
and Policy Studies, 2012).
Particularly in the less wealthy countries
outside the Gulf, respondents described an
Arab World that is not amenable to finding
employment; lacks effective education; offers
few opportunities for youth to get ahead
through hard work; faces a dismal outlook for
economic growth; and offers a difficult path to
reaching life milestones such as securing
affordable housing. In many countries,
citizens indicate that they prefer to migrate to
realize their dreams elsewhere.

11. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 10
Schwalje (2013) also reveals several economic trends
which unfolded since the Nineties when the concept of
knowledge-economy was imported to the Arab World which
reflect a broken Arab opportunity bargain. He finds that
gross value added from knowledge-based industries in the
Arab World is the lowest in the world and has remained
virtually constant over the last decade suggesting economic
diversification has not led to the growth of knowledge-based
industries. Furthermore, based on limited data from 14 Arab
countries, employment in knowledge-based industries has
not increased over the last decade which reflects the failure
of Arab efforts to transition to knowledge economies as a
means of producing high skill, high wage jobs.
The socioeconomic issues cited above are at the heart of
the series of protests that began in late 2010 and which
continued into 2012 that resulted in the heads of state of
Tunisia, Egypt, Libya and Yemen being deposed and which
continue to challenge the leadership of several other
countries in the region. While the lasting effects of the Arab
Spring remain far from certain, national responses in the
short term to the development challenges that incited the
Arab Spring have involved a formulaic mixture of the
following: introduction of national or municipal elections and
initial steps towards universal suffrage; constitutional
changes to limit and diversify power away from rulers; an
increased role and greater representativeness of
parliamentary bodies; adoption of constitutional
amendments and referendums to diversify power; and
widespread cabinet reshuffling. Particularly in the resource
rich Gulf, sizable federal salary increases, creation of public
sector jobs, and increased student and unemployment
benefits have muffled voices affected by the broken Arab
opportunity bargain.
While initial steps to quell the Arab Spring and its
tremors appear to have been somewhat effective,
the fact that many of the countries in the region
are potentially errantly relying on the assumption
of the realization of a knowledge-based economic
development trajectory to spark socio-economic
development that has failed to materialize over the
last 20 years has remained off the table. There
has not been any serious regional discussion on
whether the economic prescription of the transition
to knowledge-based economies remains the right
course for the region and can address the
economic issues which caused the Arab Spring.

12. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 11
Post Arab Spring democratic and governance reforms and
social transfers may be only distractions from what is a
looming crisis resulting from the uniform regional pursuit of
knowledge-based development based on an insular
worldview that ignores the position of the Arab World relative
to other emerging markets with fast growing and increasingly
sophisticated industrial bases. Even within the Arab World,
there is intense competition to be the “hub” of particular
industries such as financial services, transport, tourism, and
aerospace. In this global as well as regional competition to
establish and grow new knowledge-based industries there
are bound to winners and losers. However, beyond
projecting tourism flows, immigration, and commodity prices,
many of the economic development visions and national
development strategies published in the Arab World that
present development plans to 2020 or 2030 are based on
isolationist views of the global economy that fail to consider
that the economies of the Arab World face powerful and
emerging rivals which will challenge the entry, growth, and
competitive viability of knowledge-based industries in the
region. This beyond the border competition may also erode
current regional manufacturing and industrial bases due to
quality and cost competition. Increasing levels of economic
integration, driven by the accession of several Arab countries
to the WTO, globalization, and the adoption of economic
reforms to improve the enabling environment for business,
entrepreneurship, and attraction of foreign direct investment,
have also opened the door wider to foreign competition.
Visions Are Not Seeing Things As They Are, But How they Might Be
In many cases, regional economic
development planning is based on the rose-
colored visions which perpetuate a view that
having a vision and legislation on the books
that creates economic stability and
openness ensures success of entry and
investments in various industries while
discounting competition from other emerging
countries.
The economic visions captured by Arab national
development strategies typically flow from the top down
through an adapted Westminster system where the
executive branch, led by the ruler, is made up of senior
members of the a cabinet who make important decisions
informed by advisors while rarely consult weak, occasionally
elected legislatures, if they exist at all. Such systems
produce national visions and economic development
strategies with perfunctory buy in established through
consultative processes that seek allegiance and alignment to
the party line rather than real input. The result is a missing
link between the national vision and economic development
strategy and institutional priority setting and budget
allocation. Most critically, regional economic development
plans have failed to recognize the global trends that have
eroded the high wage, high skill opportunity bargain
throughout Europe and the United States as these regions
have pursued knowledge-based development.

13. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 12
The risk of Arab economies failing to
effectively contest knowledge-based
industries by not considering the
globalization of knowledge is
reminiscent of the story of
Muhammad Ali’s attempt to
industrialize Egypt through the
establishment of a textile industry in
the 1800s. In 1819, Muhammad Ali
began an industrialization drive using
imported foreign technicians which
led to the establishment of 30 modern
factories for textile manufacturing. By
1830, these factories employed
30,000 but within a decade all the
factories had failed due to lack of
technical skills, European
competition, and increased
production quality in Europe (Beinin,
1981). At the time, French and
English technical superiority and
lower labor and raw material costs
allowed the Europeans to displace
Egyptian imports to Europe. Egypt
also faced skills shortages of
engineers and mechanics which led
to obsolescence of Egyptian textile
equipment (Butterworth & Zartman,
2001). By the 1840s Egypt was
relegated to a supplier of raw
materials to the European textile
industry and a net importer of finished
textile products from Europe (Marsot,
1984).

14. Nations which have pursued economic development strategies
to capitalize on offshoring have generally employed either a
strategy based on the export of low-cost and high-end
knowledge-based services or alternatively low-cost export-
oriented manufacturing strategies. Because knowledge and
business process and manufacturing outsourcing is a cost
minimization strategy pursued by companies, wages in
outsourced sectors face persistent compression forces from
many countries which are in line to offer the lowest wages
possible to secure employment for their citizens and spur
economic growth. The Gulf countries, which employ many of
their citizens in high wage roles in parastatals operating in
knowledge-based industries, may be particularly threatened by
competition from low wage knowledge workers and be subject
to significant margin compression which challenges the
economics of their entry into knowledge-based industries.
With increasing cost competition in knowledge-based industries
from emerging countries, the less resource wealthy Arab
countries could feasibly follow a development trajectory
grounded in selective participation in knowledge-based and
manufacturing industries in which they have a cost advantage
13Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened?
and have or can develop quickly sufficient workforce skills to
compete against emerging country rivals. However, the high
wage structure of Gulf labor markets is at odds with the
emergence of high skill, low cost knowledge workers in other
countries and attempts by global companies to minimize
costs through outsourcing. While leapfrogging into some of
the more innovation-driven, high skills knowledge-based
industries might be a long-term vision for Arab countries,
such a development trajectory ignores the immediate need
now to create jobs and provide economic opportunity for
youth. Across the region there is also the risk of competitive
latency in which global industry possibility frontiers are driven
by an increasing array of countries which may create
additional competitive gaps compared to leading edge
countries and companies that go unrecognized or cannot be
reached due to market failures in skills formation by the Arab
countries. Schwalje (2013) provides evidence of a lack of
effectiveness of Arab skills formation systems that influences
Arab firms to contest lower-skilled, non-knowledge intensive
industries at the detriment to regional competitiveness and
knowledge-based economic development.

15. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 14
The commodification of knowledge work and Muhammad
Ali’s example from Egypt are also particularly relevant for
the region’s sovereign wealth funds which have a socio-
economic development mandate alongside economic
diversification. It remains unclear how sovereign wealth
funds contribute to knowledge-based development through
investments in private equities of companies and joint
ventures with multinational corporations. The common
strategy of holding toehold shares in international companies
with few knowledge transfer mechanisms places financial
returns over the indigenization of industries which can create
jobs locally. This strategy also potentially erodes war chests
that countries may need to address national socio-economic
development challenges. The investment of sizable sums
abroad with nebulous links to national economic betterment
carries emerging social risks which are not priced into
investment returns. This implies investment returns should
be suitably impaired to accommodate the social risk of
potentially neglecting the gainful employment and financial
stability of citizens at home. Ensuring the socio-economic
mandate and alignment of sovereign wealth funds
with knowledge-based development is particularly critical
with commodity market fluctuations and development of
alternative energy sources which could seriously impact
domestic product derived from oil and gas exports and limit
state funds to meet the socio-economic exigencies.
While the American opportunity bargain is more premised
upon a Schumterian view of creative destruction in which
technological advance associated with the emergence of
knowledge-based industries is the main source of growth
and incumbent firms and countries are the most likely
source of these innovations, the Arab opportunity bargain
relies on a modernized interpretation of creative destruction
which posits that emerging markets can also be sources of
knowledge-based innovation. The low levels of regional R&D
and innovation led to substantial expenditures in the Nineties
on critical components necessary for innovation systems,
research, market-oriented R&D, and entrepreneurship such
as educational systems; institutions conducting basic,
applied, and interdisciplinary research; business incubators;
funding institutions; and professional societies.
An important question for the Arab World to
answer in making investments is how much
of a risk creative destruction poses for high
skill, high wage job creation since continually
innovating economies present both
employment opportunities for workers in new
industries who have the right skills as well as
failed dreams for those who do not have the
right skills, experience, or education.

16. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 15
Contrary to what the region’s
economic development
strategies suggest, the future
of the Arab Dream is very
much reliant not only on what
happens nationally and
regionally but what happens
globally in terms of increased
economic integration,
availability of cheap highly
skilled labor, rival competition
for knowledge-based
industries, demand for
commodity exports, and the
economic health of other
countries.

17. 16Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened?
In their analysis of the structure
of European labor markets, in
which knowledge-based
industries contribute 74% of
regional gross domestic
product and employ as much
as 77% of the regional labor
force, Goos, Manning et al.
(2009) find noticeable job
polarization characterized by
disproportionate increases in
high paid, high skilled jobs and
low paid, low skill jobs
alongside a decline in routine,
intermediate skilled jobs.
Employment polarization
trends, if they accompany the
transition to knowledge-based
economies in the Arab World,
could potentially be very
troubling for regional
governments particularly in
light of the prevalence of
companies offshoring what are
currently high wage, high skill
and intermediate skilled,
routine service jobs. If some
countries in the Arab World are
unable to compete in high skill,
knowledge-based industries
The Full Employment
Fallacy of the Arab Dream
due, for example, to high wage expectations
which makes it cheaper to offshore, inferior
education and training systems, skills gaps
and shortages, or reliance on expatriate
labor that can be bid away, their economic
development trajectory might lead to a high
share of employment in low wage, low paid
occupations which could perpetuate wage
inequality and ignite embers of economic
marginalization already smoldering from the
Arab Spring. Arab governments are
struggling to find a balance between
economic interests such as productivity and
industrial and global competitiveness and
social interests of full employment. A key
question is does full employment mean a
high wage, high skill job for all citizens or
any job with a sufficient salary regardless of
skill level or quality.
The Gulf countries which rely on relatively
cheap imported labor from Arab and Asian
countries to perform low skill, low wage roles
may increasingly need to substitute citizens
from their own countries should labor market
conditions improve sufficiently in other
feeder Arab and Asian countries. Better
employment conditions in labor exporting
countries could force Gulf countries to
search farther afield for less skilled, low
priced labor that may continue to constrain
productivity rates. Alternatively,
nationalization of low skill positions by
paying above market wage rates relative to
job responsibilities may still offer lower than
expected levels of income and not
convey sufficient social esteem. Both
options would serve to undermine the
viability of industries and reduce
competitiveness when exposed to global
competition and are reforms the
population is likely to oppose. Many of the
feeder countries to the Gulf states are
also emergent outsourcing destinations
suggesting growing opportunities in
feeder countries. Wage arbitrage by
offering higher wages than feeder
developing countries is drying up as a
strategy for sourcing labor for the low
skill, low wage sectors in Arab
economies.
Traditional Taylorist and Fordist forms or
work organization decreased the
threshold of skills and training required by
employees since work was organized
according to a strict division of labor with
work broken down into specific subtasks
(Asian Development Bank, 2004). Digital
Taylorism has now increased the ability of
firms to outsource work globally with IT at
cut-rate prices relative to performing the
work at home. However, the extent to
which Digital Taylorism has taken hold in
the Arab World is unclear.

18. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 17
While the profit motive to reduce headcount and lower costs
is understandable for profit maximizing firms, the social need
to ensure full employment for citizens challenges the purely
economic rationale of Digital Taylorism. In the Arab World, it
is the government institutions and the government controlled
companies that define the rules of the game. The small and
medium sized business which make up the majority of
businesses in the region are too small and fragmented to
offset the power accorded to government in such an
industrial structure.
Due to the reliance on the public sector as a mechanism for
job creation in many Arab countries, Digital Taylorism may
result in a situation where functions are outsourced but
government and government linked firms still maintain their
staff as duplicative shadow departments with the task of
managing contractors and consultants to perform the jobs
they were initially hired to do. Employment in the public
sector or in government linked parastatals is a infrequently
spoken of postulate of the Arab opportunity bargain where
overemployment can often serve as a redistributive social
safety net that bails out less profitable, competitive, or
budget-minded government linked firms and institutions while
ensuring sufficiently high wages for their employees at the
expense of more successful firms and workers and by
passing on higher prices to consumers. Budgetary constraint
flexibility shown to public sector institutions and parastatals
allows Arab governments to deliver on the political objective
of full employment. Such redistribution is facilitated by the
institutional structure of Arab economies where government
coalitions supporting redistribution can easily gain enough
support to overcome opposition from individual businesses.
It might be argued that the political objective of ensuring high
wage jobs and full employment for citizens forces Arab
While public sector employment offers job
security and a mechanism to create full
employment in the region, such income
distribution policies can have important
implications. When wages are not linked to
productivity, they send the wrong signals
for labor market allocative efficiency.
governments, particularly in the Gulf countries, to be less
dependent on market rationality in labor markets, profitability
of parastatals, and public sector fiscal constraint.
Compulsory hiring quotas at wage rates not linked to
productivity are also a form of income redistribution imposed
on private sector firms in the Gulf aimed at full employment.
While private sector firms might be expected to resist hiring
quotas which inflate salary expenses, they are unable to
defend their interests other than to relocate outside the
country or risk losing market access. The Great Financial
Crisis has provided evidence that Arab governments are
ready to adopt extreme measures to protect the full
employment postulate of the Arab opportunity bargain. The
regional slowdown affected several state linked firms that
were additionally sidled with the social obligation of
concessionary overemployment and unable to cut costs
through layoffs. Motivated by such considerations as
protecting the government’s reputation, economic
contribution to the economy, and commitment to full
employment, many of these companies received financial
injections due to poor performance. In these cases,
governments had a significant interest in preserving
employment even at the expense of subsidizing government
linked firms.

19. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 18
In the Arab World, public sector hiring was based on
guarantee rather than need resulting in surplus public sector
labor. Because wages, social factors, and other favorable
conditions of employment offered by the public sector are
considered superior to the private sector, the public sector
attracts educated labor away from the private sector.
Overemployment in the public sector reduces
unemployment but can be accompanied by a number of
negative consequences such as employee underutilization,
poor discipline, moonlighting, low productivity, higher
production costs, inefficiency and wastage, and a
detachment between pay and performance. While some of
Arab countries might be considered to have high
employment levels, from the perspective of utilization of the
labor force to derive economic value, they exhibit low
productivity. In such a cases, full employment is not
economically rational since the same or higher levels of
output and productivity could be achieved with less
employees.
Given the likely overemployment in the public and
government owned companies in many Arab countries, a
more intense focus on the bottom line for public sector
institutions and parastatals might lead to layoffs and
unemployment which could serve as a source of tension for
regional governments. The potential for tension would need
to be balanced with the long-term need to compete
effectively with other developing countries. For some Arab
governments, the goal of full employment supersedes labor
market rationality. However, it must be considered that full
employment is not the same as deploying labor for the
highest and best use. For example, in surveying the public
sector, Al-Yahya (2008) finds evidence that formal
educational qualifications are frequently not related to
current jobs and a high number of public sector employees
who believe their current jobs require low levels of their
perceived skills and capabilities. This is evidence of
underutilization and overemployment which likely affects
productivity and service delivery within the public sector.
Full employment that offers high wage jobs
is a valuable mechanism to establish, retain,
and secure political legitimacy while at the
same time achieving allocative efficiency in
labor markets that improve economic
development and create socio-economic
benefits. Full employment based on public
sector job guarantees stands at odds with
economically rational employment that is
necessary to the development of high skill,
knowledge-intensive industries.

20. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 19
In the long run, it could be cheaper to pay for several months
of unemployment than to burden public and private sector
firms with employees who could stall performance
improvement or affect global competitiveness. The
placement of released workers in the private sector may also
be complicated by less generous salaries and benefits
offered in the private sector due to the prioritization of profit
maximization and economic interests over social interests
and the critical question of whether redeployed workers
would have the skills required by new employers. Controlling
labor supply rates through introduction of part time
employment or early retirement could also be an option.
The strategy of full employment based on high
concentrations of the labor force employed in the public
sector relies on the maintenance of an economically
irrational allocation of the labor force which would require
considerable redeployment to the private sector and layoffs
to reorient the Arab opportunity bargain towards knowledge-
based economic development. Rationalization of
overemployment in the public sector is not possible without
mass layoffs.
Widespread use of cash-based accounting and line item
budgeting complicate things further. Governments have
numerous political incentives to engineer information. Hillier
(1996) explains that governments engage in creative
accounting to convince citizens that deficits are under
control; spending is in line with budgets; liabilities that must
be met by future generations are less than they are; that past
decisions justified as sound investments are still viable; and
that performance has improved relative to the past.
Cash based accounting places an
emphasis on not spending more than what
is allocated and ensuring actual
expenditures for specific line items are in
line with budgeted amounts. By
emphasizing control over expenditures
rather than results, cost based budgeting
has led to public policy making that is at
times disconnected with budgetary
allocation, a situation that has the potential
to result in overpromising politically but
underfunding and under delivering in the
eyes of the public.

21. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 20
Because there is less concern for spending efficiency, soft
budgetary constraints have created an environment where
there is little concern for total cost of output and a
separation between fiduciary responsibilities and
management. Soft budgetary constraints associated with
political aims of full employment in the Arab World lead to
bloated public sector salary expenses that can compromise
the effectiveness of government institutions in serving
public interests. In dealing with the aftershocks of the Arab
Spring, cash based accounting systems may be a recipe for
disaster. Inflated public sector salary expenses combined
with unanticipated, extra budgetary expenses to introduce
social and economic measures to keep citizens assuaged
may strain national budgets and lead to the further
degradation of government performance since institutional
budgets will be crowded out by extra budgetary expenses.
The desire for economic betterment has driven a major
increase in educational attainment, but young Arabs are
entering a crowded market that offers few opportunities and
not much in the way of a social safety net if they don’t wind
up on their feet. The goal of Arab governments cannot
simply be full employment, the goal must be revised to
economically and socially rational employment in a post
awakening Arab World. The antiquated Arab dream of full
employment through high wage, public sector employment
has transitioned to one where the market is the ultimate
arbiter of opportunity, and competition in knowledge-based
industries is contingent on increasingly low wage, high skills
workers who benefit from the Arab region’s competitiveness
crippling income redistribution polices that lead to
employee underutilization, low productivity, higher
production costs, inefficiency and wastage, and a
detachment between pay and performance.

22. How Arab governments respond to the broken regional
opportunity bargain could make the difference between a lost
generation of youth plagued by chronic unemployment and
social marginalization as well as significantly impact future
generations. Disaffected youth have the potential to become
a perpetual thorn in the side of Arab nations as Urdal (2006)
finds a relationship between youth bulges experiencing
economic hardship and political violence. Discontent
amongst Arab youth based on an evolving opportunity
bargain that no longer promises free education, a public
sector job guarantee, and state support could severely
compromise ambitious economic development plans.
Over the last decade, the Arab World has changed
significantly. Internet use increased 27 times to 82 million
users, the fastest regional growth rate in the world. The
region had one of the highest growth rates of airplane carrier
departures reflecting an emerging openness and integration.
Regional per capita GDP adjusted for purchasing power
grew at an annual rate of 4% to $8,507, with the strongest
growth in the Levant and North Africa. However, with the
region’s quickly growing population, this growth rate trailed
all other developing regions of the world (World Bank, 2013).
Although several of the Arab countries have placed amongst
the fastest growing countries in the world, only 105 million, or
approximately 30% of the population, are estimated as
middle class with daily expenditures between $10 to $100
per day. It is estimated that the Arab World represents only
6% of the world’s middle class, and spending represents just
4% of total spending by the world’s middle class. By 2030,
the middle class is expected to grow to 234 million or 44% of
the Arab population, representing 5% of the world’s middle
class and 4% of global middle class consumption.
Securing a Viable Arab Dream
The Arab Spring was a tangible reminder
that securing a viable Arab Dream is a major
issue of concern to regional governments.
The Arab Dream must include a revised
opportunity bargain which factors in how the
marginalized can have access to livelihoods.
21Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened?
While such estimates are not exact, these figures suggest
that large growth rates are slowly producing a growing
middle class and eliminating rampant income inequality, but
other regions like East and Southeast Asia have made huge
gains compared to the Arab World (Kharas & Gertz, 2010;
Population Division of the Department of Economic and
Social Affairs of the United Nations Secretariat, 2008).
The slow growth of the Arab World’s middle class will make it
difficult to rely on consumption in the transition to knowledge-
based economies. These statistics also highlight the
likelihood that a large number of Arabs will continue living in
the poor economic circumstances which fueled the Arab
Spring if nothing is done. At the same time the Arab World is
being rapidly integrated into the global economy. From 2000
to 2008 trade as a percentage of regional gross domestic
product increased at a compound annual growth rate of
2.87%, with imports and exports increasing from 72% of
regional gross domestic product in 2000 to 90% in 2008
(World Bank, 2013).While the region certainly gains from
market access, integration also leaves the region exposed to
competition from other countries.

23. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 22
Many Arab youths have invested their
time and money in education, but
then subsequently found that their
credentials and hard work does not
allow them to fulfill their dreams of
gainful employment. The Arab Dream
is grounded in a regional pursuit of
knowledge-based economic
development driven by policies that
envision the emergence of high skill,
high wage economies that will create
jobs. However, the global availability
and growth of low cost, high skill
workers threatens the viability and
fundamentals of sophisticated,
innovation-driven knowledge-based
industries taking root in the region
and devalues the credentials of
skilled workers. If knowledge-based
industries fail to take root and lead to
employment, many of reforms and
money spent on higher education
expansion, education quality, R&D
ecosystems, and entrepreneurial
growth could be deemed
inappropriately spent. In such a
scenario, the winners may continue to
be politically connected elites while
Arabs who receive inferior credentials
will have lower wages and face a
tenuous situation leading to wage
inequality and the continuous threat
of being replaced at any time by low
cost, high skill workers elsewhere.
Creating a new opportunity bargain requires not just
benchmarking and replicating the development trajectories of
wealthy, developed countries but also being aware of the
vulnerability Arab economies face in an era of globalization and
the emergence of high skill, low wage knowledge workers that
have changed the fundamentals of knowledge-based industries.

24. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 23
While some Arab countries are more suited to competing in a
high skill, low wage global economy, other Arab countries which
are unable to compete in high skill, high wage knowledge-based
industries will need to adequately calibrate the expectations of
their citizens regarding the types of jobs which will be available in
the future and the likely instability of salaries due to wage
compression from competing low wage, high skill workers.
Efforts to privatize education attainment so that labor market
success or failure passes the burden on to individuals are prone
to market failure without sufficient demand for skills from the
labor market. Short term, quick fix government payouts to solve
the problems with the broken Arab opportunity bargain are also
likely to fail. Arab governments will have to take a hard look at
the economic counsel they have received over the last two
decades to judge its worth in securing the economic interests of
the region. Reforms to reinvigorate the Arab Dream must
challenge the assumption that more education is always the
answer, reconsider the full employment promise which hampers
global competitiveness, reduce wage inequality to ensure equal
distribution of wealth, and determine the Arab world’s position in
an global economy with emerging low cost, high skill competitors
that challenge knowledge-based economic development both in
the developed and developing world.
While some Arab countries are more suited to competing in a
high skill, low wage global economy, other Arab countries
unable to compete in high skill, high wage knowledge-based
industries will need to adequately calibrate the expectations
of their citizens regarding the types of jobs which will be
available in the future and the likely instability of salaries due
to wage compression from competing low wage, high skill
workers. Efforts to privatize education attainment so that
labor market success or failure passes the burden on to
individuals are prone to market failure without sufficient
demand for skills from the labor market. Short term, quick fix
government payouts to solve the problems with the broken
Arab opportunity bargain are also likely to fail. Arab
governments will have to take a hard look at the counsel they
have received over the last two decades to judge its worth in
securing the economic interests of the region.
Reforms to reinvigorate the Arab Dream must challenge the
assumption that more education is always the answer,
reconsider the full employment promise which hampers
global competitiveness, reduce wage inequality to ensure
equal distribution of wealth, and determine the Arab world’s
position in an global economy with emerging low cost, high
skill competitors that challenge knowledge-based economic
development both in the developed and developing world.

25. Tahseen Consulting │ The Knowledge-based Economy and the Failure of the Arab Dream: What Happened? 24
Adams, J. T. (1931). The Epic of America Boston: Little, Brown, and Co.
Alyahya, K. (2008). The Over-Educated, Under-Utilized Arab
Professional: Why Doesn’t Human Capital Development Bring Desired
Outcomes? Evidence from Oman and Saudi Arabia. Dubai: Dubai
School of Government.
Arab Center for Research and Policy Studies. (2012). The Arab Opinion
Project: The Arab Opinion Index. Doha: Arab Center for Research and
Policy Studies.
Asian Development Bank. (2004). Improving Technical Education and
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Bank.
Beinin, J. (1981). Formation of the Egyptian Working Class. Middle East
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Brown, P., Lauder, H., & Ashton, D. (2011). The Global Auction: The
Broken Promises of Education, Jobs, and Incomes. New York: Oxford
University Press.
Butterworth, C., & Zartman, W. (2001). Between the State and Islam.
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Goos, M., Manning, A., & Salomons, A. (2009). Job Polarization in
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Hillier, D. (1996). Perspectives on Accrual Accounting Occasional Paper
3: International Federation of Accountants.
References
Kharas, H., & Gertz, G. (2010). China’s Emerging Middle Class: Beyond
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Schwalje, W. (2013). Knowledge-based Economic Development as a
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df.

26. Have Questions?
For more information contact
Wes Schwalje,
Chief Operating Officer
wes.schwalje@tahseen.ae
Tahseen Blog
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