Saudi skills development as a source of economic growth

One of the topics that I have been discussing extensively with both the public and private sector since I decided to move to Saudi Arabia is the topic of building skills for the future and the how we can create "new knowledge" here; particularly around emerging technologies such as quantum, blockchain, and artificial intelligence, but also modern practices, such as design thinking or methods for innovation.  

This focus on skills is, of course, not a new phenomenon in Saudi Arabia: in 1928, King Abdul Aziz sent the first set of Saudi students to Egypt to study law, engineering, medicine, and agricultural sciences.  Since then, the Kingdom has been focused on building the skills of its citizens through its local universities, research institutions, broad skills-development programs from non-government organisations (NGOs) such as Misk, and also highly successful scholarship programs which have seen unparalleled numbers of Saudis graduate with advanced degrees from some of the most prestigious universities in the world.

It is likely that, amongst all the many programs, initiatives, and efforts taken to accellerate the Kingdom's transformation and pivot to future, this sustained focus on skills development may emerge as one of the most important, impactful, and dramatic contributors to the Kingdom's future growth and leadership relative to other nations.

If we think about the role of skills in an economy, it's useful to recall the Nobel Prize winning work of Michael Kremer on the "O-ring Theory of Economic Development".  Kremer's work, named after the small o-ring that caused the Space Shuttle Challenger disaster, posited that, in an economy, production is a function of many discrete tasks and, even if the majority of tasks are performed perfectly, poor performance in one task can massively impact the final result.  In short, skills matter.  

In 2013, American economist Garrett Jones published a fascinating extension or Kremer's work ("The O-Ring Sector and the Foolproof Sector: An Explanation for Cross-Country Income Differences"); building on it to show how small differences in the skills of workers within an economy don't necessarily lead to huge wage differences within the economy but, skills differences between countries, do drive drive massive differences in international productivity levels – and, by extension, differences in the wealth of nations.  

In explaining this, Jones bifurcated an economy into two sectors: an "O-ring sector" and a “foolproof sector”.  The “foolproof sector” includes jobs, such as cleaning or gardening, where skill or cognitive ability is not as important to the quality of the final product as the more fragile “O-ring sectors” such as software development, law, or medicine where a failure as part of the production process will lead to a poor quality outcome or product.  For example, if there are three gardners tending to your lawn and one is not as skilled as the other two, the impact on the quality of the grass that is cut is likely to be limited and you can also also add more gardners to improve the outcome; whereas if you have a software engineering project and you have a poorly skilled developer working on, for example, the user interface then it is likely that the resulting software product will be poor and it cannot be mitigated by adding more resources to either the user interface work or improving the quality of any other part of the software industry value chain.  Likewise, two mediocre lawyers or surgeons cannot substitute for one highly skilled.

Looking at any economy, we can see – as Jones also noted – that the lower skilled workers would tend to work in the "foolproof sectors" and the higher skilled workers would tend to be distributed between both sectors such that the "law of one price" holds (wages equalise).  The reason for this distribution is that there is still some demand for high skills in the foolproof sector for certain jobs; and also that whilst a low skilled worker cannot substitute for a high skilled worker in the "O-Ring Sector", the opposite is not true and a highly-skilled worker can perform a job that doesn't necessarily require such skills or cognitive ability.

This effect, of course, assumes that there are sufficient highly skilled people in the country.  If there are too many low skilled people then all the highly skilled people will only satisfy the demand in the "O-Ring sector" and there won't be this equalisation of wages; or, if not enough to satisfy demand, low skilled people will start working more in the "O-Ring Sector" further reducing the quality of output.

However, the most interesting observation of Garratt’s work is that international differences in skills between countries can have a major impact on the global competitiveness of a country.  If the workers in the "O-Ring sector", such as technology sector, of country A  are relatively lower skilled than the workers in the O Ring sector of country B, their output will also be lower quality and their income will reflect this reduced output.  This is exacerbated in that the wages of the "foolproof sector" will also be reduced as the highly skilled workers will restribute themselves between both sectors at similar wages – due to the law of one price -  such that the average wages of all workers ends up lower in comparison to the other country with the higher skilled workforce.  

The below graph, from Garratt's work, provides a visual demonstration of the link between skills and GDP:

Indeed, we can see the validity of this observation in many ways such as, for example, the work of Stanford economist Eric Hanushek who established a correlation between a country scoring highly in international mathematics and science testing and economic growth.  In looking at the rise of the "Asian Tigers" – South Korea, Taiwan, Signapore and Hong Kong – their success is, in part attributed, to how the cognitive abilities of the society were lifted and, by doing so, each of these four nations became a leader in the provision of goods and services originating in the "O Ring sectors".

The overall growth of a nation's economy – relative to the other nations – is largely a function of the skill levels of those workers who perform "O-Ring jobs" or jobs in which their individual skill and intelligence has a high impact on the quality of the produced product or service.   The focus of Saudi Arabia on both developing the skills and cogntive abilities of its citizens so that they can focus on "O-Ring jobs", such as those in science and technology, and the efforts of the government to grow the overall "O-Ring sector" through, for example, supporting the establishment of local high tech industries or creating a supportive investment climate, represents a formula that will be a force multiplier for the Kingdom's ambitions for future growth and leadership.