Skills, Competitiveness and Policy in Developing Countries

The ability to compete in liberalised markets depends on the incorporation of new technologies into manufacturing and services. A structural shift into more advanced technologies is needed to accelerate long-term growth since technology-intensive activities are growing faster than other activities. In the age of information and communication technology, all countries, regardless of the level of development, have to build the capabilities to employ these technologies. While all developing countries are improving their skill base, this process is highly uneven.  The skill base of the large majority is inadequate, which makes their manufactured exports stagnant and their ability to attract foreign investment weak. They risk technological stagnation in a low skill, low growth trap (Redding, 1996).

Changing Skill Needs of Competitiveness

The base of skills in most developing countries is not enough to allow them to compete in manufactured trade. To reach high levels of technology, management and marketing requires new and more advanced skills. Manufacturers must cooperate more closely with technology, research and educational institutions. As such, national competitiveness depends on the ability of complementary activities to raise their skill base.

Competition based on low costs and prices are being replaced by “new competition” driven by quality, flexibility, design, reliability and networking (Best, 1990). With globalization, outsourcing occurs across vast distances across national boundaries. Skill intensive functions as handling information flows and networking are the new essentials in competition.

New skills are required to set up new work production systems that have different hierarchies, information flows and responsibilities. These have to be accompanied by new work attitudes, work relationships and management systems. The ILO (1998) identified four features of these practices.

·         Greater use of work teams, involving greater group responsibility, broader skills and frequent job rotation.

·         Involvement in off-line activities like problem solving, quality improvement, health and safety.

·         Flattening of organisational hierarchies, with greater responsibility by workers and more intense information exchange.

·         Tighter links to other human resource policies, with training and remuneration systems adapted to prepare and reward employees for the new responsibilities.

Skills and Capabilities

Much of the analysis of skills on trade does not take the role of technological learning in determining comparative advantage into account. It assumes that technologies can be used efficiently once formal skills are present. No distinction is drawn between formal skills and experience-based learning in building competitiveness. Informal learning and capability development are ignored and production functions are assumed to be identical across countries. Technology is assumed to be a costless and automatic; experience and problem solving are not included. Skills are treated as a generic resource, created by ‘the education system’ and measured by school enrolments or years of schooling. In some models, learning appears as an explanatory variable, but it is viewed as passively. It raises no policy issues, apart from the possibility of gaining first mover advantages.

Developing countries are assumed to be technological followers and technology markets are taken to be efficient. Using technology does not entail any additional cost, effort, uncertainty or learning. Technologies will be automatically used at ‘best practice’ levels and there is no difference between capacity and capability. Comparative advantage only depends on relative factor endowments.

Lall (2000) observed that there is a significant difference between capacity and capability. Firms in developing countries operate with imperfect knowledge of technological alternatives. Also, finding and learning technologies is a costly, risky and unpredictable process. They involve externalities and coordination problems that may lead to market failures.

Some technologies are more difficult and costly to master because their learning process is longer and more uncertain. Some also involve advanced skills, greater technological effort and more externalities and coordination problems. More difficult technologies offer further learning because they have greater potential for productivity increases. However, they have larger spillover effects while simple technologies tend to have limited learning potential, smaller scope for technological upgrading and less spillover benefits to other activities. But, unless countries move into more complex technologies, their competitive edge remains vulnerable to easy entry, technical change and market shifts. Thus, the process of competitive industrial development is one of promoting more demanding and deeper forms of learning.

Even if they have similar endowments, competitiveness varies significantly between countries according to their ‘national systems’ for technological learning. Hence, competitiveness depends on how effectively a country supports its enterprises in accessing new technologies, mastering them, and in coping with increasingly difficult learning.

Many factors are involved in determining the technological capabilities in developing countries. This includes: macroeconomic conditions, trade and competition policies, factor markets and institutions (Lall, 1996, 2000). The progress and nature of learning depends on how failures are remedied. Thus, policies on learning become determinants of comparative advantage.

Successful development strategies fall under two broad headings:

·         Autonomous strategies to accelerate and guide learning by reducing reliance on FDI and promoting domestic infant industries, coordinating investments in related activities and clusters, overcoming externalities, directing credit and developing specific skills and institutions. Korea and Taiwan are good examples of this strategy.

·         FDI dependent strategies that rely on transnational corporations (TNCs) to lead export growth and upgrading. This has two subsets of strategies: proactive strategies, of targeting TNCs and using industrial policy to guide them into more technology-intensive activities, and passive strategies, that rely on market forces to attract FDI and upgrade its activities. Singapore and Malaysia are examples of this strategy.

Changing Patterns of Competitiveness

It has been observed that advanced technologies are the engine of growth. The highest rate for growth is seen in high technology (e.g. fine chemicals, electronics, aircraft and precision instruments) followed by medium technology products (machinery, chemicals, simple electronics and transport equipment). Low technology products (textiles, clothing, toys, simple metal products and footwear), which is the main comparative advantage of developing countries, grow more slowly. Resource based products grow the slowest. This shows that dynamism involves moving up the technology scale of each industry. Some countries (like China) can manage high growth rates with low technology products by enlarging their market shares. Sustaining competitiveness in any activity entails constant technology upgrading. Technology intensive products offer better growth prospects than others do because of the following reasons:

·         Activities with the rapid product or process innovation enjoy faster growing demand as compared to technologically stable activities.

·         Technology-intensive activities are less vulnerable to entry by competitors compared to low technology activities where scale, skill and technology requirements are low.

·         Ceteris paribus, technology-intensive activities lead to faster growth in capabilities and higher quality capabilities.

·         Capabilities in technology-intensive activities are more attuned to technological and market trends, and so are more flexible and responsive to changing competitive conditions.

·         A technology-intensive structure is likely to have larger spillover benefits to other activities and to the national technology system.

Differences in national patterns of specialization suggest that only a few countries are bound to enjoy fast growth in the new technical standard. However, there are significant differences in the technological content of manufactured exports between the leading exporters, reflecting differences in strategy and capabilities[1].

By any measure of technological competence Korea and Taiwan lead the developing world. They developed their competence by heavy investments in skills, technology and institutional development, guided by pervasive industrial policy (Lall, 1996). Singapore’s success within a highly TNC-dependent strategy was also due to pervasive industrial policy on investment, skills and infrastructure.

Determination of Success

Competitive success among leading developing countries falls under technological activity, skill formation and attraction of FDI.

Technological Activity. Foreign technology is the primary source of knowledge of developing countries. Once technology has been imported, local effort is needed to master its elements, adapt it to local conditions and improve it over time to keep up with world best practice. The capacity to employ such technological effort is the ultimate determinant of competitive success. R&D captures such effort since it is important to move to more complex technologies. The leader by far in terms of R&D propensities is the Republic of Korea. But in terms of per capita R&D spending, the frontrunner is Singapore.

Skill Formation. For simple industrial technologies, basic schooling and literacy may be sufficient. However, advanced schooling and tertiary education become important as more complex knowledge is tackled. Sophisticated modern technologies require high levels of numeracy and a broad base of skills. They also need a high proportion of technical personnel.

Sub-Saharan Africa lags at all levels of education while the four mature Tiger economies of Asia lead the developing world at higher levels, just slightly lagging the developed economies. Meanwhile, the four new Tigers, Latin America and Middle East/North Africa are roughly similar in their secondary and tertiary level enrolments, just behind the levels reached in the transition economies. South Asia and China have low levels of tertiary enrolment, but China is considerably stronger at the secondary level. These results show large gaps in the education base for competitiveness and differences in completion rates, quality and relevance to skill needs.

The breakdown of tertiary enrolments in technical subjects is probably more relevant to assess the capabilities to absorb technological knowledge. The leading 3 countries in terms of total technical enrolments – China (18%), India (16%) and Korea (11%) – account for 44 percent of the developing world’s technical enrolments.

Enterprise training is one of the most important sources of skill formation. Developed countries and leading enterprises invest more in training than smaller enterprises and those in developing countries. Training takes place in all settings but the duration, content and nature of training differ considerably.

Many studies in mature industrial countries suggest that the shortage of appropriate worker skills is a major constraint on the adoption of new technologies. However, some firms do not provide training because they are unaware of its benefits or methods, while others fear the loss of trained workers to other firms. Training also involves costs. Thus, the incidence of training is highly variable.

Poorly educated entrepreneurs and managers hold back training efforts. This is evident in the UK. Because of this and other deterrents to training, UK suffers a ‘low skill trap’, where poor educational qualifications, weak training and low levels of technology used interact with each other.

Foreign Direct Investment. World trade is increasingly related to TNC activity as TNCs now account for very large shares – over two-thirds – of world trade (UNCTAD, WIR 1996). Their shares are higher in technologically advanced and differentiated products, and are rising in response to liberalised trade and investment policies. Increasing sophisticated exports require the participation of TNCs for most developing countries. However, few developing countries are able to participate in this dynamic system.

Implications for Skill Development Policy

Instruments that accelerate the development of technological capabilities are becoming steadily more constrained. Tools such as infant industry protection, local content rules, export and credit subsidies, restrictions and performance requirements on foreign investors have been banned, but there are still many policies governments can undertake to raise their skill levels. This includes: human resource development is an area strongly favoured by the new rules of the game and the multilateral development organisations.

Market failures in skill formation can arise at two levels: 1) the general level of resource allocation and deepening of the industrial and technological structure, and 2) at the narrower level of the education and training system proper.

Many skills required by industrial upgrading and competitiveness arise from the practical experience of mastering, adapting and improving specific technologies. The extent to which this occurs depends on investment in the productive sector, the agents involved, the competitive regime and the use of new technologies. Promoting experience-based skills calls for an investment and competitive environment: sound macroeconomic management, high rates of investment, outward looking trade regimes and open domestic markets.

Capability development requires policy intervention. Such promotion can take many forms and encompass many markets (Lall, 1996, Stiglitz, 1996). But, they have to ensure that the education and training system is coordinated with the industrial system as both evolve: this coordination must become an integral part of industrial and education policy (Ashton et al. 1999, Green et al., 1999). Also, interventions should address the failures of the trainee, the education and training system and the enterprises providing training.

For the trainee:

·         Externalities: The failure to recoup all the benefits of educational investments.

·         Information gaps and uncertainty: Individuals may not know of the future value of investments in education and training or of particular skills.

·         Risk aversion: Individuals may prefer more certain short term returns to available jobs.

·         Lack of certification of skills acquired during enterprise training: Value to other firms is reduced.

·         Capital market deficiencies: Individuals may not be able to finance their learning costs and foregone earnings.

·          

For the education and training system (public and private):

·         Lack of information on educational needs in industry and demands from students

·         Capital market deficiencies in raising the funding for better standards

·         Uncertainties about future skill trends, greater in a period of rapid technical change and overwhelming in a situation where skill needs are determined by industrial policy.

·         High costs of educational services provided.

·         In the public training institutions, bureaucratic and rigid management, poor remuneration and inadequate incentives for trainers, lack of interaction with the market, and low standards.

·         In the private sector system, risks of variable and unsatisfactory standards in the absence of effective monitoring.

For enterprises providing training to their employees:

·         Low absorptive capacity on the part of poorly educated workers.

·         Low educational qualifications on the part of employers and managers.

·         Lack of appreciation of or information on the benefits of training, and lack of knowledge of ‘best practice’ technology and skills in relevant activities.

·         Lack of training materials or teachers in-house.

·         Lack of specialised institutions to provide appropriate training at reasonable cost, or lack of necessary interactions between these institutions and enterprises.

·         Lack of finance to cover costs of training.

·         Lack of full appropriability, as trainees leave for better jobs after training.

·         Lack of technological dynamism, with enterprises content to stay with existing technologies, equipment and skill levels.

The appropriate policy response at the general level is careful targeting and implementation.

As far as the education and training system is concerned, there is a universal need to upgrade the quantity, quality and relevance of instruction (Middleton et al., 1993). The first step is to benchmark the education and training system against major competitors. The next step is to address the various market failures in the demand and supply of education. A huge variety of policy responses exist, ranging from public provision to largely private led systems.

The vocational training system, particularly relevant to technical skills, falls into three broad categories ILO (1998):

1.      The cooperative system. This generally involves strong workforce representation on works councils. Employers offer apprenticeship in all sectors, taking in over half the relevant age group. Training is provided by public vocational schools, with half the cost borne by employers; the apprentices also make a contribution by taking low wages. The qualifications are nationally recognised, and strong unions discourage poaching.

2.      Enterprise based systems: These rely primarily on training provided by enterprises. This is often blamed for UK’s low skill equilibrium; in the USA, deficiencies of enterprise training are offset by a larger supply of engineering skills.

3.      The state-driven system: This also has two variants: 1) First, the mature national institutes of education had a strong role of government in meeting fast-changing skill needs or 2) the former socialist economies and other developing countries had state-led education, generally with low levels of efficiency.

All systems are under pressure as competitive forces launch and technical change proceeds. It is imperative for governments to respond to these pressures if they are to participate fully and gainfully in globalization.

There is no ‘optimal’ skill creation system for all countries – each must find its own system to suit its needs and conditions. However, a very important role remains for policy intervention to promote skill formation. Free markets cannot develop the systemic abilities for new technologies. Policies that improve human resource and technology development must be enacted.

Source:

Lall, Sanjaya, “Skills, Competitiveness and Policy in Developing Countries” QEH Working Paper Series QEHWPS46 (June 2000).

---

[1] There are indirect ways to gauge this: the technological sophistication of the processes located in the exporting country, the level of domestic content and the main agents of export activity.