Today’s blog is a background note I prepared for a forthcoming Policy Research Report on “Industrial Policy for Development” written by Ana Fernandes and Tristan Reed.
Sector-targeted training programs are designed to train workers in specific areas required by targeted industries. Examples include training workers in the technical skills needed for manufacturing automobiles or computer chips, installing solar panels, working in vaccine development, etc. Governments around the world invest in sector-specific skills through their technical and vocational training (TVET) systems, and through their university systems. Typically, these investments have been justified on the basis of arguments that the public return to education can exceed the private return, which coupled with liquidity constraints, results in students otherwise underinvesting in human capital. While the evidence on the effectiveness of public vocational training systems is at best mixed, studies of the staggered expansion of higher education in China and Brazil have found that a growing pool of college-educated workers, particularly in science and engineering, increases innovation, productivity, and trade. Even when industrial policy is not the prime motive for such investments, the quality of human capital can shape industrial policy and multinationals are more likely to conduct research and development in countries with better human capital.
There are at least two additional market failures that motivate the use of sector-targeted skills as an explicit part of industrial policy. The first is coordination failures. A large firm may only be willing to make an investment in a new location if the local workforce has the skills it needs, but it may not be profitable for workers to invest in acquiring these skills if this investment does not take place, and local educational institutions may not offer training that meets these future needs. Second, even if the government succeeds in attracting new firms, they may underinvest in training workers because of the possibility that workers will leave and take these skills to other firms in the industry (e.g. Colombian and Ghanaian evidence). The government can then play a role in helping coordinate the different parties, and in subsidizing training that offers benefits beyond the individual firm.
The example of Costa Rica
An example of this approach is seen in the case of Costa Rica’s efforts to develop a high-tech information and communication technology industry, led by its efforts to attract Intel Corporation to construct a semiconductor and testing business in 1998, with an investment of more than US$500 million. Intel was attracted by the high level of general education in the country, but expressed concerns about a lack of technically trained graduates with the skills that the company would need. In response, the government met with Intel to understand its needs, and worked directly with the company to develop and support new training programs. This included a new one-year associate degree program focused on semiconductor manufacturing that was designed jointly by Intel and the Costa Rican Institute of Technology (ITCR), as well as English language training for the first group of technicians hired in Costa Rica. This effort overcame the coordination failure problem, and ensured training was demand-driven and meeting the needs of industry. By the early 2000s, Intel was employing 3,600 workers in Costa Rica, and its exports accounted for 17-20% of the total exports of the country. Local companies benefited also from this training, as managers and engineers who worked for Intel and other multinationals brought these skills across. This case also shows the need to continue to evolve and invest in the right skills. In 2014, Intel announced it would move its assembly operations to Asia, but keep its engineering and design operations in Costa Rica, necessitating higher skilled research and development staff. Today, Intel still has around 3,500 workers in Costa Rica, but many more of them are engineers and in R&D, necessitating additional investment in worker training by Intel and continuing to work with the university system to meet these changing human capital needs.
Evidence from history
Investment in sector-specific skills was only one component of the industrial policy that attracted Intel to Costa Rica, with the government also offering investment and tax incentives under a free trade zone, as well as infrastructure investments. This makes it difficult to ascertain how important the sector-specific skills training component was in Costa Rica. This is typically the case: countries employ a bundle of policies in industrial policy, and it is very hard to evaluate how important each component is. Several examples from history do provide causal evidence for the importance of skills in addition to physical infrastructure in developing new industries. A first example comes from China, where the Soviet Union supported the construction of large-scale, capital-intensive industrial clusters in the 1950s. Using a sudden interruption of aid to obtain exogenous variation, a study traced outcomes for steel plants over the next 40 years, finding that those that only got advanced technology had this advantage fade away, whereas plants where this was accompanied with technical training in steel continued to grow and were producing 49% more and were 46% more productive 40 years later. Conversely, a lack of investment in domestic skills has been identified as one reason import substitution strategies in Nigeria in the 1970s were not successful.
Service-centric industrial policies
In addition to developing a domestic industry, sector-specific skill training can be an integral part of a service-centric industrial policy that prepares workers for the global market through migration. This has worked best when the government has regulated quality, but enabled the private sector to increase the supply of training opportunities in areas with strong global demand. Recent studies of nurses in the Philippines and IT workers in India have found that this lead to a “brain gain”, whereby the country increased the supply of these skilled emigrants, while also growing the number of skilled workers in these fields at home as not all those who were trained emigrated. Kenya has started working with vocational schools to tailor their courses to meet foreign labor demands as part of a new goal to dramatically expand emigration job opportunities. Sector-specific training is also taking place as part of industrial strategies to help countries move out of carbon intensive activities such as coal. The European Union’s Just Transition Funds have been supporting these efforts to re-skill workers in Slovakia’s Horna Nitra region and Romania’s Jiu Valley.
What to watch out for
There are several potential risks in employing sector-targeted skills training policies. The first is that the quality of training offered by TVET and universities in many low and middle-income countries may not meet the standard needed for global firms, and what is taught may be slow to respond to emerging demands. A second risk is that the country takes a bet on training workers on very specific skills that have no domestic return if the country is unable to develop a new industry. A third is the standard concerns of political capture, additionality and crowd-out, in which government efforts just substitute for training that would have been carried out by firms themselves. The government needs the capacity to work closely with educational institutes and industry to help them jointly shape training content, but then may not wish to commit to very specific training until after a key firm enters. For example, Costa Rica initially had high schools and colleges develop a higher technology curricula around electronics, but did not define precisely what schools should teach, waiting until Intel came to the country to develop training in more narrow specialties.
A further lesson is that technical training in science and engineering is important, but may not be sufficient if there is a lack of managerial talent. Recent work has documented the high cost of middle management as a constraint to the expansion of a modern sector in developing countries. Historical evidence from U.S. assistance to Italian factories shows a strong complementarity between providing technology and management training, and randomized trials that tested provision of consulting services found improvements in management, productivity, and employment in India and Colombia. Improving management is subject to similar concerns about the capabilities of domestic training organizations to meet global standards, but has the potential advantage of providing a key input holding back many industries in the country.
And of course, more research is always needed
Industrial policy offers an additional rationale for countries to invest in sector-targeted skills development and vocational programs. But while such programs are widely used, the research base on how to best deploy such policies, and their causal impacts, remains very limited. The literature on improving vocational training programs offers some lessons around the role of competition and private providers, the need for demand-driven content, and experimenting with payment structures that pay based on how many workers find jobs rather than just how many are trained. But how to best diagnose and overcome coordination frictions and use these programs efficiently for industrial policy remains an open research question.
Source : World Bank
