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Chapter 2

Promoting inclusive growth in Morelos

This chapter provides an overview of the economic and social policies in the state of Morelos that are most related to human capital issues including an assessment of education, labour market training and innovation policy priorities in the region. Education and training policies should be pursued to improve social cohesion and productivity in the state. They should seek to attain inclusive growth by increasing student education performances and improving the alignment of skills supply with skills demand. Investing in innovation is also critical to regional competitiveness. Morelos should better mobilise its innovation infrastructure for knowledge diffusion and exploitation. A final section is dedicated to the newly-created Council for Human Capital, a regional governance body aiming to address the interconnectedness of such policy challenges and promote an integrated vision of regional development. Each policy domain is evaluated to support the state government of Morelos into building on opportunities and enhance the region’s economic development, learning from OECD best practices and policy recommendations.

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2.1 Introduction

The current priority of the state of Morelos is to boost regional economic development and inclusive growth through a strong investment in human capital. A skilled human capital is at the essence of regional development and competitiveness. A region that benefits from a high-skilled workforce able to learn, create knowledge and rapidly adapt to changing labour demands and technologies will be able to use those skills to drive innovation and achieve a sustainable form of economic growth. Human capital is not only a determinant of economic growth and productivity, it is also one of social cohesion and well-being because with higher-level skills and quality jobs, people tend to live healthier. While developing a strategy to strengthen skills across the region, Morelos must also address the disparities that can be observed in different parts of its territory, and design and adapt policies accordingly. Rural areas of the state tend to be more marginalised than the urban, particularly metropolitan, areas. Territorial disparities are also noticed in students’ school performance as children living in the central and southern parts of the state tend to perform more poorly than those living in the northern part of Morelos. Likewise, the students that live in the smaller cities located at the periphery of metropolitan areas tend to underperform metropolitan students. A place-based approach can better integrate the various national, regional and municipal programmes and ensure they benefit from areas of policy complementarities. Pursing a single policy (e.g. education) in isolation will not effectively meet the ambitions that the state government of Morelos has set. Rather, the state will have to rely on a holistic approach encompassing different policy domains which, if well- coordinated, can help build stronger human capital and eventually achieve sustainable economic growth. Improving the skills in Morelos is paramount to boosting productivity growth in the region over the medium and long run. For all types of OECD regions, human capital appears to be the most critical and statistical robust factor influencing regional growth and development. The cross-regional analysis finds that, overall, reducing the proportion of the people in a region with very low skills seems to matter more than increasing the share with very high skill levels. Furthermore, the gains to human capital are multiplied when other framework conditions in the regions are in place, which indicates the importance of adopting a broader holistic approach to regional development. Building a competitive regional profile will also require engaging in inclusive policies and ensuring that all citizens can enjoy the redistributive effects of different policies. This will demand that infrastructure reforms are undertaken to allow a better connection of people to jobs and service, and – through a better overall mobility in the state – increase well-being. If well-managed, policy complementarities should undoubtedly help the state of Morelos in achieving a sustainable and inclusive form of regional economic growth. With the recent creation of the Council for Human Capital, the state of Morelos has well understood that fostering synergies across different policy areas is likely to bring the best results. The Council for Human Capital aims to develop an integrated strategy to strengthen the skills of the region’s population. However, the Council does not intend to focus merely on the supply of skills. It will also seek to support businesses in

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becoming more productive and competitive, help the region strengthen its innovation profile and, over time, increase demand for high-level skills.

2.2 Building a future skilled workforce through education

Education and skills policies are at the cornerstone of economic development. Quality education is intended to ensure that the future workforce of a country or a region develops the right skills to navigate the labour market, create innovations and contribute to society's well-being as healthy, responsible and ethical citizens. However, such positive outcomes can only be produced at a large scale should regions develop an inclusive form of development. The state of Morelos has understood this well by putting human capital at the centre of its economic growth strategy. Nonetheless, territorial disparities in student performances are still visible in Morelos and call for the need to put more measures in place to ensure that no child is left behind and benefits from the same quality of teaching and learning experience as better-off peers. While the region has taken steps to address the issues of inequity and inequality and boost participation rates in higher levels of education, it also needs to ensure that the skills that young people acquire are relevant to the needs of the economy. This may require new forms of collaboration to be envisaged when designing education and training policies.

Morelos’ educational landscape and priorities The education system in Morelos reflects Mexico’s federal organisational structure. The Secretariat for Public Education is the federal and state’s main actor responsible for national education policy, strategy and delivery. Education is organised in three sequential levels: i) basic education comprised of pre-primary, primary and lower secondary school (typically for those aged 3-14), ii) upper secondary education (typical ages 15 to 17) and iii) tertiary education. Education is mandatory between the ages of 3 and 17. Several modalities of education may be observed at different education levels, as illustrated in Table 2.2. Education in the state of Morelos is virtually universal from ages 5-14. Morelos has made strong efforts to ensure that all children are enrolled in basic education. Most students attend school in the early stages of compulsory education and in urban rather than rural areas, as observed by enrolment rates in communitarian, indigenous and televised schools (see Table 2.2). Enrolment numbers start to decrease from lower secondary level, pointing at a difficult transition into upper secondary and higher levels of education. Morelos is doing better than the Mexican average in school completion across all levels of education (except pre-primary education), although provisional data for 2016 captures a significant reduction in upper secondary education drop-out rates from 20.3% in 2014 to 11.3 in 2016 (see Table 2.1 and 2.3) (Ministry for Public Education, 2014a; Ministry for Public Education, 2015; Ministry for Public Education, 2016). As observed in the first chapter, Morelos students' mean performances in PISA are above the Mexican average, although they are still lagging far behind OECD peers. Results from the most recent national PLANEA evaluation (2015), moreover, rank Morelos amongst the lowest performing areas of Mexico while highlighting large discrepancies among the performance of children from different socio-economic backgrounds and communities.

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Table 2.1. Education completion rates in Morelos and Mexico (%), 2013-14

Education level Morelos Mexico Primary education 99.5 96.3 Lower secondary 98.7 87.7 Upper secondary 58.0 63.2 Source: INEE (2016), La Educacion Obligatoria en Mexico, Informe 2016, www.snte.org.mx/pdfindigena/LaEducacionObligatoriaenMexico.pdf.

Table 2.2. Enrolment in education in Morelos, 2013-14

Level/type Total enrolment Proportion of Enrolment by modality (proportion within level and type enrolment (%) of education) (%) Total school system 545 144 100.00 Basic education 391 987 71.90 General Communitarian Indigenous Pre-primary 68 639 12.50 96.6 1.5 1.9 Primary 217 430 39.80 99.2 0.2 0.5 General Technological Televised Lower secondary 105 918 19.40 54.7 28.6 16.5 General programmes Technical-professional programmes Upper secondary 74 293 13.60 43.8 56.1 Bachelor Postgraduate Tertiary education 50 870 9.30 85.9 9.6 Education for workers 27 650 5.00 Note: Early childhood education: refers to programmes with an intentional education component aimed at developing cognitive, physical and socio-emotional skills for participation in school and society. They are grouped into two categories: ISCED 010, early childhood educational development – programmes designed for younger children (between the ages of 0 and 2); ISCED 020, pre-primary – programmes designed for children from the age of 3 to the start of primary education (ISCED level 1). Communitarian schools: schools targeted at small communities and provided by a distinct government agency called the National Council for Educational Promotion (CONAFE, Consejo Nacional de Fomento Educativo). CONAFE is responsible for promoting education to rural and high deprivation urban areas. Televised schools: the televised system (Telesecundaria) was created in the 1960s to expand access to education to rural and extremely remote areas. Instruction is delivered through specialised television broadcasts, printed and digital materials, together with teachers’ instruction. Technical-professional programmes: those include the Bachillerato Tecnologico, Profesional Tecnico Bachiller and Profesional Tecnico. Source: Ministry for Public Education (2014a), National System of Education Statistical Information.

Table 2.3. Drop-out rates in Mexico and Morelos, 2013-16

2016 Education level 2014 2015 (provisional data) Morelos Mexico Morelos Mexico Morelos Mexico Primary education 0.6 0.6 0.7 0.7 0.9 0.5 Lower secondary 3.3 4.7 2.8 4.0 2.7 4.2 Upper secondary 20.3 13.1 14.4 12.4 11,3 12.0 Tertiary education 8.9 6.9 1.9 7.1 4.9 6.8 Source: Ministry for Public Education (2014b), Principales Cifras del Sistema Educativo Nacional 2013-2014, www.planeacion.sep.gob.mx/Doc/estadistica_e_indicadores/principales_cifras/principales_cifras_2013_2014_bolsil lo.pdf (accessed 24 October 2016); Ministry for Public Education (2015), Principales Cifras del Sistema Educativo Nacional 2014-2015, www.planeacion.sep.gob.mx/Doc/estadistica_e_indicadores/principales_cifras/principales_cifras_2014_2015_bolsil lo.pdf (accessed 24 October 2016); Ministry for Public Education (2016), Principales Cifras del Sistema Educativo Nacional 2015-2016, www.planeacion.sep.gob.mx/Doc/estadistica_e_indicadores/principales_cifras/principales_cifras_2015_2016_bolsil lo_preliminar.pdf (accessed 24 October 2016).

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The state of Morelos has developed its education policy priorities for the 2013-18 governing period as stated in a Sectoral Programme for Education and in alignment with the priorities contained in Mexico’s National Development Plan. Two of the state’s major priorities in education policy are improving the quality of basic education and increasing attendance in upper secondary and tertiary education (Gobierno de Morelos, 2013a; Gobierno de Morelos, 2013b).

Improving the quality of basic education In Mexico, socio-economic inequalities are exacerbated by a school system that remains inequitable (Santiago et al., 2012). In Morelos, the communitarian, indigenous and televised schools – all located in rural areas – tend to suffer from poorer infrastructure and attract the most inexperienced teachers while the general and technical schools – most often located in urban areas – have higher quality educational materials, infrastructure and teachers (Santiago et al., 2012). To improve quality and equity, the state of Morelos’ main actions are towards the improvement of educational materials and infrastructures and supporting schools in managing their own resources and developing more autonomy. Four key programmes have been supporting those efforts. 1. The Programme of Excellence to Combat Lagging in Education (Programa de Excelencia para Abatir el Rezago Educativo) aims to improve the physical infrastructure of some school buildings in order to improve the working and learning environment for students. In 2014-15, 64 schools that demonstrated highly deteriorating infrastructure were supported through an investment of 28 657 236 million pesos (MEX). This investment allowed for the construction of new classrooms and the renovation of others, as well as the improvement of schools’ basic sanitary services (Gobierno de Morelos, 2016a). While the Programme of Excellence to Combat Lagging in Education came to an end in 2015, it has been replaced by the Education Reform Programme (Programa de la Reforma Educativa). The Education Reform Programme meets the same objectives and purpose as the preceding programme, but benefits from an investment increase amounting to MEX 30 189 607 million, which also results in a wider reach as the programme is active in a total of 66 schools in 2015-16 (Gobierno de Morelos, 2016a). Student books, cafeteria equipment as well as administrative and classroom furniture were some of the additional investments made towards improving school materials and infrastructure (Gobierno de Morelos, 2016a). 2. Through the Mexico Connected project that aims to expand Internet connection in the state of Morelos, broadband access between 2 and 50MB (megabites) will be installed in educational institutions in two phases. The first phase is planned to cover 1 331 places and the second should cover 430 places (Gobierno de Morelos, 2016a). However, the extent to which this broadband expansion will include the provision of computers and new digital technology as complementary tools for teaching and translate into digital skills training in the classroom – rather than merely serving for administrative purposes – is unclear. 3. The pilot Project in Favour of School Well-being (Proyecto a Favor de la Convivencia Escolar) intends to train 381 school directors in the use of material for teachers and students. This effort involves the delivery of 12 230 materials by the state government across the 381 schools. By investing in new materials, the underlining objective of this project is to ensure that children have access to a

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positive school climate driven by new practices promoted by school leaders. Likewise, the Safe School Programme (Programa Escuela Segura) grants funding support to 155 schools to improve the school environment and foster better learning. It also provides technical support to 634 schools by means of three books delivered to the schools’ library (Gobierno de Morelos, 2016a). 4. School autonomy and resource management are the goals of two programmes. First, the programme for Strengthening School Management (Fortalecimiento de la Gestión Escolar), which will invest MEX 41 million in 595 schools, seeks to support school leaders in the management of school resources (Gobierno de Morelos, 2016a). With a similar ambition, the Schools of Quality programme (Programa Escuelas de Cualidad) aims to strengthen the autonomy of basic education institutions in managing resources, while supporting each school and their Technical School Council in the adoption of best practices that can help them meet planning, evaluation and budget allocation responsibilities effectively. Through an investment of MEX 26.57 million in 2015-16, a total of 475 schools are benefiting from the programme which, compared to the previous year, represents an expansion to 55 new schools (Gobierno de Morelos, 2016a). Another component of the Schools of Quality programme involves the evaluation of teachers in their classroom instruction and directors in their capacity to lead as well as activities to increase parents’ engagement in their child’s learning.

Investing in educational infrastructure and materials in disadvantaged schools contributes to improving equity and performance A large number of students continue dropping-out of education at upper secondary level as a result of continuous under-performance and a growing feeling of disengagement towards school. The instructional costs of disadvantaged children are likely to be higher than those of the well off and Morelos is taking positive steps in palliating those needs. According to the evidence presented in Chapter 1, in the state of Morelos, the schools located in the smaller cities that are at the periphery of metropolitan areas seem to concentrate poorer student performances and may require greater attention. Increasing the quality of the teaching and learning that children benefit from in basic education directly affects the rest of their scholastic journey. Despite the existence of scholarship programmes intended to incentivise attendance, improving the transition from basic education to upper secondary education in the state of Morelos is an uphill battle. Evidence from PISA supports Morelos’ initiatives to improve equity and better student outcomes by showing that investing in high-quality materials for schools is a prerequisite for high student performance (OECD, 2013a). The relationship between schools’ educational resources and mathematics scores in PISA is significant. Evidence also shows that, on average across OECD countries, higher-performing students generally attend schools with better educational resources (OECD, 2012a; OECD, 2013a). Educational resources tend to refer to science laboratory equipment, instructional materials/computers and/or qualified teachers in key areas, whereas physical infrastructure tends to refer to school buildings, heating and cooling systems, and instructional space. Physical infrastructure, while playing a lesser role on student performance, tends to be a significant indicator of equity in emerging countries’ school systems and is strongly associated with disadvantaged schools, which are more likely to host disadvantaged students and show low academic achievement rates. Improving physical infrastructure can thus positively contribute to raising student performance, particularly in disadvantaged schools. Better physical infrastructure and working

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conditions in disadvantaged schools also constitutes an important factor in encouraging high-quality teachers to continue to work in disadvantaged schools (OECD, 2012a).

Although a certain level of investment is necessary, more investment does not necessarily lead to better performance outcomes Despite conventional wisdom, once a minimum level of expenditure in education has been reached, it is unlikely that more investment will automatically result in better student performance (Burtless, 1996; Hanushek, 1997; Nicoletti and Rabe, 2012; Woessmann, 2003). A good proxy for measuring actual expenditure on education is spending per student. An economy’s cumulative expenditure on education is the total dollar amount spent on educating a student from the age of 6 to the age of 15. PISA studies show that, after a threshold of about USD 35 000 per student, expenditure is unrelated to performance (OECD, 2010a). Mexico spends a little over USD 20 000 per student from the ages of 6 to 15. More precisely, expenditure per student is almost four times greater in higher education than it is in the lower levels of education and, because expenditure per student for each level of education is determined at the federal level, the same is true in Morelos. While more could be done at the federal level to re-balance expenditure per student in favour of lower levels of education in Mexico, how, when and where the money is spent can be as important as how much is being spent. Studies based on PISA show that the quality of educational resources is most strongly associated with the incidence of low performance in mathematics at the country level, followed by the quality of physical infrastructure (OECD, 2013a). Improving the quality of a school’s physical infrastructure and educational resources can make a big difference for underachieving students when the initial quality of those resources is poor. Increasing investments in a school that already has satisfactory resources will not substantially influence the incidence of struggling students. “Where” resources are spent is of greatest importance, especially in a country such as Mexico in which equity in resource allocation is particularly low (OECD, 2016a). In countries and economies where educational resources are distributed more equitably, the share of low performers in mathematics is considerably smaller, on average, even when comparing education systems with similar resource quality. More importantly, equity in resource allocation is almost unrelated to the share of top performers in mathematics. This suggests that education systems can tackle inequalities in education while simultaneously promoting – and achieving – academic excellence.

School autonomy is beneficial to student performance, however not in all cases An analysis of results from the PISA 2000, 2003, 2006 and 2009 examinations showed that school autonomy is only positively associated with student performance in developed and high-performing countries (OECD, 2016a). For school autonomy to generate positive impacts on school quality and student performance, the state of Morelos needs to ensure that school administrators are well-qualified for this task and that they have the right tools in place at the school level to allow for monitoring and accountability.

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Additional policies that contribute to better performance and school quality outcomes A number of complementary policies can be implemented to achieve higher education quality and reduce the share of low-performers. Data-driven school information systems can indirectly contribute to improving overall school quality and student performance, but additional measures can also be implemented to provide more direct support to pupils. Across OECD countries, different measures have been developed to identify low performers early and provide remedial support. However, to be successful those measures must entail the mobilisation and involvement of experienced teaching professionals, especially for the most disadvantaged students.

Data-driven school information systems Although positive experiences may be observed in individual schools, the state of Morelos is missing a state-wide data-driven approach to school and performance improvement. More precisely, what might be missing is a coherent information and monitoring system that would serve as a central piece of infrastructure in the educational landscape. Through its use, teachers would be able to record student information such as absenteeism, grades, and behavioural problems, all of which are possible signs of disengagement. Reliable information systems and accurate data can be used by teachers from one year to the next not only to identify and monitor low-performers closely, but also to reflect on the interventions that could promote further learning. These systems and databases may be used to keep track of students’ full educational record, especially in a region where child migration is of high concern. Stakeholders in Morelos have reported an important issue of migration from nearby states, but also within the region, as a result of which many children are taken out of school and migrate and, in the process, their academic records get lost. Despite being developed on a national scale, the Dutch example of a system that regularly records data on school and student performance may be useful to Morelos (see Box 2.1).

Box 2.1. The use of data for school and student improvement in the Netherlands

In the Netherlands, an important source for research and monitoring is the Personal Identification Number (PGN), which is issued to every child in the country over the age of 3 and a half. Commonly referred to as the education number, it is the same as the tax and social insurance number. Schools pass on the PGN together with other data on pupils to other schools, as the child progresses through the education system. These data are increasingly used for purposes such as monitoring pupils’ school careers, school attendance or dropout. The PGN is very useful in the action plan against dropout, because it offers complete and reliable figures on rates nationally, regionally and at municipal and district levels. All schools in secondary education are expected to register absenteeism, disengagement and dropout, and a monthly report is available to municipalities and schools to allow them to give priority to those at risk. Also, these data are linked to socio-economic data (including demographics, native Dutch citizens, ethnic minorities, unemployment, people entitled to benefits, etc.) by region, city and district, which provides a wealth of information for implementing and adjusting policy. This monitoring of results enables the authorities to assess what works and what does not, and therefore to disseminate best practices. Source: OECD (2012a), Equity and Quality in Education: Supporting Disadvantaged Students and Schools, http://dx.doi.org/10.1787/9789264130852-en.

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Identifying low performers early and mobilising specialised school staff to provide remedial support

To identify underachievers early, Morelos could implement diagnostic assessments at the beginning of the school year or a study unit which can help teachers identify, with more precision, which students are having learning difficulties in one or more subjects and what type of remedial support may be appropriate to support them. Attending to the needs of low-performing students may require additional goods and/or personnel to be allocated to disadvantaged schools, such as teachers specialised in certain subjects. In Finland, for example, a special teacher who is specifically trained to work with struggling students is assigned to each school and works closely with teachers to identify students who need extra help (OECD, 2016a). Multi-professional care groups, consisting of the school principal, special education teacher, school nurse, school psychologist, social workers, teachers and parents, meet periodically to discuss individual students in each comprehensive school (OECD, 2016a). In a similar vein, Singapore provides support to students who do not have the basic numeracy skills and knowledge needed to follow the mathematics curriculum at school (“Learning Support for Maths” [LSM]). These students are identified through a screening test at the beginning of the first grade and receive support by a specialised teacher for 4-8 periods per week. LSM teachers are provided as additional teachers to each school, based on need, and receive additional training and teaching resources for LSM students, as required (OECD, 2016a). It may be worthwhile for the state of Morelos to engage in projects such as the above or the Itinerant Pedagogical Advisors programme, which ensures the effectiveness of remedial policies by mobilising qualified teachers and specialised school staff to serve, first and foremost, low-performers and disadvantaged schools. A crucial issue in Morelos lies in that disadvantaged students and students in rural and remote settings tend to benefit from quality teaching the least despite the fact that quality teaching is the most crucial element improving disadvantaged students’ performance (OECD, 2012a). The CONAFE Itinerant Pedagogical Advisors programme delivered in the states of Puebla and Tabasco was identified as a positive case study by the OECD’s Fostering Innovative Learning Environments project. The Itinerant Pedagogical Advisors programme focused on schools with very low performance in highly-marginalised small rural communities. Pedagogical advisors were university graduates in Pedagogy or Education who alternated between two community schools throughout the school year. The advisors employed diagnostic instruments to identify students with special needs, monitor and coach the community instructors, in addition to making recommendations for the next instructor to follow up on. In schools that benefited from the Itinerant Pedagogical Advisers programme, the percentage of low-performing students in mathematics decreased more than in schools where the programme was not carried out.

Incentivising experienced teaching professionals to serve in disadvantaged schools

Mexico, and the state of Morelos, has made teacher policy a priority in the past few years by putting in place reforms on teacher training, teacher career progression and

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evaluation. Teacher quality is a complex and multi-dimensional issue that reflects several challenges including how to expand the pool of qualified teacher candidates, recruit teachers to the places that are most needed, distribute teachers in an equitable way and retain qualified teachers over time. In Morelos, results from recent entrance examinations to the teaching profession continue to cast light on the poor performance of candidates. Despite the limited flexibility that Mexican regional government entities may have over some of the multi-dimensional challenges cited above, there is certainly room for state governments to incentivise the sharing of best practices, improve teacher support and create additional incentives for a more equitable allocation of teachers to schools. In the state of Morelos, the rural east and south regions are reported to be the least favoured in terms of educational services. This territorial gap in public service delivery should be given significant attention for the impact that it may have on driving inequalities that are observed later in life through labour market and well-being outcomes. Moreover, while it is prompting the increasing popularity of private schools, as observed in Chapter 1, it is critical for the state of Morelos to ensure that the few existing public schools deliver high-quality teaching, with instruction being adapted to the needs of local students. Teachers in disadvantaged schools may need additional training and mentoring on how to meet the needs of the students they teach, learn how to diagnose their problems and be responsive to difficult classroom situations (OECD, 2016a). Moreover, fostering communities of practice and strong mentoring networks within difficult schools can contribute to increasing the retention of novice teachers. In Shanghai, the People’s Republic of China, all new teachers analyse lessons in groups with experienced teachers, join teaching research groups to discuss teaching techniques and can be recognised for excellent teaching as novices through district-organised competitions (OECD, 2012a). In addition, improving working conditions (e.g. infrastructure and collaboration with other teachers) in disadvantaged schools can be an important factor in influencing teachers to stay or leave disadvantaged schools. Effective support combined with compelling financial incentives can substantially contribute to attracting and retaining competent and experienced teachers to disadvantaged schools. However, the incentives need to be significant enough to make a difference when compared to other professions. Most OECD countries offer such incentives as annual or one-time bonuses for teaching in a disadvantaged and/or remote area (OECD, 2012a). In the United States, North Carolina enacted teaching quality improvement plans with five key features: increased initial certification requirements for teachers, increased salaries tied to meeting performance standards, new teacher mentoring, ongoing professional development for all teachers, and scholarships and loan “forgiveness” programmes targeted to recruit high-quality candidates to teach in disadvantaged schools. The state also offers incentives to attract higher quality candidates and improve the effectiveness of new and more experienced teachers, through rigorous initial training, mentoring and ongoing development. North Carolina offered a retention bonus (USD 1 800) for certified mathematics, science and special education teachers in high-poverty and low-performing schools (OECD, 2012a). Overall, the bonus programme reduced teacher turnover by 17%, a cost savings of approximately USD 36 000 for each teacher who chose not to, or delayed, leaving the profession or moving on to a different school. Before the bonus was implemented, a

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third of teachers in these subjects were uncertified and many were concentrated in disadvantaged schools (OECD, 2012a). At the system level, more resources may need to be shifted towards compulsory education in Morelos. The imbalance in spending across education levels reflects the situation at the national level whereby expenditure per student is almost four times greater in higher education than it is in the lower levels of education (OECD, 2015a; Scott, 2014). Developing the right tools, implementing tailor-made and incentive programmes may thus be impeded by limited resource levels and/or school flexibility over spending. Although resource allocation decisions are made at the federal level, there may be leeway for the state government of Morelos to provide additional support to increase the resources of primary, lower – and upper secondary schools and to provide schools with a reasonable degree of freedom to administer the additional resources.

Quality early childhood education may be the best return on investment for disadvantaged children

Many OECD countries grapple with how to improve school performance and support children in developing the skills they will need in tomorrow’s labour market. Achieving these objectives not only speaks to the quality of an education system but also implies increased equity and productivity. At present, large performance disparities can be noted among children from different social and economic backgrounds and living areas in Morelos. These disparities tend to translate into better or worse positions when students enter the labour market later on. At school, disadvantaged children need to make tremendous efforts to catch up to the level of their better-off peers. When compared to his or her OECD counterpart, however, the average student in Morelos still ranks poorly on the PISA scale. PISA results suggest that attendance in early childhood education decreases the likelihood of low educational performance at age 15 (OECD, 2016a). Students who attend school at this level tend to perform better than those who did not, even after accounting for their socio-economic backgrounds, gender, immigrant background, language spoken at home, family structure, location of student’s school (rural area, town or city), grade repetition and programme orientation (vocational or general) (OECD, 2016a). Other studies show that investing in early childhood education and care yields high returns, particularly in the case of disadvantaged children, while investing in training and lifelong learning (LLL) yields positive – yet lower returns – than in previous educational stages (Woessmann, 2008). Disadvantaged students benefit more from early educational investments, while well-off children from later investments (Woessmann, 2008). The idea is that “skills beget skills”, meaning that the skills achieved in the early years of life constitute a building block for further learning and competence acquisition (OECD, 2015b; Carneiro and Heckman, 2003). While every child in Mexico is entitled to enrol in pre-primary education, average enrolment percentage rates are lower than the OECD average. In Morelos more specifically, very few children have benefited from enrolment in early childhood education below the age of 4 (INEE, 2016). Exploring the potential to develop a network of free early childhood education centres for disadvantaged children could provide positive educational results. Evidence shows that the long-term effects of early education on economic and social outcomes are particularly high for children from disadvantaged backgrounds (Heckman, 2011; Heckman, Stixrud and Urzua, 2006; OECD, 2015b). As

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such, increasing early childhood education coverage is increasingly perceived by OECD countries as a cost-beneficial, strategic investment to improve learning outcomes and reduce the influence of socio-economic backgrounds on school performance (OECD, 2015b).

Table 2.4. Enrolment rates in early childhood education in Morelos and Mexico (%), 2013-14

Age Morelos Mexico Position in ranking of Mexican states 3 years-old 22.7 39.9 26 4 years-old 79.0 88.7 27 5 years-old 98.0 84.9 8 Source: INEE (2016), La Educacion Obligatoria en Mexico, Informe 2016, www.snte.org.mx/pdfindigena/LaEducacionObligatoriaenMexico.pdf (accessed 24 October 2016).

However, enrolment in early childhood education is not sufficient on its own. The quality of programmes is essential and must be monitored alongside their results. Quality indicators include the child-staff ratio, the duration of programmes and public spending per child. Some OECD countries have developed systems to benchmark and monitor children’s progress, including children from different socio-economic and ethnic groups. Others use school entry tests to focus on child development and to provide information on how young children are progressing. Australia, for example, uses a national adaptation of the Early Development Instrument (EDI). The EDI, originally developed in Ontario, Canada, is a measure of children’s development as they enter school. Teachers complete a checklist measuring children’s physical health and well-being, social skills, emotional maturity, language, cognitive and communication skills, and general knowledge. The results are aggregated at the group level (school, neighbourhood, and city) to provide a population-based measure of children’s development (OECD, 2015c). Expanding the access to quality early childhood education programmes to low- income children could lead to substantial positive educational and employment outcomes. It would also contribute to further increasing women’s labour market participation, which in Morelos remains lower than OECD average. Consideration, however, should be given to expanding education service delivery in marginalised and rural areas of the state of Morelos. CONAFE is the federal institution responsible for education provision in rural and highly-marginalised urban areas. Morelos may need to consider overhauling its education service delivery model to fill existing service delivery gaps. Indeed, the delivery of educational services is less developed in the rural east and south areas than in urban areas such as those in the east around Cuautla, in the south around the Zacatepec municipality and in the north-centre around Cuernavaca, Emiliano Zapata, Jiutepec and Temixco municipalities. Portugal’s “clusters of schools” system, which combines several small primary schools in isolated rural municipalities, exemplifies a different approach to education service delivery in rural areas. Likewise, the state government of Morelos may want to explore this type of solution in collaboration with CONAFE.

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Box 2.2. School ''clustering'' in Portugal

Portugal's weak results in the 2000 PISA tests exposed major shortcomings in the nation's education system. In rural areas, many primary schools were small and isolated. In towns and cities, schools were often so crowded that they had to operate a double shift. Students, particularly from disadvantaged backgrounds, frequently had to repeat grades. Many eventually dropped out of school. A national debate on education led to sweeping reforms. One of the most significant was a decision to reorganise the school network by creating "school clusters" bringing together several schools in a single educational project. A typical cluster may consist of five to ten pre-school units and primary schools feeding into a single lower secondary school. Each cluster is led by a director who is appointed by a council of teachers, parents, students, municipal leaders and other relevant community and institutional representatives. The Ministry of Education and municipalities work together to create clusters, deciding on the construction of new schools on the basis of the number of students and schools, geographical factors and demographic indicators. Thanks to their broader range of staff and better facilities, these clusters help to improve work organisation and teacher collaboration, thereby providing better and more extensive services for students. Source: OECD (2011a), Education Policy Advice for Greece, Strong Performers and Successful Reformers in Education, http://dx.doi.org/10.1787/9789264119581-en.

Increasing attendance at the upper secondary and tertiary school level Increasing participation in education is a clear policy priority in Morelos. Attending school is facilitated through the provision of monetary cash transfers that lower the opportunity cost of completing an education. International assessments and literature (Murnane and Ganimian, 2014) have supported the effectiveness of cash-transfer programmes for increasing school participation when targeted at low-income families and when conditional on school attendance. Beca Salario universal scholarship Students in Morelos are supported by a range of federal programmes as well as the state government’s own Beca Salario universal scholarship. The state government of Morelos created the Beca Salario pilot programme, implemented for the 2013-14 academic cycle, to incentivise students to stay in school. Unlike most other cash-transfer programmes, Beca Salario is universal, i.e. any student enrolled in a public institution from their 3rd year of lower secondary education until postgraduate studies is eligible to apply and benefit from the scholarship. The objective of this social programme is two-fold: reducing early dropout because of a lack of resources to pay for education, and by doing so, achieving universal education coverage at the upper secondary level. Altogether, the programme seeks to improve social equity and improve the quality of children’s learning environment within and outside the school, through the development of community activities. The beneficiaries from the programme receive monthly financial support based on their level of education: MEX 300 for those in lower secondary education, MEX 500 for those in upper secondary education and MEX 700 for those enrolled at the tertiary level (excluding postgraduates). Beneficiaries are free to decide how to spend the grant funds (e.g. transportation, meals), especially those in their “early years” of education as basic

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education institutions tend to be free of charge and some upper secondary schools are no- charge, as well. Since its first year of implementation, Beca Salario’s reach has continued to expand and dropout rates across all education levels are expected to decrease. As captured earlier in this chapter, there was a significant decrease in upper secondary drop-out rates in the state from 20.3% in 2014 to 14.4% in 2015, with provisional data for 2016 showing a further decrease to 11.3%, which makes it lower than Mexican average (Ministry for Public Education, 2015; Ministry for Public Education, 2016). In addition, Morelos is expecting a gradual increase in upper secondary and tertiary enrolment rates as a similar result of other scholarship programmes. Compared to 2010, Morelos today registered a 40% enrolment increase in public universities (Gobierno de Morelos (2016a. To date, no information on enrolment rate percentage increases in upper secondary and tertiary education is available for the state of Morelos. This further stresses the need for Morelos to engage in a better monitoring of its programmes, as argued in a subsequent section of this chapter (see Section 2.2 on Bécate and the Promotion of Self-employment programmes).

Table 2.5. Beca Salario investments and numbers of beneficiaries, 2013-16

Academic cycle Beneficiaries Investment (USD) 2013/14 93 275 417 621 2014/15 102 370 482 158 2015/16 108 530 260 337* Note: (*) number of beneficiaries and amount distributed as of January 2016. Source: Gobierno de Morelos (2016a), Tercer Informe del Gobierno 2013-2018, http://morelos.gob.mx/sites/default/files/PDFs/tercer-informe-de-gobierno.pdf (accessed 5 August 2016).

To expand the learning environment beyond the classroom, the Beca Salario programme engages all beneficiary students in community activities organised through their schools. Those activities are a platform to put in practice young people’s skills (practical, social and emotional) and knowledge while participating in community initiatives. A series of initiatives have been organised to address a variety of themes such as early school leaving, sustainable development, health, literacy, culture and sports (Gobierno de Morelos, 2016a).

Beca Salario meets national development and state sectorial development objectives The objectives of the Beca Salario programme, which are focused on access to education and education quality, align fairly well with Mexico’s National Development Plan and the state of Morelos’ Sectorial Education Programme 2012-2018. Both development programmes focus on providing a quality education, reducing dropout rates and improving performance and the transition from one education level to the next. Echoing the goals of Beca Salario, Morelos’ Education Programme states “achieving universal coverage in upper secondary education” as one of its main objectives.

The community component of Beca Salario puts a relevant emphasis on the need for children to develop socio-emotional skills The community environment can have an important influence on children’s learning ability and experience. A child who grows up amid an environment plagued by violence and crime may struggle to concentrate and learn. However, the community can also be a place of further learning in which schools and community groups organise activities that foster positive non-formal learning experiences for young people. Beca Salario’s

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community initiatives are a positive platform for young people to acquire and further develop a wide range of skills that will be of value throughout their personal and professional life. Alongside 21st century skills, the importance of social and emotional skills, in particular, is growing in recognition. In its identification of 16 core skills, the World Economic Forum places social and emotional skills (also called “soft skills”) at the top of the list. Likewise, recent work by Cunningham and Villasenor (World Bank Group, 2016) suggests that while employers value all skillsets, demand for socio-emotional skills and higher-order cognitive skills is higher than for basic cognitive or technical skills. When thinking about how to best prepare children for tomorrow’s labour market, cognitive skills have thus always come to mind, but social and emotional skills should now too. Recent evidence concerning Morelos shows that 79% of young children have low levels of socio-emotional skills, making Morelos one of the lowest performers in this area. The issue seems to be most pressing among children from migrant and rural backgrounds (INEE, 2016). The low levels of socio-emotional skills development in Morelos’ children and young people have implications beyond the simple relationships people have with one another. Social and emotional skills are strong predictors of educational and labour market outcomes such as academic achievement and better earnings, but also a reduced likelihood of engaging in crime and violence. (Cunha and Heckman, 2007; Heckman, 2011; OECD, 2015b). Self-presentation, oral communication, leadership, working in teams and other such skills can be crucial to one’s employability and success in professional life. In relation to this, findings from a nationwide employers’ survey in Mexico, including Morelos, reveal that, while very much in demand, soft skills is a domain in which many young graduates are lagging (CIDAC, 2014). Social and emotional skills are not skills that children were born with, but rather a set of malleable characteristics that can be developed and improved. Furthermore, evidence suggests that social and emotional skills contribute to the development of cognitive skills. To illustrate this, creative problem-solving relies not only on one’s creativity and ability to think outside the box, but also on one’s capacity to be critical and reflect on information. The best time to develop socio-emotional skills, as well as foundation skills, is in the early years of life. Nonetheless, social and emotional skills continue to be improved during adolescence and in early adulthood. Several OECD countries have thus sought to integrate soft skills development modules into school curricula and/or extra-curricular activities (OECD, 2015b).

However, Beca Salario’s design and monitoring may be improved to ensure it meets its objectives The universal characteristic of Beca Salario makes the target population of this programme a very broad one, extending to any young person currently enrolled in a public institution from the 3rd year of lower secondary school onwards. Establishing such a large pool of eligible recipients reflects a redistributive approach to policy making, however the extent to which this approach will be effective in addressing the factors behind the low participation rates and retention of a specific segment of the population against the rest of the student body as well as generate higher educational outcomes for those most “at risk” is unclear. The programme would benefit from identifying the different profiles of eligible students based on socio-economic characteristics such as household income, territorial location, gender and/or mother’s educational profile. This analysis should be completed

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with a rigorous evaluation of the factors affecting those groups of students and their willingness and/or ability to pursue their studies. Ideally, cash-transfer incentive programmes in education seek to support those who would not be likely to continue studying due to economic reasons as well as those who are considered “at-risk” of leaving school early as a result of continuous low-performance and a growing feeling of disengagement towards school. While in Mexican society, students from wealthier families tend to go to private schools while the others make their way through the public system, in a region such as Morelos – where over 90% of children are enrolled in public institutions – it is fair to expect that different socio-economic realities and levels of deprivation may be represented in the public education system. For a public school student who is not amongst the poorest groups and is already determined to complete a high-level of studies, receiving free money to do so from the Beca Salario may be considered as a bonus, not a game- changer or vital necessity to achieve an already planned ambition. As such, delivering financial incentives to those who could and would continue studying even without being granted money can be seen as redistributive policy making, but does not exactly meet the initial objectives of the programme supporting those who may dropout for financial reasons. This illustration highlights a key contradiction between the programme’s objective and design. One of the programme’s objectives is to overcome the lack of economic resources as a factor discouraging young people to stay in education. However, by design, the programme’s universal vocation does not specifically address this concern since it is not conditional on student socio-economic characteristics and deprivation indexes. A better definition of the target population would allow for a more precise definition of the programme’s objectives and how it can be adapted to best address the sources of the challenges at stake. Alongside the programme’s long-term objectives, short- and medium-term targets and desirable outcomes should be set to evaluate the success of the Beca Salario against those outcomes and ensure the programme is delivering towards its objectives. The extent to which such targets have been elaborated is unclear at present. Results from annual evaluations of the programme could prove helpful in reassessing the programme’s targets and expected outcomes over time. Short summary To address equity and inequality in education, the state of Morelos has implemented a number of programmes with two goals in mind: the improvement of educational infrastructure and materials, and more autonomy in school management. While, in general terms, they are important objectives, as validated by international literature, they are all the more necessary to reduce the territorial disparities in learning achievement in Morelos. The following measures, potentially more effective, could be implanted to improve teaching/learning and reduce underachievement include: i) the installation of a regional data-centred school information system to gather key student and school indicators; ii) the early identification of low-performers and implementation of remedial policies; iii) the mobilisation of well-qualified staff to serve in disadvantaged schools. Attendance in early childhood education has also been stressed as one of the most effective policies to reduce performance disparities from an early age amongst children of different socio-economic backgrounds and living areas. Expanding low-income children’s access to quality early childhood education programmes is a policy that could lead to substantial positive educational and employment outcomes. It could also draw attention to the need to improve and reassess educational service delivery in poorly-attended areas of the rural east and south areas.

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To conclude, increasing participation in upper secondary and tertiary education is set as another central priority for education policy in the state of Morelos. To this aim, the state government created a “universal” scholarship programme, Beca Salario, from which all public school students benefit. However, a contradiction between the programme’s objective and design may be highlighted. A better definition of the target population would allow for a more precise definition of Beca Salario's objectives and how it can be adapted to best address the sources of the challenges at stake. Likewise, the state should engage in a close monitoring of the programme and define short- and medium-term targets and desirable outcomes alongside long-term objectives for evaluation to ensure it is delivering towards its objectives. Strengthening the responsiveness of education and training to labour market demands Despite being crucial, increasing participation in education will not result in better employment outcomes for graduates if the qualifications that young people gain do not equip them with the skills and knowledge that businesses need. Measures should be developed to ensure education and training matches labour market needs. This should be defined as an additional objective to those already set by the state government of Morelos for it could have a tremendous impact on regional development. Greater responsiveness may contribute to achieving a better match of skills supply and demand, which in turn may result in improved productivity levels in firms and stimulate employers’ demand for highly-skilled employees. At present in the state of Morelos, the current – yet scarce – human capital on the market has yet to be fully mobilised. Unemployment and skills mismatch issues not only reflect a situation of low skills equilibrium (whereby a low supply of skills is matched by a low demand for skills amongst local employers) but also raises questions related to the relevance and quality of current education programmes with respect to the local labour market and economic priorities of the state. A recent nationwide survey of employers in Mexico reported that in addition to showing low foundation skills, young graduates appear to be lacking basic technical knowledge and skills in their field of study, which represented major obstacles for their recruitment (CIDAC, 2014). Yet theoretically, the young people freshly out of education programmes should be in a position to demonstrate the most up-to-date knowledge in their field. According to the employers surveyed, the situation in Morelos is similar to that of Mexico on average with 26% of HR staff reporting that they could not find a suitable candidate for their vacancies despite receiving applications for the job (CIDAC, 2014). Skills mismatching is thus reported as a considerable challenge by stakeholders in Morelos. Technical Vocational Education and Training (TVET) in Morelos There are a number of measures that the state of Morelos can use to ensure skills supply matches demand. Across OECD countries, Vocational Education and Training (VET) is increasingly being perceived as an effective tool to achieve this goal. TVET development in Morelos matches the cluster development of the state as it underpins the productive capacity of SMEs and their position in supply chains (OECD, 2013b). Thus, VET programmes in Morelos focus on advanced manufacturing, ICT, health, the hospitality and food sectors, although business administration programmes are also provided, for example. Vocational education and training in the state of Morelos is a complex education system comprising of various sub-systems independent from each other. It is delivered at both upper secondary and tertiary levels. In Morelos, the National College of Professional and Technical

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Education (CONALEP), the College of Science and Technology Studies (CECYTE), the General Direction of Agricultural Technological Education (DGETA) and the General Direction of Industrial Technological Education (DGETI) are in charge of upper secondary VET. While those are national institutions, they are expected to align their programmes and priorities with institutions within the state’s development plan. At the tertiary level, the Technological University of the South of Mexico (UTSEM) and the Technological University Emiliano Zapata (UTEZ) offer technological courses of short and long duration.

Engaging employers is essential to increasing the relevance of education and training programmes and providing work-based opportunities Morelos’ higher education vocational institutions, particularly technological institutes, have been engaging with the business sector. The Polytechnic University of the State of Morelos (UPEMOR), the South Technological University of the State of Morelos (UTSEM) and the Emiliano Zapata Technological University (UTEZ), all public institutions, have to prove to their respective national co-ordinating body that the industrial sector has an interest in the programmes they have developed and/or are considering to develop, and that the actors in this sector are willing to provide facilities for students to gain professional experiences in their industries. Such practices can result in positive employment outcomes for future graduates as businesses start establishing direct recruitment lines with universities. Evidence shows a positive (47%) number of businesses in Morelos that collaborate with higher education institutions (HEIs) to recruit young people, against a lower (38%) average at the national level (CIDAC, 2014). Likewise, the National Employment Service can be an important ally in guiding HEIs in the orientation of their current and future programmes based on local labour market knowledge. The Technological University Emiliano Zapata (TEZ) benefited from the insights of the National Employment Service in Morelos to adapt its new 2016 curricula, which includes subjects such as marketing and business creation, to the needs and requirements of businesses. The TVET system seems to face more challenges at the upper secondary level than at the tertiary level where collaboration with employers appears stronger. Upper secondary TVET is perceived as a second chance education rather than a quality alternative to the general education route. This assertion is corroborated by employers reporting that TVET graduates do not have the skills to enter the labour market because of the poor quality and relevance of training programmes. The demand for further training under the Bécate Programme underscores the issue that most young TVET graduates face, namely unpreparedness to enter the workplace. Educational institutions in Morelos may need to further increase incentives to engage employers in the updating of training curricula and course content. The presence of multinational companies (MNCs) in the region could be leveraged early in skills formation. At present, industry stakeholders reported that this type of collaboration tends to be very low, or even non-existent, with business representatives demonstrating very low trust in the quality of training programmes and pointing to unexperienced teaching staff and outdated methodologies, as examples of shortcomings. Yet, private sector involvement is necessary to ensure that education programmes meet businesses’ new skills requirements, reflect changing occupational needs and respond to the emergence of new professions. It is all the more relevant in light of Morelos’ innovation development agenda and the newly emerging courses that may derive from it. The UTEZ is a good example of education responding to industry needs. When a company moves into the region, the university undergoes an evaluation of skill needs and required competences as a basis from which to develop a new course. Upper secondary institutions in Morelos should engage in similar initiatives.

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Box 2.3. Encouraging industry experts to teach in vocational programmes Teach Too is a programme launched in England to encourage occupational experts from industry to spend some time teaching their occupational expertise to others and contribute to curriculum development, while continuing to work, so keeping on the job vocational education and training as up-to-date as possible. The programme implements a recommendation by the Commission on Adult Vocational Teaching and Learning on the need for “vocational teachers and trainers to combine their occupational and pedagogical expertise, [and] build strong partnerships with employers.” The programme will be developed by: learning from existing best practices and disseminating them, funding a range of development activity to encourage innovation; challenging employers; and training providers to propose solutions that benefit their learners and businesses. Drawing on this knowledge and activity, the intention is to develop a national Teach Too framework that all stakeholders would be keen to embrace. Source: OECD (2014a), Skills beyond School: Synthesis Report, http://dx.doi.org/10.1787/9789264214682-en.

A competent and versatile labour force could represent one of the state’s major competitive advantages. More courses delivered in English could facilitate young people’s integration in multinationals, while strengthening Morelos’ international standing. A skilled, bilingual workforce would also benefit a number of sectors such as tourism and commerce, and potentially attract more firms to the region. Likewise, promoting entrepreneurial skills early in education may support the development of more dynamic entrepreneurial initiatives in Morelos. Strengthening the role of employers as accreditors of training could thus increase the relevance and quality of courses, as well as facilitate smooth school-to-work transitions for the graduates of those programmes.

Work-based learning opportunities ensure that young people are adequately prepared to enter the labour market Engaging businesses in education is also paramount to ensure that young people benefit from quality work-based learning experiences. Stakeholders in Morelos have reported that access to and the quality of on-the-job training experiences can differ, with some institutions such as the CONALEP providing more opportunities than others by relying on a larger employers’ network. However, quantity does not necessarily imply quality. Education and training institutions should develop strong relations with participating employers and develop oversight over what is demanded of trainees in the workplace to ensure best practices in on-the-job training. An emphasis on delivering quality apprenticeships can be noted across most OECD countries. Morelos should establish a regional system of apprenticeships to make work- based learning more systematic in VET and allow for the adoption of mechanisms to better control their quality. Positive outcomes in terms of matching skills supply and demand may also likely be gained. As such, apprenticeships should not only be presented as opportunities for students to apply the skills they have developed in the classroom, but they should also be seen as a model that businesses can benefit from. While evaluating the cost benefits (for employers) of engaging in VET is no easy task, recent calculations done by Bertelsmann Stiftung suggest that businesses have more to win than to lose. While focusing on the case of Spain, the study shows that apprenticeship training can result in net benefits for firms by the end of training or in the medium term when trainees are hired, which allow firms to save on recruitment and

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hiring costs (2015). The evidence also reveals that the positive returns on investment from engaging in apprenticeships are at greatest advantage for medium and large sized firms than smaller firms because the cost of training for smaller firms tends to be significantly higher. With a motivation grounded in those findings, Fundacion Bertelsmann Spain, the sister company of Bertelsmann Stiftung, launched a large campaign across three regions of Spain incentivising SMEs to provide apprenticeships and supporting them in this task to ensure that supply and demand are well-matched and generate benefits for both parties (see Box 2.4). The state government of Morelos may want to encourage similar endeavours as those undertaken in Spain.

Box 2.4. Supporting SMEs in providing apprenticeships, Spain In Spain, Fundación Bertelsmann created the Alliance for Dual Training (AlianzaFPDual), a national network for companies and institutions committed to the promotion and development of dual vocational training, based on the German model of VET and apprenticeships. The Alliance intends to provide models of quality for the implementation of dual training initiatives while bringing together and sharing best practices with the ambition to attract an increasing number of companies. To support SMEs in delivering dual training programmes and apprenticeships, Fundacion Bertelsman created a technical support unit composed of dual training facilitators covering three priority regions (Andalusia, Catalonia and Madrid), where half of Spanish SMEs are concentrated. The role of facilitators is to approach SMEs. To facilitate this contact, facilitators draw on the networks of clusters and business associations, training centres, large companies and their value chains. Companies that show interest receive free support and advice in creating dual vocational training opportunities and developing apprenticeship programmes accordingly. Among some of the functions covered by the technical support unit are, among others, those of identifying companies’ occupational needs, selecting candidates and facilitating the liaison between training centres and companies. Source: Bertelsmann Stiftung and Fundación Bertelsmann (2015), Apprenticeship training in Spain – a cost-effective model for firms?, https://www.bertelsmann-stiftung.de/en/publications/publication/did/apprecenticeship-training-in-spain-a- cost-effective-model-for-firms/ (accessed 23 August 2016).

2.3. Upskilling the workforce and boosting participation in the labour market

The low quality of education and poor attainment rates of previous generations have resulted in Morelos being home to a predominantly low-skilled local population. However, the state at the same time, attracts the migration of high-skilled individuals who come to work for the many R&D centres located on its territory and gathers workers whose competences are praised by multinational companies. High-skilled employment in the labour market is however scarce with unemployment and under-employment being reported as a major challenge and impacting younger people’s incentives for completing longer studies. For the lower-skilled and in a context where unemployment benefits are not an option, the informal sector is a safety net. However, a low-skilled labour force and a large informal economy represent bottlenecks to growth. Low levels of education can be a drag on labour productivity and the capacity to adapt to new economic conditions. It also increases the likelihood of people becoming informal workers and of firms remaining small and not investing in new productive technologies. To boost inclusive growth and productivity in the region, the state of Morelos will need to engage in policy measures that support the upgrading of workers' skills and companies to develop in the formal economy.

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Skills supply and demand in Morelos The level of skills supply and demand can provide insights into the quality of local job creation and the potential for future growth in regions. Skills supply is measured by the percentage of people with post-secondary education, while skills demand is measured by the percentage of medium- and high-skilled occupations and wages (OECD, forthcoming). The following figure shows that in 2015, 16 regions in Mexico were in a “high-skills equilibrium”, with both a relatively high supply of and demand for skills. Fifteen regions were in a “low-skills trap”.

Figure 2.1. Skills supply and demand, Mexican regions, 2015

Source: Calculations based on data from OECD (2016b), Job Creation and Local Economic Development 2016, http://dx.doi.org/10.1787/9789264261976-en.

The state of Morelos is characterised by a low-skills equilibrium whereby the low supply of skills meets a low demand for skills. In a low-skills equilibrium, inadequate skills matching and labour shortages often occur when vacancies remain unfilled either due to a sheer lack of local people to fill them, or because people are not attracted to the pay, job contract provisions or working conditions of the positions (Froy, Giguère and Meghnagi, 2012). Where both the supply of skills and the demand for skills is relatively low, it may be harder for regions to move to higher-skilled, higher value-added production and services. However, the state of Morelos has a strong asset: a higher youth premium than the Mexican average, yet already high compared to other OECD countries. In 2014, its youth dependency ratio was 41.25% compared to the OECD average of 27.51%, as shown in Chapter 1 analyses. The young demographic trends characterising Morelos are an element of opportunity for the region to increase productivity and become more competitive. Meeting those objectives will require Morelos to strengthen its human capital through labour market training and to support individuals to access economic activities that go beyond mere self-subsistence. Particular efforts may be needed to reach out to those who

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are involved in the informal sector and would benefit from tailor-made labour market re- integration opportunities. Labour market training and job matching for the unemployed in Morelos In most countries, the Public Employment Service (PES), alongside public and private further education and training institutions are the main providers of vocational training opportunities for the unemployed. Through the provision of skills training, the PES plays an indirect role in boosting productivity and economic development by supporting self- employment and better preparing the population in meeting the expectations of the labour market, thereby increasing the matching of skills supply and demand. It can also play a more direct role by supporting entrepreneurs with equipment, helping firms recruit and by supporting the creation of jobs, subsidising jobs in the public and private sector. In its Sectoral Agenda for 2013-2018, the state government of Morelos’ Ministry for Labour defines similar objectives and sets as priorities the development of public policies in support for job creation and the hiring of young first-time jobseekers, immigrants and disabled individuals (Gobierno de Morelos, 2013c). A heterogeneous pool of people would be eligible for training and employment support in Morelos. Because the unemployed tend to be first time job-seekers, or individuals who recently left formal employment, they tend to be better educated while low-skilled individuals almost systematically fall into the informal market and experience difficult transitions towards formal employment. Two decentralised agencies provide training and employment services in Morelos. The first is the National Employment Service (Servicio Nacional del Empleo [SNE]) attached to the Ministry for Labour, which only handles the unemployed and the under- employed. The second is the Institute for Work Training (Instituto de Capacitacion para el Trabajo – ICATMOR), linked to the Ministry for Education and which is available to the wider population. Both organisations enjoy good coverage across the state. The SNE tends to co-operate with municipalities to advertise job fairs, jobseeker workshops and Centres for Work Mediation (Centro de intermediación laboral); whereas the ICATMOR relies on a system of mobile units to advertise and deliver its training across the 33 municipalities of the state (ICATMOR, 2016a). While they ultimately share the same objectives (upskilling and labour market integration), the SNE and the ICATMOR show complementary, yet distinct characteristics and ways of operating as illustrated in Table 2.6.

Table 2.6. SNE and the ICATMOR

SNE ICATMOR Has the infrastructure to provide the training No Yes Number of training courses a person can take Only one Unlimited Subsidy, in the form of a stipend in support of training and for public transportation Total (100%) Partial (70-80%)

Is a CONOCER evaluation centre No Yes Source: ICATMOR own creation based on Administrative Registries.

Labour market training policy plays a central role in supporting job creation by ensuring that businesses can access people with the right skills. The National

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Employment Service’s “Bécate” programme, funded via a mix of most largely federal (77%) and state resources (23%) (Servicio Nacional del Empleo, 2016a), provides employment support to the unemployed and under-employed. Bécate covers three dimensions of work, which not only seek to respond to supply training needs but also intend to increase the demand for skills. As such, Bécate’s sub- programmes focus on skills training, job matching and job creation in the form of self- employment. The supporting self-employment programme is aimed to equip individuals with the basic skills necessary to develop low-productive activities. The SNE also promotes entrepreneurship with a dedicated programme through which it lends materials and equipment in the first year for entrepreneurs to start their business. All training costs for individuals and firms within the Bécate programme are covered by the SNE. In the year 2016, between January and September, a total of 11 258 people benefited from training delivered within Bécate, the majority of which was in the training for self-employment, 5 808, and 4 778 in the workplacement for TVET graduates (Servicio Nacional del Empleo, 2016a).

Table 2.7. Bécate

Bécate sub- Objective Duration Participants’ support Obligations from programmes during training participating firms Mixed training Supporting new 1-3 months Scholarship equivalent Having at least 5 businesses, or large to 1 or 2 times the vacancies; hiring 80% firms that are minimum salary per of trainees expanding their day of training activities, in training attended their personnel in specific occupations Training for Provision of training 1-3 months Scholarship equivalent Hiring 100% of technicians and courses in public or to 1 or 2 times the trainees professionals private institutions for minimum salary per (replacing as of 2016 people aged 16-29 day of training the training vouchers graduated from attended; sub-programme) university with the transportation stipend; final objective to meet accident insurance the specific occupational needs of firms Practical work training Supporting the 2 months Scholarship equivalent Having at least 5 recruitment of TVET to 1, 1.5 or 2 times the vacancies graduates (aged 16- minimum salary per 29) in MSMEs day of training attended; transportation stipend, MEX 20/day attended; accident insurance Training for self- Training in arts and 20 working days Scholarship equivalent Not applicable employment crafts and basic (or one month) to the minimum salary trades to support per day of training those who want to attended; become self- transportation stipend employed

Source: Servicio Nacional del Empleo (2016b), Becate, http://www.sne.morelos.gob.mx/becate.php (accessed 11 October 2016).

The National Employment Service works in close collaboration with the ICATMOR for the delivery of training. The ICATMOR trains 23 000 people annually

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(ICATMOR, 2016b). Unlike Morelos’ SNE, the ICATMOR only provides a partial subsidy (70-80%) for individuals to take on courses and does not provide stipends for doing so (ICATMOR, 2016a). Given the lack of unemployment and other support benefits to the unemployed, such conditions can represent serious impediments for many individuals to access those courses. However, funding support can also be sought through the SNE who, by delegating training responsibilities to the ICATMOR, will cover the full value of the courses for trainees. Those individuals must be able to fit the “formal unemployment” criterion nonetheless. The ICTAMOR provides a range of courses, some tailor-made for the personnel of large companies, others as specialisation modules at the request of educational institutions. However, it also delivers modular courses available to the wider population that tend to involve basic skills (e.g. arts and crafts, textiles, massage therapist), the most popular are related to beauty and food and beverages, two areas with high self- employment (ICATMOR, 2016a). In addition, some courses focus on the acquisition of cross-disciplinary skills (e.g. computers and English) but the opportunities for progression are very limited. For example, IT courses are limited to basic computing, software and Internet use and do not offer opportunities to develop further skills such as coding. Delivering courses with distinct progression levels could allow many to take on new career pathways regardless of age or past education level. Moreover, encouraging people to develop medium-level skills in key competences such as those mentioned above represents human capital gains for Morelos' economy.

Ensuring effective job placements through Bécate

Through its Bécate programme, the immediate benefits for both firms and jobseekers of having the SNE facilitate the training and direct integration of individuals into the workplace is all but uncontested. Under some of its sub-programmes, the obligation for firms to hire a large number of trainees can represent an incentive for those who are unemployed or under-employed. Forcing firms to hire trainees also enhances job creation and increases private sector commitment towards the programme. By engaging in the programme, firms can delegate training and hiring responsibilities to the PES, thereby saving on the time and costs that many do not have. However, despite resulting in direct job placement, the extent to which PES- sponsored vocational training results in an effective matching of skills supply and demand is questionable. The SNE is often under pressure to attain short-term objectives in terms of placement or training and this is reinforced by the legally binding obligation of most firms towards recruitment. This pressure could lead the SNE to respond too quickly to employers’ needs, even if the quality of the job being offered is poor. The under-employment levels in Morelos may be an illustration of this haste. By helping employers to fill such vacancies, the public sector may be subsidising business activity in a way that leads to poor efficiency in the use of public resources while also contributing to low productivity (Froy, Giguère and Meghnagi, 2012). In addition, there is a risk that the job will not be commensurate with their skill level. When there is a mismatch, short- term efficiency gains may be achieved but it may not be the best way of building a more adaptive and productive labour force in the long term (Froy, Giguère and Meghnagi, 2012). An assessment of the longer-term outcomes from Bécate would be necessary to evaluate its effectiveness at the regional level. However, this is a challenge as no follow-up with beneficiaries is being conducted after completion of the training and

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hiring phases. Yet, establishing a monitoring framework would be useful to report on the progression of former trainees over time, in and outside of firms. Collecting evidence on former beneficiaries’ length of stay in firms (job retention and labour market “churning”), job search duration (for those not hired), wage changes, contract types and career and skills development are some of the outcome indicators that would be relevant for the SNE to capture. Improving the collection and use of data is paramount to improving services, understanding what tends to work, what does not, and for whom. Generating, analysing and interpreting this type of information, together with detailed participants’ profile information, and converting it into robust intelligence can support the design of more tailored interventions and constitutes key information to communicate to educational institutions, employers and individuals.

Training for self-employment

Another dimension of the Bécate programme is self-employment training, which supports people in the development of income-generating activities in basic services or trades (Servicio Nacional del Empleo, 2016b). For this programme, the SNE liaises directly with municipalities to enquire about new training demands. Supporting individuals in developing subsistence-level activities is intended to lift people out of poverty and may do so, to a certain extent. However, lifting people out of subsistence-level jobs (most often family activities) and into more productive activities remains a challenge. Mission trip interviews revealed that the likelihood of engaging in higher productivity activities with good economic returns tends to be low. Depending on the activity, complementary services in training areas such as accounting, digital competences (e.g. for e-commerce platforms) and other cross-disciplinary skills (e.g. English) may be needed to strengthen the occupation-specific 20 days training and help expand the range of opportunities the self-employed can create out of their activity.

Fostering entrepreneurship

High-skilled, well-paid and full-time jobs are scarce in the region of Morelos. While work placements and training can generate positive outcomes, entrepreneurship also represents an avenue towards employment and does not necessarily need to be knowledge-intensive or “high-impact” to generate successful economic gains. Entrepreneurship does not only benefit the entrepreneur; its impact extends to the wider economy by contributing to job creation and economic growth. Through its Promoting Self-employment Programme, the SNE in Morelos supports aspiring entrepreneurs with assistance in the elaboration of a business plan and by lending materials and equipment for a one-year duration. Because capital is a major challenge for early stage entrepreneurs, by facilitating access to equipment the government of Morelos is providing a positive push to the start of many entrepreneurs’ operations. The rationale behind the Promoting self-employment programme is thus easy to understand and support. In 2015, 161 new businesses were created and from January to September 2016, 170 small businesses were supported (Servicio Nacional del Empleo, 2016a). A follow-up is organised three times in the first year to determine progression and should the start-up’s development be gauged

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as positive, a process of official acquisition of the equipment and materials temporarily provided by the SNE is being conducted. However, after the one-year follow-up, the programme is missing a medium and relatively longer-term monitoring of entrepreneurs’ activities. Continuing to monitor newly-created firms over three and five years would provide valuable information and allow the government to report on indicators such as survival rates and job creation. Gathering follow-up information can also be of high value to better understand local firms’ dynamics, where the bottlenecks are after one year of existence and what the SNE can do in collaboration with other entities (e.g. universities, business networks) to support critical development stages. More targeted support can only contribute to building more resilient businesses, enhance local economic development and population well-being through the employment opportunities entrepreneurs can generate not only for them, but also fundamentally for others.

Embedding training and employment policies in a local economic development strategy

The organisation of training in Morelos requires a more ambitious strategy for employment and training. Training in Morelos is demand-led, but the SNE currently operates in a largely ad hoc way by seeking to respond to short-term demands from existing firms and the aspiring self-employed. When missing in-house expertise, the SNE sponsors training for jobseekers at the ICATMOR. The training delivered by the SNE and the ICATMOR tends to be focused on low-productivity activities with no clear pathway for progression and the development of higher-order skills in the determined area. In Morelos, training is seen as a reactive tool that tries to meet the current occupation-specific needs of the labour market. The Bécate programme is a good illustration of this vision. Training should be developed so that it helps build the future economic structures of Morelos. As such, the state of Morelos should increasingly seek to invest in skill development that is focused on sectors, activities and occupations with a strong economic growth potential. Skills development should respond to the needs created by areas of economic relevance for the region’s development. While it may, to a certain extent, be doing so with the majority of courses focusing on the hospitality, beauty and the food and beverages sectors, there is a need for Morelos to professionalise those industries by providing higher-level training based on the strengths and specific requirements of different sectors that, combined, show high growth potential. For instance, maximising the economic potential of the agro- tourism industry will require investing in labour skills including conversational English, excellent cultural knowledge of local sites and the region, an understanding of food production processes and agriculture while delivering high-level customer service at all times. Morelos’ training offerings should also increasingly reflect the levels and types of skills needed to meet the demands created by the sectors defined as priority areas in the region’s Innovation Development Agenda. Training needs and skills development policies in Morelos may thus be more effective if embedded in a local economic development strategy. A local economic development strategy would allow for greater cohesion around skills and employment policies in relation to broader regional economic development. At present, neither within the SNE nor the ICATMOR is there a medium- or longer-term vision about how occupational and training needs will evolve. OECD countries are increasingly

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seeking to adopt forecasting methods for detecting tomorrow’s skills. Such methods guide education and labour market institutions in the design and updating of their programmes and services (OECD, 2016c). Adopting a more evidence-based approach to policy making could increase the effectiveness of education and labour policies in Morelos. However, this would require engaging in regional labour market data analysis and projections, understanding better what sectors have the highest growth potential and which occupations and skill sets will be in high demand. To illustrate this point, Austria’s Ministry for Labour created a Special Committee on New Skills, and its Public Employment Service established a Standing Committee on New Skills with the objective of anticipating which qualifications may be required in the medium term and, in response, developing appropriate training and employment support measures (OECD, 2016f).

Providing effective counselling and skills profiling services to improve labour market outcomes

Training is only one element of a wider labour activation strategy. The most effective strategies tend not to be “one size fits all”. Alongside skills training and work placements, skills profiling, job search assistance and the creation of personalised career development plans have been recognised as best practice elements of a labour activation strategy by helping identify the training needs specific to each individual (G20/OECD, 2013). Together with employability skills training, personalised counselling can be most helpful to first-time job seekers for helping them spend less time in unemployment after school. Additionally, it may also reduce the likelihood of them falling into informality, which is an important point as one’s start of a professional career with an informal job decreases the likelihood of joining the formal labour market at a later stage. Public Employment Service capacity is fundamental in delivering quality services to the local population. In Morelos, the staff to job seeker ratio is high (1:332) and raises limitations in the delivery of personalised and timely services (Servicio Nacional del Empleo, 2016a). It also indicates a low probability of having services tailored to individuals’ needs and reaching those who need them the most. In attempting to address those challenges, Germany conducted an experiment, reducing the ratio of PES advisers to job candidates and was able to observe positive labour market and job matching outcomes as a result of more intense counselling, among other practices (see Box 2.5). Similarly, more effective skills supply and demand matching in Morelos may result from an increase in the number of competent and experienced advisers in SNE office. Different segments of the population will have different needs which not all advisers may be most qualified to meet. This is also valid for vocational training institutions such as the ICATMOR. However, in a federal country such as Mexico flexibility over this issue is often strongly dependent on the resources allocated from the central government to the state and which may limit organisational improvements.

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Box 2.5. Research on effective counselling approaches A number of recent studies have focused on which counselling strategies and caseworker characteristics are associated with positive impacts on employment. • Low client-to-staff ratios: in a recent German experiment 14 local PES offices hired additional caseworkers to lower the staff/client ratios to an average of 1:70 (from the usual 1:80 to 1:250) to improve the quality of placement services. Evaluations of the experiment showed that with a lighter caseload PES offices could intensify counselling, monitoring and sanction efforts as well as contacts with local firms, resulting in shorter benefit durations in the participating PES offices. The costs of hiring additional caseworkers were offset by decreased benefit expenditure after a period of about ten months. Another Swiss study found that good staff/client ratios and the recruitment of motivated and highly trained personnel were factors that reduce the average duration of unemployment spells and the percentage of jobseekers entering long-term unemployment. • Work-first strategies: a number of European studies have shown that work-first strategies, where caseworkers concentrate on supporting and guiding clients in their search for work and rapid job placement rather than placement into training measures, improve employment outcomes. • Caseworker characteristics: a Swiss study found that a similar social background between caseworkers and jobseekers – as measured by nationality, gender, educational level and a similar age – can have positive impacts on employment and job stability, possibly through channels such as motivation, trust or more-effective communication strategies. Similarly, only one or two personal characteristics did not lead to detectable effects on employment. This may imply the need for a diverse PES workforce, to facilitate the allocation of jobseekers to caseworkers with a similar social background. Caseworker attitudes toward their clients may also play an important role. Several studies from Switzerland and Germany found that caseworkers who apply tough rather than softer, more co- operative attitudes towards their clients may be more successful. • Contacts with employers: Egger and Lenz (2006) identify contact with employers by all job counsellors as a major success factor and Frölich et al. (2007) find a positive impacts on employment rates in PES offices where the staff have good relationships with employers and, in particular, know employer needs, rapidly react to vacancies and make targeted use of direct referrals after a careful pre- selection of candidates. The authors also find a clear positive correlation between jobseeker outcomes and PES office co-operation with private placement agencies, which may be complementary to direct employer contacts. Source: OECD (2015h), Strengthening Public Employment Services, paper prepared for the G20 Employment Working Group Istanbul, Turkey, 7-8 May 2015, http://g20.org.tr/wp-content/uploads/2015/11/Strengthening-Public- Employment-Services.pdf (accessed 5 August 2016); Egger, M. and C. Lenz (2006), “Évaluation des résultats du service public de l’emploi”, Politique du marché du travail, No. 18, Study commissioned by the Commission de surveillance du Fonds de compensation de l’assurance-chômage, SECO, Bern, 31 May, www.seco.admin.ch/dokumentation/publikation/00004/00005/01796/index.html?lang=fr; Frölich, M. et al. (2007), “Influence des ORP sur la réinsertion des demandeurs d’emploi”, Politique du marché du travail, No. 20, Study commissioned by the Commission de surveillance du Fonds de compensation de l’assurance-chômage, SECO, St- Gallen and Zurich, 1 February, www.seco.admin.ch/dokumentation/publikation/00004/02139/index.html?lang=fr.

Addressing the needs of SMEs A comprehensive, demand-oriented training offer should also seek to meet the needs for training in micro-, small and medium-sized companies (MSMEs). In Morelos, employer-sponsored work training is very limited amongst the smaller firms while being recognised as an essential practice by the larger firms. The capacities of different firms and cost implications of providing training need to be taken into account, but the benefits of providing lifelong learning opportunities to workers may also need to be better

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understood. Continuous learning and skills development in the workplace can not only result in effective productive gains in the use of existing skills but also reduce skills mismatching. Through short-term, yet tailored training and development services, labour market training and educational institutions are in a unique position to support the local business landscape in becoming more productive, create more jobs and make stronger contributions to regional economic growth. While low-skilled small business entrepreneurs, in particular, should become a specific target of business training and services, it was reported that the needs of micro- businesses and SMEs have been overlooked by formal training institutions. In 2016, the ICATMOR has been supporting 65 micro-businesses and entrepreneurs on questions about firm growth and the development of managerial skills and intends to better position its programmes and services in the future to suit business needs more effectively (ICATMOR, 2016c). Likewise, the UTEZ, in its capacity as a Cisco accreditor, provides training, qualifications and diplomas on IT tools for workers in companies, as well as short courses for those wanting to start a business (OECD, 2013b). Accessing a wide range of business development services, such as management training, access to finance, inter-firm linkages, information on technologies, marketing, export and domestic market access can support companies in better orienting their activities and define the skills they need for them. The provision of business development services (BDS) may also help introduce more effective organisational processes which can raise overall efficiency at the firm level. Supporting existing companies can lead to further job creation.

Maximising the latent skills present in the informal labour market A large segment of the population is being shut out of Morelos’ employment and training institutions because they do not fit the “formal unemployment” criterion. Those working informally are the “invisible”, or hardest to reach and tend to be young people and women. As seen in Chapter 1, they accounted for 66.48% of employed people in Morelos in the first quarter of 2014, which is 8.29 percentage points above the national level of 58.19%. Further analyses also showed the higher levels of informal work in the agricultural rather than the manufacturing sector. While currently ineligible for the range of SNE service offerings (through which they could also have subsidised access to ICATMOR training), those who are inactive, in or exiting low-productivity jobs constitute a pool of unutilised latent skills. Bringing untapped skills’ potential to the formal labour market while expanding upskilling opportunities could yet represent substantial gains in terms of Morelos’ productive labour force. A higher share of formally active and productive labour force would benefit different dimensions of the economy and contribute to higher population well-being.

Supporting the missing entrepreneurs Morelos is putting measures in place to mobilise female entrepreneurs. Experiences across OECD countries increasingly point at entrepreneurship as a promising avenue for under-represented groups, or “missing entrepreneurs” to move towards productive activities (OECD/European Union, 2015). The Ministry for Social Development of the Morelos government supports Morelos Women’s Businesses (Empresas de la Mujer Morelense), a programme that seeks the empowerment of women through enhanced collective capacity, training and engagement in productive activities.

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Box 2.6. Morelos Women’s Businesses Morelos Women’s Businesses is a programme aimed at women who are heads of households. To participate in the programme, women must be willing to gather in groups of three to six women to suggest projects that promote a local product or group of local products of which the integration in local value chains will enhance its production and commercialisation in a determined region. Each social group receives financial support from the state government of Morelos to buy the necessary machines, equipment and other tools to run activities. To be an eligible head of household, women must be mothers of children younger than 22 years-old and receive economic support from no other adult in the household. According to the Mexican national institute for statistics, INEGI, around 126 098 women in Morelos were considered as heads of household in 2015. As of July 2015, over 3 200 women had been supported by the Morelos Women’s Businesses programme across 835 projects. Source: Periódico Oficial “Tierra y Libertad” (2015a), Mujer Morelense Convocatoria y Reglas de Operación, No. 5265 , www.transparenciamorelos.mx/sites/default/files/convocatoria%20y%20regles%20de%20operacion%20em m%20%202015_2.pdf (accessed 5 August 2016).

Validating prior learning and certifying skills Despite these scattered examples, Morelos is missing a fully-fledged employment and training strategy to address the challenges faced by the most vulnerable and to bring them closer to the formal labour market. Workers concerned by informality tend to register low levels of education and a rather low socio-economic status. A step towards getting people closer to more productive jobs and the formal labour market may be initiated with the process of recognition and validation of prior learning and competences acquired in non-formal and informal settings. In 2015-16, a total of 112 people in the state of Morelos underwent this process through the ICATMOR, but the extent to which it is positioned as a first step with incentives towards further learning is unclear. It would be worthwhile to design a strategy centred on the process of recognition and validation of prior learning because allowing individuals to have their skills certified can open doors to those who have left formal education, thus providing incentives for them to retrain and gain a qualification. Taking those steps may help increase the value of their skills in the formal labour market and ultimately incentivise them in looking for better quality jobs, higher wages and work conditions. However, this depends on a permeable training system that individuals can easily navigate. The labour market training system in Morelos could be consolidated so that it facilitates the transition from education to the labour market, and vice-versa. In Austria for example, PES training leads to the same qualifications and diplomas as those offered by initial and continuing vocational education and training. Likewise, in Ireland and Norway, all labour market training refers to the national qualifications framework of those respective countries. The state of Morelos’ training system would benefit from having a regional qualifications framework that coherently links occupations to skills outcomes and serves as a local quality reference framework to labour market and education stakeholders in Morelos. This instrument would facilitate the updating of the region’s wider vocational training catalogue, allowing for emerging occupations and new skills requirements to be reflected at a faster pace than what local stakeholders reported vis-à-vis Mexico’s National Catalogue of Competences. Its development would thus require strong involvement from the business sector to ensure continuous relevance, because education has a natural tendency to lag behind technological and industry changes.

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Making adult education accessible Increasing the supply and quality of adult education in Morelos – particularly for low-skilled adults – will contribute to raising productivity and boosting the employability of people and their adaptability to rapidly changing workplaces by acquiring not only strong foundation skills but also participating in work experience. Adult education is an opportunity to complete compulsory education for those who did not in their childhood and pursue higher level studies from there on. Compulsory school completion in Morelos is undertaken together with practical work experience in order for adult participants to continue to make a living while returning back to school. The ICATMOR is the sole institution accredited to provide adult courses that enable individuals to complete compulsory school. As of September 2016, a total of 29 375 people had attended this adult education programme in Morelos (Instituto Estatal de Educación Para Adultos, 2016). Without a stronger investment and a system of incentives built around making adult education more attractive and accessible, Morelos will not be able to rely upon a skilled and flexible labour force that is equipped to meet emerging labour market demands. This would be a loss in a region with such a high youth population and such a low-skilled population. Defining comprehensive outreach strategies While skills validation and upskilling may be of value, evidence shows that those who are furthest from the formal labour market may require more than one-shot interventions to reconnect with it. The government of Morelos is missing a well- articulated strategy to reach out to marginalised youth, and those who tend to be reluctant to using employment and training services. While focusing on youth, the Bécate programme and the workshops organised by the SNE (Talleres para buscadores de empleo) only serve one segment of the young population: one that views the PES as a go- to. Despite being open to all, the potential for job fairs and dedicated job search facilities to reconcile those people with the labour market is limited. Although they experience less structural informality, many OECD countries show successful examples of strategies developed in partnership with civil society, social enterprise organisations, the private sector and public government bodies to address inactivity and unemployment challenges. Those strategies most often define a specific target population and tailor their services accordingly. In addition, a central element to most of those lies in outreach. In Morelos, six municipalities of the state (Cuernavaca, Jiutepec, Cuautla, Temixco, Emiliano Zapata, Yautepec, Ayala, Puente de Ixtla and Xochitepec) concentrate 65% of the underachieving student population. As a result, interventions and outreach may be more pressing in those communities (CONEVAL, 2012). The approaches to this outreach, employment and training strategies are varied. • Tamega and Sousa, a small municipality in northern Portugal, has decided to develop a comprehensive strategy to boost employability for which it mobilised all civil society actors, including the clergy (See Box 2.7). • In Brazil, to target youth the Public Employment Service adopted the idea of a “one-stop-shop” called “Estação Juventude”, which is in the pilot phase across different municipalities of the country and is designed as a place where young people can find information related to a number of themes (e.g. cultural events, scholarships) as well as receive personalised job-search assistance and enrol in

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skills development courses. The physical infrastructure and equipment of each “one-stop-shop” is determined in accordance with the needs of the locality and social partners involved in the project (Governo Federal do Brasil, 2016). • In a similar vein, the Harambee Youth Employment Accelerator in South Africa founded in partnership with the private sector and the Treasury’s Jobs Fund, works with first-time job seekers, providing them with intensive counselling and training, including on basic skills development for work readiness programmes, before matching them to a job (Harambee, 2016). In relation to such initiatives, and potential similar developments in the state of Morelos, a territorial dimension may be taken into account.

Box 2.7. Tâmega and Sousa Comprising 12 municipalities, Tâmega and Sousa is the first inter-municipal community (Communidad Inter-Municipal) in the north region of Portugal to have elaborated its own strategy for employability: the Plan of Action for the Promotion of Employability. The Plan of Action was designed in 2011 in reaction to the low competitiveness of the region and growing youth unemployment rates, but also to take better advantage of the region’s young population (the youngest in Portugal). The Plan is developed around three priority domains with targets to be achieved by 2015. Each challenge is the object of a detailed analysis in which objectives, obstacles, targets and potential measures are identified. • Human Capital: dropout rates, low educational attainment, gap between content of education and training and professional/occupational practices in the workplace. • Employment: youth unemployment, those not in employment, education or training (NEETs), better co-ordination between education provision and labour market demand, supporting entrepreneurship. The Plan of Action is used as a management tool. In addition to a review of all challenges, it defines the responsibility of each actor involved in the execution of the different initiatives. Its successful implementation relies strongly on multi-stakeholder participation. The Plan gathers the support of a wide-range of education providers, representatives of social services and the private sector, as well as the diocese and eleven ministers. A positive result of the adoption and implementation of the Plan of Action has been reflected in dropout rates, which decreased in Tâmega from 6.20% in 2001 to 1.51% in 2011. While occupying one of the lowest positions in the North region in 2001, Tâmega managed to rank below Portugal’s average (1.58%). Comparable results are found across the CIM’s twelve municipalities. Only five did not meet the national average in the last year surveyed. A continuous assessment of the different initiatives comprised in the Plan of Action would be necessary to evaluate its overall success and potential to serve as a model case study to other CIMs throughout Portugal. Source: OECD (2015e), Skills Strategy Diagnostic Report Portugal, www.oecd.org/skills/nationalskillsstrategies/Diagnostic-report-Portugal.pdf (accessed 24 August 2016), based on Comunidade Inter-Municipal de Tâmega e Sousa (2014), Plano de Ação para a Promoção da Empregabilidade, Tâmega e Sousa Comunidade Inter-Municipal.

Supporting and incentivising the work of social enterprises and NGOs A number of work readiness programmes targeting the unemployed and the long- term unemployed have also been designed and delivered by social enterprises and not- for-profit organisations. Where there is potential for successful and sustainable initiatives, the government of Morelos should support and incentivise this type of organisation in developing programmes tailored to specific groups, serving the under-served with a

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comprehensive offer and building linkages with local employers as a complement to the existing services delivered by public government, employment and training institutions. To illustrate this, Speedpak Group, an Irish social enterprise, targets the highly marginalised with the objective to help them increase their employability. Speedpak Group emphasises the importance of having programme participants (re-)familiarise themselves with what it means to be in the workplace, and views this as a crucial process towards one’s successful (re-)integration in the labour market.

Box 2.8. Speedpak Group, Ireland The Speedpak Group is an Irish social enterprise whose vision is “to build our business, to provide work opportunities, to end long-term unemployment. Trading, Training, Transforming™”. The Company improves the employability of long-term unemployed people by providing real work experience, accredited training, career planning, mentoring and personalised support, in a commercial business environment. Since its creation, Speedpak Group has employed and supported approximately 900 unemployed people from the most marginalised and socially excluded groups. Speedpak Group was founded in 1995 by a local development company in collaboration with the business community to address the issue of long-term unemployment in disadvantaged communities. The “market gap” identified was that local unemployed people could not get a job without work experience and conversely could not access work experience without a job. To address this, the Group built two commercial businesses, Speedpak Contract Services (www.speedpak.ie) and Shamrock Rosettes (www.shamrockrosettes.com). Approximately half of the company’s income is generated by its commercial activities while the other half comes from both government contracts to deliver labour market programmes and corporate social investment. The company is overseen by a highly experienced Board of Directors (all Voluntary Directors are unpaid) and run by a professionally qualified management team (MSc & BSc education levels) and a core staff of 13 (paid staff). The company has 60 “trainees” (programme beneficiaries) at any one time and provides approximately 100 opportunities in any calendar year. Trainees act as temporary staff across production, sales, HR, finance and customer service functions. To this end, participants are provided with a range of skill training including administration and reception, light manufacturing, commercial packing, customer service, quality assurance, health and safety and use of plant and equipment. Speedpak Group’s catchment area, made up of 130 000 people, is considerably disadvantaged in comparison to the state and the greater Dublin area with more than twice the number of people parenting alone, 25% more early school leavers with no formal educational qualifications, 55% more males and 95% more females unemployed. These communities experience higher levels of anti-social behaviours and have proportionately more ex-offenders and ex-drug abusers. High unemployment stems from a myriad of complex and interrelated reasons including lack of experience and work history; inter-generational unemployment; low formal education and under-investment in local infrastructure. There is a direct correlation between low educational attainment and unemployment. By fusing work and learning the Speedpak Group provides an innovative local solution to this social challenge. It provides a bridge to employment through commercial work experience, building work skills and positive work behaviours required in the workplace. Its model of learning is designed to use these skills learned in the workplace as the curriculum for accreditation at QQI level 4 on the Republic of Ireland’s National Framework of Qualifications. Source: Speedpak (2016), Speedpak Group website, http://speedpakgroup.com/what-we-do/ (accessed 24 August 2016).

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Charities and social enterprises, through their social vocation, tend to share similar objectives as public governmental bodies when it comes to supporting the weaker groups in upgrading their skills and employability. The charity Fast Track Into Information Technology (FIT Ltd) is an example of a successful not-for-profit initiative. FIT Ltd delivers ICT training at different skill and specialisation levels providing second chances to those who have been distanced from the labour market by supporting them in accessing quality jobs in a key growing sector, that of information technology.

Box 2.9. Fast Track Into Information Technology, Ireland

Fast Track Into Information Technology Ltd (FIT) is an industry-led charity that works in close collaboration with Irish government departments, national education and training agencies, local development and community-based organisations. FIT provides ICT skills training at different levels (at entry, intermediate and expert levels) to ensure it reaches various segments of the Irish population. Central to FIT’s mission is the re-integration of the long-term unemployed into the labour market through ICT cross-disciplinary skills training that allows graduates to enter multiple sectors of work including, but not limited to, the IT sector. From a skills audit that it conducted in 2014 among some of the largest, but also small and medium-sized companies, FIT argues that 75% of immediate vacancies are for employees able to exercise skills at the competent and entry levels, compared to 25% at the expert level (FIT, 2016). Qualifications for those competent and entry-level opportunities can be acquired through formal vocational training. As a result, FIT launched its ICT Professional Associate apprenticeship style pilot programme offering a two-year education based on six months of in-school training and 18 months of work-based learning. FIT works hand-in-hand with some of the largest employers in Ireland to ensure that its programmes are up-to-date with the skills demanded by the labour market. With over two-thirds of participants coming from an unemployed or long-term unemployed background, in its first year the ICT Professional Associate programme showed very promising graduate outcomes in terms of transition from education to the workplace, or to further education. Recent evidence showed that transition rates of FIT graduates into employment or further education is 70%. Source: Fast Track into Information Technology (2016), Skills Audit 2014, http://fit.ie/about/skills-audit/ (accessed 10 November 2016); OECD (2014b), Employment and Skills Strategies in Ireland, http://dx.doi.org/10.1787/9789264207912-en; OECD (2016f), “Skills for a Digital World”, Working Party on Measurement and Analysis of the Digital Economy, www.oecd- ilibrary.org/docserver/download/5jlwz83z3wnw.pdf?expires=1479308077&id=id&accname=guest&checksum=8C 742A16384388422883646F9E199831 (accessed 5 August 2016).

Reaching out to informal businesses and workers may be beneficial too Morelos’ business landscape is characterised by a large number of micro and small enterprises not registered in the business registry; in others words, “informal”. While evidence suggests that most tend to be low-productive, others may be performing better, but all undoubtedly show under-exploited productive and economic potential. Those entrepreneurs and businesses tend to lack the resources to invest in services that may lead to higher productivity and they possess little incentive to get a formal job. Morelos is currently missing a strategy for reaching out to low-skilled informal micro- and small- entrepreneurs and support higher productivity across the informal business landscape.

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Leadership and organisational management skills training in areas such as project management, business development, e-commerce and marketing can substantially help improve business productivity (International Labour Office, 2008). Evidence shows that skills mismatching is sometimes linked to inefficient organisational processes and the difficulty to determine what skills are needed for certain types of activities (Froy, Giguère and Meghnagi, 2012). By supporting firms in becoming more productive, the SNE would contribute to a better matching of skills supply and demand. It may also help raise the demand for certain types of skills by such companies and, in turn, increase incentives for young people to upskill in the hope of getting a well-paid job. Accessing game-changer services for firms such as business development services may be part of a wider strategy to encourage business formalisation in the medium or longer term, while also having an effect on the demand for higher-order skills.

2.4 Better integrating innovation and entrepreneurship activities with the rest of the economy High skills and innovation go hand-in-hand as driving forces for regional economic growth. As it is the case for education policy, innovation cannot be viewed and pursued in silos. Rather, an innovation system that effectively contributes to regional development mobilises a large range of stakeholders whose activities and collaborative efforts generate knowledge that can be commercialised and used by society. As such, the gains from a successful innovation system will tend to be made by regions that are connected with the different players within their territory but also with outside players. This will also imply that those players are interconnected for synergies and cross-fertilisation effects to happen. In recent years, the state of Morelos has been strengthening its innovation profile and aiming at further shaping a regional ecosystem for innovation. While it registers high patent applications compared to the Mexican average and gathers a large number of high-skilled researchers, average productivity levels are low in Morelos, which reveals a certain disconnection between innovation activities and the rest of the economy. Likewise, the issues of skills mismatch and low-skilled employment in the labour market highlight the need for innovation policies to support local businesses in doing better. A major challenge for the region thus lies in how to better integrate research, entrepreneurial and firm activities to enhance higher productivity and competitiveness across the state. Innovation policy priority sectors in the state of Morelos Innovation policy in Morelos is planned, designed and implemented by the Ministry for Innovation, Science and Technology (STI). The state of Morelos was the first in the country to establish a ministry specifically dedicated to STI. Its strategic objectives include building a knowledge-society through the interaction of public, private and social actors as well as promoting and funding scientific, technological and inter-disciplinary research. A body of the Ministry, the Council for Science and Technology of the State of Morelos (CCyTEM) takes responsibility for the funding of infrastructure projects, training, scientific research, technological development and innovation to promote knowledge creation and knowledge transfer (Periódico Oficial “Tierra y Libertad”, 2015b). The National Council for Science and Technology (CONACyT) promotes the development of state and regional innovation agendas. The objective of those is to support Mexican regions in the definition of strategies that promote STI in accordance with each state’s local economic capacity and comparative advantage. The Ministry for Innovation, Science and Technology of the State of Morelos has developed its own Innovation Development Agenda which details the region’s objectives in innovation

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policy. As such, Morelos’ Innovation Development Agenda is aligned with Mexico’s National Development Plan and the State of Morelos’ Sectorial Plan for Innovation, Science and Technology 2013-2018. In this Agenda, the state of Morelos determines five knowledge-intensive sectors as main areas of specialisation. Those are the following: information and communication technologies; renewable energies; biofuel; scientific and technological services and pharmaceutics and bio-pharmaceutics (CONACyT, 2013). The Agenda also defines two flagship programmes in those areas: Mexico Connected and Flight Plan (Plan de Vuelo) (CONACyT, 2013). With Mexico Connected, Morelos positions itself as one of the first states in the country to offer free internet across to more than four thousand sites and public spaces, such as schools, libraries, health centres, community centres and parks (Mexico Conectado, 2016). By investing in ICT infrastructure, the state is effectively recognising the importance of accessibility and connectivity issues to innovation. This should contribute to building a more favourable environment for business investment and attracting FDI. It is also key to improving the productivity and competitiveness of businesses as a result of access to data sources, scientific articles, knowledge and new production and management types and techniques. The Flight Plan project (Plan de Vuelo) is a pioneering programme that could position Morelos as a leader in Mexico in the production of aviation fuels from non-toxic Jatropha Curcas oil. The National Bioenergy Innovation Network co-ordinates the project through the Morelos Centre for Agricultural Innovation (CemiAgro). Collaboration with producers, researchers, businessmen and government innovation in agribusiness is being encouraged to generate significant business opportunities in the production and processing of oils, bioenergy and other products derived from plants of high commercial value (Valderrama and Roldán, n.d.).

A strong investment in knowledge-based capital Innovation and learning occurs more effectively when there is an established ecosystem of firms, research centres and other organisations that interact, compete, share ideas and are generally engaged in the production of knowledge and technology. The state of Morelos has a strong asset that lies in the wealth of scientific and research institutes present in its territory. In recent years, the state has been strengthening its regional innovation ecosystem. The creation of ICT infrastructure (e.g. Mexico Connected), Research and Development (R&D) centres, incubators, Science and Technology (S&T) parks and the growing number of laboratories that are quality accredited are only some of the demonstrations of Morelos’ commitment to increasing tangible knowledge-based capital. The main generators of knowledge in Morelos are Higher-Education Institutes (HEIs) and research centres. Universities in Morelos are either large state schools, smaller technical junior colleges offering two-year vocational schools, or branches of major national research universities, such as Tecnologico de Monterrey (OECD, 2013b). They house incubator and accelerator programmes for start-ups and SMEs. Between 2010 and 2014, industrial economic activity has developed encouraging clusters of technology-based companies. The Ministry of Innovation, Science and Technology has developed an integrated strategy promoting technology-based companies and scientific services.

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• The Centre for Innovation and Technology Transfer (CEMITT), an incubator and technological development office, was created to support those efforts. The CEMITT provides services including industrial protection, business incubation and 3D printing prototyping, among others. • The state of Morelos counts on seven Technology Transfer Offices (TTOs) and a number of state-funded programmes exist to support innovation in firms, technological development and the incubation of technological firms (FINNOVA, 2015). • With the “Impulse to Technological Development for Enterprises” programme (Impulso al desarrollo tecnológico mediante el apoyo a empresas), the state has supported ten firms in becoming more competitive through a series of consulting services (Ministry for Innovation, Science and Technology, 2016a). In addition to HEIs, Morelos has, to date, a total of 44 research centres (Ministry for Innovation, Science and Technology, 2016a). Those research centres are, for the most part, affiliated with universities, but some are fully private, and some are part of the CONACyT system, which is a national public body for the development of science and technology (OECD, 2013b; Periódico Oficial, “Tierra y Libertad”, 2015c). The Ministry of Innovation from the state of Morelos plans on opening three new research institutes by 2018 to create more jobs in the field of research and respond to the challenge of unemployment that is currently prevailing in this area of work. With only one vacant position opened in the past 10 years, less than 10% of graduates decide to stay in Morelos to pursue their professional career (INEGI, 2016). Outside the realm of research institutions, the industrial landscape is over-represented by micro and small enterprises that do not have the resources to finance high-skilled graduates. As a result, those who would like to stay are encouraged to open their own businesses. Technology parks have been a successful policy in stimulating industrial activity. The Ciudad de Industria Cuernevaca (CIVAC), built in 1966, is the largest development centre in Mexico. CIVAC is home to major international corporations such as Roche, Unilever, Baxter, Alucaps, Givaudan, Glaxo Smith Kline, NEC Corporation, GlaxoSmithKline, Fibrolub Mexican Mayekawa Mycom, Nissan, in addition to 150 other companies. The presence of global players in CIVAC has significantly benefited Morelos’ economy, creating international linkages and giving local workers access to higher wages, quality training and valuable professional experience (OECD, 2013b). The INNOVACyT Scientific and Technological Park is another large, but more recent facility that came into being in the state of Morelos. INNOVACyT is intended to host research centres and businesses as well as offices of specialised services for innovation activities. The objective is to encourage greater linkages between academia and the industry through the creation of private laboratories. In its first phase, the park has attracted private investment amounting to MEX 385 million with the perspective of generating more than 500 specialised jobs around the state. The second phase is currently ongoing and will include, among others, the launch of Mexico's first Centre for Genomic Intelligence, BioInfotec. BioInfotec will promote businesses in the health sector in the areas of genomics, modelling and image processing. It will have a global impact in the areas of basic and applied scientific services, promoting human capital formation in specialised scientific research, all under a new paradigm of co-operation between academia and business. The market potential for this centre touches health entities such as clinical laboratories, hospitals, research institutes and biotechnology companies whose business processes would benefit from the technology developed by the centre as well as

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R&D institutes devoted to research on issues related to genomics (Ministry for Innovation, Science and Technology, 2016a). Amongst the region’s most recent developments are the construction of a Centre of Advanced Applied Scientific and Technological Research (CICATA) at the National Polytechnic Institute, worth over MEX 60 million, which will add to the portfolio of scientific and technological services (Ministry for Innovation, Science and Technology, 2016a). Most recently, a large infrastructure investment is planned for the creation of the Green Industry Development (DIVE) industrial park which will be located in the east region of the state, close to the campus of the Autonomous University of the State of Morelos and which will focus on the automotive, pharmaceutical and cosmetic sectors. A strong factor for locating the DIVE Park in this part of the state relates to the arrival of the gas pipeline and opportunities for greater connectivity with other Mexican states. Morelos has also made large investments in intangible knowledge-based capital. Over the past few years, the state of Morelos has been at the top of the rankings, compared to other Mexican states, in leveraging CONACyT sectorial and institutional funds for international co-operation projects to its R&D centres, laboratories and higher- education institutions. A major reason for this lies in the competitive profile and wealth of scientific professionals, HEIs and R&D centres present in the region as well as researchers’ capacity to access those two competitions openly, while the other programmes for funding are designed to meet the needs of a particular region or sector and require a more team-based collaborative model amongst stakeholders (Foro Consultivo Científico y Tecnológico, A.C., 2013). Table 2.8. Federal and state investment in STI in Morelos

Share of the national Fund State Investment National Investment National Ranking investment Fondos Mixtos (FOMIX) Supporting state and municipal governments in financing research that aims to find solutions to regional challenges 2001-12 (MEX millions) Supported projects 92 4 939 1.50% 24 Spent resources 132.14 7 280.00 1.89% 21 Institutional Fund for the Regional Promotion for Scientific, Technological and Innovative Development (FORDECYT) Supporting the development of STI activities and training that strengthen the regional system for STI (2009-13) (MEX millions) Supported projects 1 75 1.33% 21 Spent resources 40 1316.31 3.04% NA Institutional Funds Supporting specific projects and activities at the request of the S&T community (2013) (MEX millions) Supported projects 52 3 540 1.47% 16 Assigned amount 55.69 6931.50 0.80% 17 Sectorial Funds Promoting scientific research and technological development in defined sectors. (2013) (MEX millions) Supported projects 565 10 004 5.65% 2 Assigned amount 1 042.79 MEX 21 216.51 4.91% 2 International Cooperation Fund on Science and Technology Promoting STI activities of high impact through international cooperation activities (2013) (MEX millions) Supported projects 2 34 5.88% 3 Assigned amount 16.21 259.98 6.24% 3 Source: Foro Consultivo Científico y Tecnológico, A.C., (2013), Ranking Nacional de Ciencia, Tecnología e Innovación, http://foroconsultivo.org.mx/libros_editados/ranking_2013.pdf, (accessed 13 October 2016); Foro Consultivo Científico y Tecnológico, A.C., (2013), Ranking Nacional de Ciencia, Tecnología e Innovación, http://foroconsultivo.org.mx/libros_editados/ranking_2013.pdf (accessed 13 October 2016).

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CONACyT is also responsible for measuring research excellence according to various criteria, including number of publications in international peer-reviewed journals. Given the strong presence of the HEIs in Morelos, the state fares well in terms of scientific articles. In 2012, Morelos’ research community ranked 2nd in the country for the number of scientific articles it publishes (CONACyt, 2014). The same ranking placed Morelos as 5th in scientific and innovative productivity in 2013 (Instituto Mexicano para la Competitividad, 2014; Foro Consultivo Científico y Tecnológico, A.C. 2013). The quality of research in Morelos is recognised across the country as the region is home to 6% of all researchers in Mexico (CONACyT, 2016a). Out of over 2 000 researchers in Morelos, 999 are affiliated with the National System of Researchers (Sistema Nacional de Investigadores – SNI) and 283 are recognised in the Morelos state System of Researchers (Sistema Estatal de Investigadores – SEI). Those numbers reflect an increase since 2013 when 901 researchers were registered with the SNI, representing close to 5% of the national total (CONACyT, 2014). While mostly determined at the federal level, Morelos devolves high expenditure levels in tertiary education too, which allow for the development of certain skills that contribute to knowledge-based capital. Reflecting its commitment to innovation through higher education, the state also provides scholarships for new entrants and places tertiary education as a key education policy priority. For instance, Morelos invested MEX 18.2 million into four distinct graduate programmes to make them more competitive. A skilled workforce represents a competitive advantage to any region’s innovation ecosystem. Sufficient human capital resources will shape an economy’s ability to produce globally competitive goods and services. For example, an engineer’s knowledge and expertise in a firm will most likely always be of high value even if the firm does not possess a specialised R&D department. Morelos provides degrees in leading fields that correspond to the areas of specialisation defined in the state’s Innovation Agenda. In this region, because high- skilled jobs are limited, stimulating demand for specialised skills by building a competitive workforce profile in determined or niche areas may be a worthwhile strategy for boosting local employment and economic growth. As such, HEIs in Morelos offer 67 Masters and PhD degrees recognised by CONACyT’s National Quality Postgraduate Programme with the highest numbers of students registered in engineering and manufacturing, chemistry, biology and renewable energies (Ministry for Innovation, Science and Technology, 2016b). All Masters and PhD students that get into university programmes recognised by CONACyT are automatically eligible for a scholarship covering tuition fees and a stipend. In Morelos, teaching and research happens in the same institution, to the detriment of having PhD students embedded in companies. While HEIs are strengthened, cross- fertilisation is undermined. Encouraging the mobility of researchers into firms is essential as it tends to be those people who drive innovation. Incentives are being created in Morelos to establish greater connections between the student body and enterprises and facilitate knowledge transfer. A total of 31 students were placed in companies in the past three years with CONACyT committed to paying students’ first year of salary to the firm (CONACyT, 2014; CONACyT, 2016a). In addition, to ensure a smooth transition into companies, the Ministry for STI, together with the help of consulting companies, also provides training to young researchers. As an example, someone who goes from a university laboratory to the R&D department of a company may need training, whereas one who goes from one laboratory to another may not. While a step in the right direction,

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the scope of such programmes remains too small to generate high-scale or deep changes in the institutional culture of universities, which seems to be hindering the development of regional innovation.

Strengthening funding for innovation

Public investment for innovation is high, but very few firms engage in innovation Innovation in the state of Morelos is primarily publicly-funded. Through CONACyT, the federal and state government can support scientific, innovation and technological projects that help achieve regional priorities in alignment with the Innovation Development Agenda. Public investment is mainly directed towards supporting small- and medium-sized enterprises in R&D and innovation activities. The state of Morelos has developed a comprehensive number of programmes and services that include training and consulting, support to technological transfer and upgrading, incubation and accreditation among others. Between 2012 and 2016, 69 MSMEs and 8 large enterprises received MEX 466 million. MSMEs thus represented 90% of the supported firms, against 10% for large enterprises (CONACyT, 2014; CONACyT, 2016a). Private investment in innovation in Morelos has also been on the rise. While it reached MEX 149 million in 2009-11, it rose to MEX 372 million between 2012 and 2016. During the latter period, public investment in programmes in support of innovation attained MEX 466 million. As a result, total public-private investment in innovation has reached MEX 838 million thus far in 2016 (CONACyT, 2016a). Increased public-private investments in innovation characterise a desirable demand-push for innovation whereby universities and research centres are solicited by industrial actors to find solutions to production and innovation problems. In recent years across OECD countries demand-side innovation policy has emerged as part of a greater awareness of the importance of feedback linkages between supply and demand in the innovation process (OECD, 2011b). Despite positive increases in public-private investments for innovation, private R&D expenditure in firms remains at a constant low, which reflects a low propensity of firms to innovate. This is likely to be due to the high number of micro and small companies in Morelos’ business landscape and the low-productive capacity that these tend to show, not to mention that many of them are operating informally. The large proportion of micro and small enterprises in Morelos is, to a certain extent, correlated to an entrepreneurship landscape that makes it difficult for companies to grow and increase their productivity. Supporting better access to capital for knowledge-based start-ups The difficulties that most companies face in growing tend to relate to funding. The “Morelos Fund”, a financial support programme delivered by the Morelos Institute for the Financing of the Productive Sector, was created to support the activities of micro and small companies with high economic potential. The “Morelos Fund” facilitates access to credit and provides loans ranging from MEX 30 000 to MEX 2 million (Instituto Morelense para el Financiamiento del Sector Productivo, 2016). The fund has been operating since 2009, but lacks the resources necessary to make a greater impact on firm growth and further promote economic development in the state of Morelos. Moreover, the extent to which the provision of this fund has been efficiently used by recipient companies is unclear and would call for the adoption of an appropriate monitoring or tracking system to evaluate results after reception of the loans.

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Like in other OECD countries, the state of Morelos’ Ministry for STI has started to invest increasingly in new innovative firms that offer untapped means of transforming knowledge resources into economic opportunities and sources of employment for highly- qualified personnel. These types of firms mostly known as knowledge-based start-ups are central to the development of innovation. In the state of Morelos, knowledge-based start- ups also face significant challenges to their development linked to access to capital and pre-seed funding. A previous OECD study on knowledge-based start-ups in Mexico (OECD, 2013c) already underlined the same issue, revealing that, despite a large number of competing programmes for funding, this category of firms faced the most difficulties in accessing capital in the stages that precede or immediately follow their creation. In Morelos, through the CMITT (high-tech incubator, patent centre, technology centre), funding from the Ministry for STI in 2015 could only benefit five projects due to budgetary constraints (Gobierno de Morelos, 2016b). Despite the incubation and consulting services that have been developed, public funding is largely insufficient and a diversification of funding sources would be necessary to allow Morelos’ entrepreneurs to develop and reach their full potential. While angel investors and private equity funds are of great importance for accelerators, stakeholders in Morelos emphasised the existence of a rather conservative mindset towards investment. Lack of investment and investors represent a genuine bottleneck for building a regional innovation ecosystem in Morelos. Unlike for most other countries, in Mexico public support does not necessarily seem to facilitate access to private financing for new firms or encourage existing firms to increase their business R&D and innovation expenditure. Brainport Development in Eindhoven can be taken as an interesting case study for having conducted a transition from a closed- innovation model to an open-innovation model.

Box 2.10. From a closed-innovation model to an open one, Brainport Development (Netherlands)

Over the past few decades, Brainport Development and the Eindhoven economic development board, transitioned from a closed model of innovation into an open model by stimulating strong involvement of the private sector. This has been a critical driver for the region’s successful performance in recent years. Innovation was previously based on closed organisational forms and mainly driven by Philips. The company’s loss of international competitiveness drove it to adopt the concept of open innovation, establishing the first knowledge campus, and creating many spin-offs to existing business operations (e.g. ASML, NXP, FEI, Atos Origin, Liquavista, Panalytical, VDL ETG, Assembleon, Keytec and M&T). The change of approach has helped make the region one of the main knowledge hubs in the OECD area. This has been recognised by the international community, which declared Brainport Development the Intelligent Community of the Year 2011 out of more than 400 participants. The triple helix governance approach adopted by Brainport Development has been a key driver toward the open innovation model. The composition of Brainport Development's board included mayors (from the regions of Eindhoven, Veldhoven, Helmond and Waalre), presidents of four knowledge institutions (TU/e, FONTYS, University of Tilburgand and ROC Eindhoven), and four business representatives (from Philips, VDL, BZW, and the regional Chamber of Commerce). The Brainport programme maintains a strong spirit of co-operation among the three communities resulting in a wide range of programmes and initiatives. Source: OECD (2014c), OECD Territorial Reviews: Netherlands 2014, http://dx.doi.org/10.1787/9789264209527-en.

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To strengthen future firms’ growth potential, the state of Morelos may want to encourage the development of more start-ups that are led by entrepreneurs who already possess an acute entrepreneurial or business background. Evidence shows that spin-offs from existing firms have a high propensity to grow (OECD, 2013b). However, incubation in Morelos happens within universities’ doors, most often tapping into the student body for future entrepreneurs. Student start-ups tend to have a high mortality rate due to the typical barriers of youth entrepreneurship, such as lack of prior work experience, difficult access to external sources of finance, and limited social networks. Most of those who survive tend to remain small or take many years to grow. In addition, the state of Morelos should seek to promote and increase the number of strong innovation incubators outside universities. Innovation incubators are essential to supporting knowledge- and technology-based start- ups to grow, facilitating their access to networks, shared facilities and finance. Finally, to complement the actions of the Morelos Fund and the Ministry for STI, the state of Morelos should think of innovative ways to support start-ups and SMEs in obtaining funding, in the same way The Banking Table initiative developed by Brainport Development in the Netherlands did. In Eindhoven, Brainport Development, the economic development board of the region, has set-up a collaboration called The Banking Table amongst different financial institutes of the region who are asked to jointly screen funding proposals from innovative start-ups and SMEs and whose role is to ensure that those business cases will be funded (E52, 2015). Short summary The state of Morelos has been making important investments in tangible and intangible knowledge-based capital to strengthen its innovation capacity. However, the regional innovation system relies mostly on HEIs and research centres as generators of knowledge. Despite the presence of technology transfer centres and technology support programmes, knowledge and innovation activities are limited beyond the walls of academia. While public investments for innovation are thus high, with positive increases being noted in public-private investments, private R&D expenditure in firms remains at a constant low. The fact that very few firms engage in innovation hinders the competitiveness of the region. Another issue relates to the access of new firms, particularly knowledge-based start- ups, to capital. The dearth of investors, due to the existence of a rather conservative mindset towards investment, represents a genuine bottleneck for building a regional innovation ecosystem in Morelos. Unlike for most other countries, in Mexico public support does not necessarily seem to facilitate access to private financing for new firms or encourage existing firms in increasing their business R&D and innovation expenditures. To strengthen future firms’ growth potential, the state of Morelos may want to encourage the development of more start-ups that are led by entrepreneurs who already possess a robust entrepreneurial or business background. The state of Morelos may also want to increase the number of strong innovation incubators outside universities. Improving the development of an integrated regional innovation ecosystem The strongest experiences in building an innovation ecosystem are those that have promoted synergies between knowledge creation, knowledge transfer and the financing of knowledge based start-ups. An effective innovation ecosystem consists of companies, HEIs, R&D centres, incubators and innovation campuses, to name just a few. Large investments in infrastructures for knowledge-based capital reflect a strong willingness of

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the region to build a sustainable innovation ecosystem. Efforts to incentivise participation in higher education in the state show a similar drive. However, increasing the number of highly-qualified graduates in the region may not bring satisfactory job creation and job quality outcomes if the local labour market does not offer a sufficient number of jobs requiring high-level qualifications. Avoiding a scenario whereby young people train in Morelos but leave the region to find productive employment elsewhere requires the development of an integrated regional innovation strategy that will stimulate the demand for high-level skills. While Morelos registers higher patent activity than the national average, reflecting the solid performance of R&D centres in the state, this activity seems to be disconnected from the rest of the regional economy with stakeholders reporting a low propensity of HEIs to commercialise their research results. Yet patent activity is generally the source of intangible assets that are most likely to give rise to S&T based start-ups, especially academic spin-offs. A discrepancy has been highlighted in previous OECD work on the strong S&T capacities of a country such as Mexico but the low dynamism that it shows in the creation of knowledge-based start-ups (OECD, 2013c). The state of Morelos is no exception. At present, the Morelos innovation ecosystem remains disconnected and fragmented, missing key elements to stimulate (i) cross-fertilisation, (ii) absorption, and (iii) adaption. Strengthening university-business collaborations to enhance knowledge transfer, diffusion and exploitation Universities in Morelos have embraced their role as centres of knowledge and are home to business incubators and accelerators, but the process around the diffusion and exploitation of this knowledge from academia to industry can be improved. Addressing this issue and building a sustainable regional innovation ecosystem will require stronger links to be established between universities and businesses. To foster university-business collaboration, the government of Morelos has established a Creation of Networks programme (Formación de redes) whereby 4 networks, 19 businesses and 4 academic institutions collaborate in joint projects for national resources (CONACyT, 2014). While this programme may be a beneficial starting point to induce changes in the way HEIs and the private sector interact, it does not tackle the source of stakeholders’ reluctance to collaborate or provide incentives to foster this on a wider scale. University researchers have little interest in participating in activities that may lead to commercialisation. This is reflected in the low mobility of researchers, but also by the very requirements set for faculty, which revolve around teaching, advising and publishing but do not place researchers as central agents in knowledge dissemination to the business sector. Researchers’ primary interest lies in gaining membership in the SNI and producing research that will be published in internationally-recognised journals, a determinant factor for ranking in the SNI. A previous OECD study of Morelos (OECD, 2013b) has moreover underlined a certain cultural aspect to this issue in the university hierarchy. It was found that among professors at technical colleges, industry work was common and uncontroversial, whereas among researchers at the national university, rewards earned through collaboration with the industrial sector were seen as “dirty money” (OECD, 2013b). Technology Transfer Offices are relatively recent in Morelos and, despite their presence, stakeholders and a previous OECD study have reported that the incentives for researchers to be involved in technology and service transfers remain weak (OECD, 2013b). Yet knowledge diffusion is a complex process that requires action by the firm to improve its existing innovation and adapt it to market specificities, the technological environment and the company’s own organisational culture. University-industry

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collaborations and knowledge commercialisation should thus be valued as essential processes towards regional innovation and a more dynamic regional economy. A technical college, the Universidad Technologica Emiliano Zapata, may have understood this well by adopting policies that create financial incentives for researchers to participate in technology development projects. Researchers at UTEZ are rewarded with a bonus for taking an active role in bringing knowledge and technology outside the university’s doors (OECD, 2013b). The institutional culture of universities in the state of Morelos may also be hindering the development of regional innovation. While university-firm collaborations have been improving slowly, also through CONACyT, meaningful incentives linked to remuneration and prestige may thus need to be established in order to change the culture that is currently prevailing in academia and effectively reward co-operation across research disciplines and with industry. HEIs in Morelos should embrace a more multi-faced role whereby they are generators of new knowledge through research, but also engage in an absorptive capacity by building social relations from the activities they undertake as well as by incentivising more student placements in firms, developing clusters and so on. Human capital is paramount for transferring technological learning from HEIs to firms. While technology transfer offices may bring guidance and support, effective technological transfer requires investments in absorptive capacity by the firm. Skilled labour can involve formal education but may also involve learning-by-doing and experience on the job (OECD, 2013b). Lifelong learning plays an invaluable role in the process of technology transfer and upgrading by firms. For this reason, the Ministry for STI in Morelos has developed the Fostering Innovation in the Business Sector programme (Fomentar la innovación en el sector empresarial morelense) to train over 3 000 individuals (entrepreneurs, business owners, academics) in themes related to innovation (CONACyT, 2014). However, limitations to prosperous university-industry collaborations do not only emerge from academia. Because the response time of HEIs and R&D centres often does not meet the needs of businesses, corporate stakeholders can be reluctant to enter into research contracts with universities. In addition, many businesses see little value in innovation per se, and are misinformed about the organisational and productivity efficiency gains that it can generate.

Increasing productivity by strengthening linkages amongst firms Linkages should not only be strengthened between HEIs and businesses, they should also be maximised between different firms of a same sector. These linkages are particularly important for improving the position of local firms and attracting FDI in a number of sectors in which technology requirements change quickly. This is the case of the manufacturing sector which currently attracts the highest levels of FDI in Morelos, thereby having strong implications for job creation. Morelos is a host to renowned multinational corporations such as Nissan and Saint Gobain, and a non-negligible receiver of FDI. However, interaction and collaboration among firms in those clusters must be fostered to generate "collective efficiency” and to support local, most often MSME providers in becoming better integrated in the national market (OECD, 2013b; Pietrobelli and Rabellotti, 2004; Schmitz, 1999). Greater collective efficiency in clusters will attract new customers, new firms and skilled individuals which will turn Morelos into a dynamic industrial pole and boost the regional economy. To achieve this, it is paramount that firms understand the virtues of collaborating. Similar sized firms may well benefit from interacting among, and learning

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from each other by the mere fact of undertaking related activities in close proximity. In addition, as commonly argued, the smaller- and medium-sized businesses have a lot to gain from the knowledge that larger firms carry with them. In both contexts, the smaller firms are likely to become more productive and innovative. In turn, the larger firms should also understand how well they will benefit from having access to productive and skilled local contractors in their supply chains.

Box 2.11. PROFO, Chile

Researchers have extensively documented the benefits that can arise as smaller firms within an industrial sector band together to achieve the kinds of efficiencies due to scale that each alone cannot achieve (Pietrobelli and Rabellotti, 2004; Marshall, 1890). Not least among these external economies of scale or collective efficiencies (Schmitz, 1999) are the prospects for the enhanced diffusion of knowledge and for innovation. Yet the kind of collective action required for the formation of such links are challenging, and they require considerable trust – a societal attribute often thought to be wanting in many less-developed economies. Given such co-ordination problems, and in light of the potential private and social benefits, there is a clear rationale for governments to facilitate such interactions.

Seeking to stimulate greater collective efficiency among firms in the same industry, the government of Chile created Programs of Managerial Development (PROFO). PROFO is directed at increasing the productivity of small and medium-sized firms, by encouraging the formation of horizontal networks. Through the formation of these networks, it is hoped that SMEs can overcome scale-based barriers related to the ability to licence technology, access markets and hire skilled managers.

Legally, a PROFO is a partnership in which small and medium-sized businesses participate for a maximum of three to four years. There must be at least 5 firms to form a PROFO. Operating costs are shared between the public and private sectors, with public support starting at 70% in the first year, falling to 60% in the second year and 50% for the third year. Correspondingly, participating businesses finance at least 30% of the costs the first year, 40% the second and 50% the third. The agreement usually is made for three years, but an extension for a fourth year may be obtained if positive results can be demonstrated and if the group of companies decides to extend its partnership by undertaking joint investments or forming further consortia.

The amount of the government subsidy can be as much as USD 100 000 per year per group, with a contribution limit of USD 12 000 per participating company. The activities and types of expenditure that these funds can finance are: the remuneration of the PROFO manager (appointed by the member companies) and other support staff, technology transfer seminars, exhibitions, shows and consultancy work, travel, training and purchases of specialist books and reviews.

Corporacion de Fomento de la Production (CORFO), the state agency responsible for the promotion of national productive activity, is responsible for approving PROFO projects and allocating funds. PROFOs have been initiated by diverse entities such as public-sector bodies and private-sector trade associations such as the Chilean Textile Institute. The programme is very grassroots and adaptive. CORFO has no direct operation oversight of individual PROFOs.

Source: OECD (2013), Mexico: Key Issues and Policies, OECD Studies on SMEs and Entrepreneurship, http://dx.doi.org/10.1787/9789264187030-en; Pietrobelli, C. and R. Rabellotti (2004), Upgrading in clusters and value chains in Latin America: The role of policies, Inter-American Development Bank; Marshall, A. (2006), Principles of Economics, Cosimo Classics, (originally published by Prometheus Books in 1890); Schmitz, H. (1999), “Increasing Returns and Collective Efficiency”, Cambridge Journal of Economics, Vol. 23, No. 4, pp.465-483.

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However, creating those linkages does not automatically happen from clustering. “Matching”, an innovative business-to-business initiative aims to facilitate the creation of networks of firms and the use of network contracts, as a tool for the formalisation of an inter-firm relationship. Promising initiatives can start with the 111 companies in Morelos that are part of the National Network of State Science and Technology (RENIECyT) and act across various domains including agroindustry, advanced manufacturing, health, and renewable energies. Incentives in the form of joint investment projects may also need to be created to actively link firms sharing a sector and increase the value that they see in collaborating amongst each other (OECD, 2013b).

Box 2.12. Business-to-business matchmaking in Italy

“Matching” is an innovative business-to-business (B2B) initiative, which is organised annually by the Compagnia delle Opere (CDO), an Italian entrepreneurial association with over 34 000 corporate members, mostly small firms, and supported by the Ministry of Economic Development, the national Association of Chambers of Commerce, and the Lombardy regional government. Its main purpose is to foster the creation of networks of firms, with particular emphasis on the utilisation of network contracts to formalise the collaboration between SMEs and SMEs, and large firms and SMEs. The cornerstone of matching is a national 3-day event held in Milan every year involving on average over 2 000 firms, institutions and supporting bodies, and generating over 50 000 B2B appointments. During this national event, over 100 thematic workshops take place, supported by a network of experts in a variety of fields (exporting, innovation, etc.). The event has two critical success factors. First, there is an online matching mechanism which allows participants to develop an agenda of pre-matched B2B appointments before the event. Local CDO advisors regularly incentivise firms to prepare their online virtual showrooms, scan the list of other participants and send appointment requests. Second, all local advisors meet regularly during the preparation period and actively filter the agenda, cross-checking each participant’s list of appointments to increase its potential effectiveness and offering suggestions for additional synergies. An analysis of the 2011 edition suggests that firms conducted an average of 41 business meetings during the three days, out of which around 11 were judged as useful and 4 led very quickly to new commercial or partnership exchanges. The national event is complemented by a network of smaller replica events organised by the 40 CDO local branches. These local events typically involve between 150 and 300 participants and aim to facilitate continuous interactions among participants during the year. Building on a network of foreign branches in 17 countries, CDO has also started to organise mini-matching events based on the same formula in countries such as Brazil, the People’s Republic of China, Qatar, the Russian Federation, and Spain, with the objective of supporting the internationalisation of its SME members. Source: OECD (2014d), “National programmes for SMEs and entrepreneurship in Italy”, in Italy: Key Issues and Policies, http://dx.doi.org/10.1787/9789264213951-9-en.

Helping firms seize the benefits of knowledge spillovers

The right conditions need to be set for local firms to benefit from the spillover effects deriving from the presence of firms that are at the global technological frontier (e.g. MNCs), even before entering into joint projects (Borenzstein, Gregorio and Lee, 1998; Coe, Helpman and Hoffmaister, 2008; OECD, 2013b). The less sophisticated

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entrepreneurs, micro- and small- enterprises may need support in the diffusion of basic business skills, equipment purchase and training. While data is lacking, during missions stakeholders reported that in Mexico, on-the-job and employer-sponsored training is a practice most commonly, if not only, observed amongst the larger and international firms. Influenced by Japanese culture, the firm Nissan in Morelos for example views workers’ continuous need for training in the workplace as a fixed operating cost rather than a variable. The firm has even developed a new programme for training whereby it sends some of its technicians to the Nissan plants in Japan for them to learn and bring back to Morelos a new savoir-faire in the use of technologies but also other dimensions of work (Nissan). Likewise, in Morelos, the competitiveness of the CIVAC industrial park relies strongly on a skilled and versatile workforce that is continuously trained to adapt to new changing demands.

Box 2.13. Innovative workplaces

In an effort to understand which working organisations leave their employees greater room to innovate and, as a result, generate higher levels of innovation, an OECD study looked at the European Working Conditions (EWC) survey to understand the most prevalent forms of work organisation across the EU to determine which of them could be defined as “learning organisations” as per their likelihood of being conducive to greater levels of learning for the employee and the organisation itself. The results show that organisations that rely on the expertise of individual professionals and fuse them in creative project teams to create innovative projects on behalf of their clients, the so called “operating adhocracy”, are most likely to provide their employees with continuous professional development and training programmes. In addition, organisations that delegate problem solving activities to a wide range of employees could be more successful in both upgrading the competencies of workers and in transforming ideas into new products and processes. Interestingly, learning organisations across the 27 EU Member States are a widespread phenomenon as 67% of firms in the EWC survey are characterised by high levels of autonomy in work combined with high levels of learning, problem-solving and task complexity. Source: OECD (2016f), “Skills for a Digital World”, Working Party on Measurement and Analysis of the Digital Economy, www.oecd-ilibrary.org/docserver/download/5jlwz83z3wnw.pdf?expires=1479308077&id=id&accname=guest&che cksum=8C742A16384388422883646F9E199831 (accessed 5 August 2016) based on OECD (2010b), Innovative Workplaces: Making Better Use of Skills within Organisations, http://dx.doi.org/10.1787/9789264095687-en.

Using foreign direct investment (FDI) to enhance R&D and manage a transition towards higher-value activities

Utilising FDI is a crucial determinant of the potential for knowledge spillovers (Javorcik, 2008; OECD, 2013b). The state of Morelos, like most of Mexico, is viewed as a competitive place in which to run low-cost and low sophisticated activities such as the manufacturing of automotive parts for the automobile industry. As a result, Morelos tends to fit into the global economy as a low cost, competitive place to do business whose distinct feature is its central geographical location with the rest of Mexico. Enhancing sophistication and productivity will require Morelos to engage more in R&D and trigger increasing levels of private R&D. Incentivising greater FDI investments for R&D could

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substantially help the region in making a transition towards higher-value activities and upgrade its economy. However, fostering linkages between people, companies and institutions remains fundamental to prevent R&D (even if volumes are low) from being under-utilised because of poor co-ordination and collaboration between different actors (OECD, 2013d).

Short summary

Morelos registers higher patent activity than the national average, reflecting the good performance of R&D centres in the state, but this activity seems to be disconnected from the rest of the regional economy with stakeholders reporting a low propensity of HEIs to commercialise their research results. Despite holding strong S&T capacities, a low dynamism is noted in the creation of knowledge-based start-ups in Morelos. At present, the state's innovation ecosystem is fragmented and inward looking, missing key elements to encourage i) cross-fertilisation, ii) absorption, and iii) adaption. Strengthening university-business collaborations will be crucial to enhance knowledge transfer, diffusion and exploitation. Likewise, increasing productivity by strengthening linkages among firms of different sizes but also of the same size can be particularly important for improving the position of local firms and attracting FDI in a number of sectors in which technology requirements evolve quickly. The state of Morelos may need to create incentives in the form of joint investment projects to actively link firms sharing a sector and increase the value that they see in collaborating with one other. In addition, measures should be put in place to help firms capitalise on the benefits of knowledge spillovers that derive from the presence of large MNCs in Morelos' territory. In relation to knowledge spillovers, the state of Morelos should also define a strategy centred on how to make the best use of FDI, a crucial determinant of the potential for knowledge spillovers, and focus increasingly on R&D activities. Enhancing sophistication and productivity will require Morelos to engage more in R&D and trigger increasing levels of private R&D.

Place-based approaches are central to innovation policies

Regional economic policies that draw on existing regional economic strengths and focus on supporting a limited number of sectors with global innovative potential have tended to show the most effective results. For this reason, effective policies tend to be place-based. With a focus on sectors such as renewable energies and pharmaceuticals, the state of Morelos seems to be building on existing strengths to form the cornerstone of its innovation policy. The smart specialisation strategy currently being implemented by the EU combined with new mechanisms to co-ordinate policies and build capability at a subnational level can further provide a platform to develop a more place-based approach to innovation policy. The European Union has adopted the principle of smart specialisation as the basis for its territorial development policies in its Europe 2020 strategy, which defines a ten-year growth strategy for its member countries. The idea of smart specialisation emerged out of work by the European Union, the OECD and other intergovernmental bodies on the drivers of territorial development (OECD, 2016b).

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Box 2.14. Smart specialisation Smart specialisation is focused on helping entrepreneurs identify their knowledge-based strengths at the regional level and in a more exploratory approach in which public decision makers listen to market signals using a range of assessment tools (e.g. SWOT analysis, surveys) and mechanisms such as public-private partnerships, technology foresight and road mapping. The success of smart specialisation policy measures is closely dependent on the capacity of regional government institutions to act as co-ordinators or facilitators of the interventions. The way in which institutional mechanisms govern innovation processes and provide incentives for the interaction between regional actors remains a largely unexplored area of scientific research. A recent OECD report on smart specialisation identified the following key policy messages : • Policies for entrepreneurial discovery. The smart specialisation approach calls for an “entrepreneurial selection” of market opportunities (e.g. to minimise failures and to avoid ill-informed policy decisions). While successful companies will constitute the new specialisation of the country/region (self-discovery), the role for policy is to develop a flexible strategy focusing on measurable intermediate goals, identifying bottlenecks and market failures and ensuring feed-back into policy learning processes. The approach includes incentives to strengthen entrepreneurship and encourage agglomeration. • Promoting general purpose technology platforms and networks. Given the range of applications of general purpose technologies, technology platforms involving public and private actors but also standards setting organisations can help increase productivity in existing sectors and help identify sectors in which to concentrate resources. • Diagnostic and indicator based tools and infrastructure. Smart specialisation requires regions and countries to maintain an infrastructure and indicator base to monitor and evaluate performance and policies. • Strategic governance for smart specialisation. Good governance and the development of local capabilities are key to identifying local strengths; aligning policy actions, building critical mass, developing a vision and implementing a sound strategy. • Openness to other regions. The specialisation strategy of regions should take into account that other regions are also involved in knowledge creating activities and that duplication might lead to lower effectiveness and finally failure. Hence, co-operation with other regions with complementary capabilities and strategies is important. Source: OECD (2016d), OECD Territorial Reviews: Peru 2016, http://dx.doi.org/10.1787/9789264262904-en.

Fostering innovation across sectors and sub-regions

While building on existing strengths, Morelos’ innovation policy currently appears as a stand-alone, rather than building cross-disciplinary and cross-sector linkages, including the more traditional, less knowledge-intensive sectors. The Innovation Agenda defines knowledge-intensive areas of specialisation, which shows that Morelos has the potential to compete in global markets. While innovation in high-value sectors should be pursued and accelerated, innovation should not just be the result of scientific research papers but also involve the leveraging of tradition-specific knowledge towards further economic

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development. This is particularly valid for the tourism industry, which employs a large segment of the population in Morelos and contributes heavily to GDP. However, the state’s Innovation Agenda fails to build bridges with other sectors driving the region’s economy or dimensions of society other than those defined as its five core areas of specialisation. An exception can be noted vis-à-vis the agricultural sector with which, through a project for innovation in agriculture (Proyecto de Innovación agropecuaria), the Ministry for STI developed an innovation network for biofuels, which includes 82 researchers from 32 national and international institutions to work with 90 farmers, 4 firms and 3 state ministries co-operating on the question of the scientific and technological development required by airports and auxiliary services, the only agency commercialising biofuels for the aeronautic industry in Mexico (CONACyT, 2014). The objective is to develop the competitiveness of the region in this area and generate sustainable and competitive S&T development in the biofuel value chain. In addition, the state of Morelos has launched an experimental project to develop non-toxic Jatropha curcas, which are native to Mexico, across 250 square kilometres. This led to the development of technologies for the production of primary materials for the biofuels industry as well as the production of food at lower costs for the population, with a particular focus in highly-marginalised areas. The project’s results will be published at the end of 2016 (Valderrama and Roldán, n.d.). Building on the promising examples from collaboration in the agricultural field, the government of Morelos should develop a strategy that seeks to integrate innovation into all dimensions of the region’s social and economic policy. Innovation is a key factor that aims to address societal issues such as smart mobility, healthy ageing and the like. This will have implications for attracting FDI and creating jobs, which should be applied across a wider span of economic sectors. The state of Morelos should strategically think about how it can attract more companies and what type of companies it wants to attract. Morelos would benefit from developing a strategy for the whole region and its sub- regions. Likewise, the state should better reflect on how it can take advantage of existing foreign companies to attract more investments. Until a more comprehensive and integrated strategy comes into being, large economic opportunities – not only in the more traditional sectors but also wider dimensions of socio-economic life – will remain unexploited.

2.5 Developing a holistic approach to skills, the labour market and innovation

Regional authorities are instrumental bodies for the promotion of social cohesion and economic development. Through the different functions they take as service providers, employers and regulators, regional authorities are well-placed to monitor local labour markets, identify opportunities and challenges for growth. As such, regional authorities are in a unique position to create training, employment and innovation policies (e.g. smart specialisation) from a place-based approach. Place-based policies resonate with the different territorial realities of a region and seek to exploit competitive advantages while being responsive to the needs of populations, including those of highly marginalised communities. In addition, effectively addressing some of the human capital, social and economic issues facing a region will require that policies be well co-ordinated and implemented in partnership with several relevant stakeholders. Fostering local strategic partnerships tends

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to trigger positive outcomes not only for producing more targeted interventions but also for overcoming the fragmentation of responsibility for skills development between different institutions. To facilitate these efforts, national and regional governance instruments have been developed across OECD countries. The state government of Morelos has recently (2015) established the Council for Human Capital in this vein. A major challenge for Morelos through this Council will be to develop a coherent framework for human capital development and learn how to exploit policy complementarities to enhance regional productivity and competitiveness and make it an ambitious initiative.

The Council for Human Capital of the State of Morelos

The Council for Human Capital of the State of Morelos is a regional body created by the Ministry for Economy that has a mission to promote and achieve economic development based on a strong investment in human capital, innovation and cross- sectoral collaborations. The institutional structure of the CCH is organised around five working groups (government, education, private sector, syndicates, and social organisations) and nine sectorial technical groups to which working group members participate. Each of the sectorial groups below corresponds to a priority sector. Around these sectors, the Council has defined a number of programmes that it will launch in different phases and that aim to mobilise multiple stakeholders from all walks of life. The following technical groups have been identified: (1) white economy; (2) tourism; (3) research and education; (4) construction; (5) agriculture and fishing and agro-industry; (6) renewable energy; (7) tele-working; (8) high-technology; and (9) logistics. At the regional level, similar bodies to Morelos’ Council for Human Capital can take the form of regional sector skills councils, development agencies or local labour market observatories, and be either formally institutionalised (e.g. Australia, Norway, United Kingdom and United States) or working as a temporary working group (e.g. Germany). Because of the way they are structured, sector skills councils and development agencies particularly can result in successful joint programmes and initiatives whereby employers work hand-in-hand with training providers to reflect on how to meet human capital needs in their local labour market catchments. The different perspectives of the stakeholders involved are then often integrated in policy discussions and offer advice to policymakers on how to increase the employability of the workforce, reduce skills mismatches and shortages. However, strong capacity and political commitment are fundamental for such institutional structures to work and sustain themselves across changes of government. While the state of Morelos is developing its Council for Human Capital, at the national level, the OECD-Mexico National Skills Strategy project starts with work to identify Mexico’s major skills challenges, which will lead to the formulation of several interventions. The second phase of the project, that of implementation, will address some challenges and possible interventions in more detail by focusing on a limited number of case study regions across the country. It would be desirable to connect the Morelos Council for Human Capital to the national skills strategy.

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Box 2.15. OECD Skills Strategy

The OECD Skills Strategy advocates three interrelated policy levers and an overarching theme of strengthening the skills system to build the right skills and turning them into better jobs and better lives: • Developing the right skills: ensuring that the supply of skills is sufficient in both quality and quantity to meet current and future emerging needs. This requires developing the right mix of skills through education and training but also ensuring effective policies to attract and retain talent. Strategies include: encouraging and enabling lifelong learning; supporting the development of skills relevant to national and local labour market demand; and improving employability. • Activating the supply of skills: many individuals are out of the labour force or under-represented, requiring additional support and incentives to re-enter the labour market. Strategies include: encouraging people to offer their skills to the labour market and retaining skilled people. • Putting skills to effective use: successful skills policies also require that current available skills be utilised, which will ultimately improve productivity. Strategies include: better matching of skills and job requirements and increasing demand for high-level skills. • Strengthening skills systems: the Skills Strategy takes a whole-of-government approach, with dialogue and collaboration across ministerial portfolios, and engaging stakeholders to build a national consensus and commitment to action. Source: OECD (2012b), Better Skills, Better Jobs, Better Lives: A Strategic Approach to Skills Policies, http://dx.doi.org/10.1787/9789264177338-en; Stacey, J. (2015), “Supporting Quality Jobs in Tourism”, OECD Tourism Papers, No. 2015/02, http://dx.doi.org/10.1787/5js4rv0g7szr-en.

Dimensions for improvement in the Council’s current form While the Council presents the initial institutional structure and characteristics to carry forward decisive work in the region, improvements may be needed along a number of dimensions before it can seize the full benefits from multi-stakeholder partnerships and produce large-scale positive human capital outcomes.

Defining the Council’s mission and operating mode better The Council for Human Capital aims to promote and achieve economic development based on strong investment in human capital, innovation and cross-sectoral collaboration. However, it is unclear what its role, functions and tasks are as an institution. The definition of the Council’s role, functions and tasks should underpin mutual goals and a game plan that is shared by all stakeholders and ensures alignment with a common vision. A workshop1 organised by the OECD in co-operation with the Council for Human Capital revealed not only a rather fragmented “common vision”, but also that no tangible goals and milestones had been defined, shared and understood by representatives from the sectoral groups.

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The mission of the CCH should more clearly define its role, functions and tasks, including the mutual goals and common game plan shared by all the stakeholders involved in it. It would also be desirable for the council to work closely with state labour market training agencies to define its priorities. In addition, the state Ministry of Economy currently plays a crucial role in creating the conditions for the CCH to become operational. However, once the conditions are created, it may be preferable to elect an independent general co-ordinator for the CCH to oversee all activities undertaken, facilitate communication and knowledge-sharing channels, but also to steer actions towards consensus among the different groups. The co- ordinator should be independent from any of the groups represented in the Council. Electing an independent general co-ordinator could help to avoid a public sector-led approach subject to political changes which could jeopardise the programme and policy coherence in the CCH’s agenda over the years.

Ensuring a more varied composition of sectorial representatives The viability of an organ such as that of the Morelos Council for Human Capital requires a harmonious representation of key stakeholders. The current composition of each sectorial councils include three representatives from the private sector, four representatives of the state government, and four representatives from the education sector. In a sectoral group such as that of Education and Research, there currently is a predominance of representatives from higher education institutions and research centres for the implications that these types of institutions have in driving innovation. The presence of primary, lower and upper secondary representatives (both from government and from networks of schools) is therefore undermined. However, representation from the latter may be as essential as that of higher education institutions and research centres. Likewise, officials from the state government and the education sector are currently over-represented at the detriment of business professionals. Increasing the representativeness of private sector is paramount to the healthy development and sustainability of the Council. It is also essential in its mission to reach a better matching of skills supply and demand. The council should thus aim to increase the involvement of recognised business leaders from small, medium and large size firms as well as start-up entrepreneurs, and ensure that people of the same “level” sit in the same boards. To illustrate, an HR representative from a small company tends to be more operational and forward-driven than an HR Director from a large company. Moreover, the CCH may want to identify and work with “front runners” in order to best achieve its strategy and goals. Front runners are preferably decision makers from companies, government and education institutes who will enhance support for the CCH. They could be the highest HR representatives (front runners) from the larger companies and the CEOs of SMEs. Connecting these front-runners together to work toward concrete and tangible projects or goals and creating a trust-based relationship may benefit the project substantially. Establishing an overall Council for Human Capital board with representatives from the sub-boards may be an organisational structure to explore. The role and function of the overall board should be more strategic and thus differ slightly from the sub-boards. It would then be important to distinguish what types of actors should be sitting on the board

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and the sub-boards, and ensure that equal representation of stakeholders is always achieved. Finally, civil society is an important, yet omitted player in the Council. To a regional innovation system, civil society should be perceived both as a producer and a user of knowledge. Their lack of representation in the Council for Human Capital’s early stages of development should be corrected to ensure that the interests of Morelos’ local population are represented and different dimensions of well-being are taken into account in programme design and implementation. The state of Morelos should thus spread knowledge to municipalities about the Council in an effort to mobilise not only key actors from civil society but also all governmental actors of the state, particularly those acting in areas predominantly populated by rural and indigenous communities. Thinking about how to better connect those communities to the Council for Human Capital will be critical to inclusive growth.

Adopting a demand-led approach The Council for Human Capital should aim for a demand-led approach. A demand- led approach is driven by a clear and highly responsive sense of employers’ needs, accounting for the varying needs of different sized companies (e.g. start-ups, large firms). This implies a strong involvement of the private sector not only in defining skills needs, but also in designing and providing training programmes. A demand-led approach can present benefits, including a better matching between training provision and what is required of young people in the workplace (likely to result in better job matching); and building employers’ trust in the CCH as employers will be more willing to work with partners who they feel understand them and their needs. Brainport Development in the region of Eindhoven (Netherlands) has adopted a successful Triple Helix model to achieve those benefits.

Box 2.16. Triple helix partnerships: The case of Brainport Development in Eindhoven (Netherlands)

Brainport Development can be characterised as a “horizontal triple helix collaboration” partnership, for it is based on the co-operation of large companies and SMEs, knowledge institutes and governments across various levels. Of the triple helix parties, the regional authority (the provincial government) is perhaps the least dominant, the least powerful, and the most limited in terms of resources. The project management approach builds on the model of the former Horizon Programme which consisted of a large number of bottom-up initiatives with external project owners. Brainport Development invites the involved firms or knowledge institutes to take ownership of initiatives and projects that are being carried out. Brainport Development won the Eurocities Award in 2010 in the “co-operation” category, for co-operation among companies, knowledge institutions and government in the region of Eindhoven. The innovation system of the region is privately driven and, as such, the role of public government and public R&D investments is limited. The development of the strategy was led by the former vice president of the multinational company DSM and the steering group included a former manager of Philips. In line with the approach of the agency to appoint external people as “project-owners”, many initiatives and projects are led, or “driven” by businessmen on a personal basis. Source: OECD (2012c), OECD Territorial Reviews: Skåne, Sweden 2012, http://dx.doi.org/10.1787/9789264177741-en.

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Adopting an approach to sectors that allows for effective cross-fertilisation

Nine sectors have been identified by the Council for Human Capital. Those nine sectors combine and include sectors by economic activity (e.g. tourism, agriculture and fishing, construction or agro-culture) and thematic areas common to all sectors (research and education, renewable energy, high-technology and logistics). The thematic areas are relevant to all sectors, but their treatment in silos may impede cross-fertilisation between them. Organising sectoral and thematic areas around a matrix may ensure that sectors benefit from the synergies of thematic areas. With this matrix framework, working groups of the thematic areas should participate in all sectorial activities to spread common knowledge. In addition, each of the nine defined sectors encompasses broad sub-areas. Tele- working for example includes software development; administration; animation; video- games; translation; legal; tele-market; health. A reduction in the number of sectors may be advised. A strategic selection of key sectors during the initial phase of the Council for Human Capital project would prevent the development of scattered actions and programmes. The key sectors that should be selected are those that are embedded in the DNA of Morelos (unique selling point, USP) high growth sectors that show a lot of potential for attracting FDI, start-up and incubator activities. Some of the features to consider in sector selection may include (OECD, 2014a): • knowledge-intensive, with co-operation between business and knowledge institutes • export-oriented, with growth opportunities in new markets • subject to sector-specific regulation influencing innovation • able to contribute to pressing social issues • avoid picking winners. Last but not least, there is no coherence between the priority sectors defined in the Ministry for STI’s Agenda for Innovation and those defined by the Council for Human Capital. How to reconcile this in order for all mobilised stakeholders to agree on a selected number of priority sectors for the region will be interesting to think about.

Further shaping the Council

Reaching consensus over programme design and goal setting

In a structure such as that of the Council, a good starting point is often to find one or two topics that are of relevance to and recognisable by all the sub-boards and that can be addressed from the supervisory strategic board. Based on interviews during mission trips, improving labour turnover was highlighted as a challenge experienced by many companies. Defining a mutual project leads stakeholders to the definition of mutual goals and results. Moreover, increasing the tangible character of the actions that will be undertaken by the Council is fundamental to its members. As such, the Council may want to define two

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types of goals: short term “quick hits” that will motivate members to continue working and the long-term strategic goals. Short-term goals should be concrete (e.g. a new initiative in a company) and revised as the work goes on and participants learn more of their common target, understand better each other’s starting points, views and so on. In defining short- and longer-term goals it will be important for the Council to understand what it can concretely achieve despite the reluctance of other influential organisational groups. When working together to identify the types of skills that children should develop in primary and secondary school (e.g. entrepreneurial skills, meta-cognitive skills), it will be fundamental to determine what initiatives can be taken forward despite the power of the teachers unions, for example. The Council should communicate and increase the visibility of what it is trying to achieve. Stakeholders from the different sectors should get the impression that they are to a certain extent involved in all the programmes by being aware of the projects, the objectives and by having results communicated to them.

Evaluation and monitoring

Evaluation and monitoring are central to undertaking programme changes and managing improvements. The Council for Human Capital should start evaluating its own work early on. The Council may view its work as a learning process and an attempt to build social capital.

Securing resources

The projects undertaken by the Council for Human Capital should seek to answer a mutual challenge or opportunity that is recognised by all stakeholders. The mutual recognition of the value or necessity of undertaking a programme or project should determine their mixed funding structure. Having stakeholders allocate a budget towards an initiative makes it automatically far more demand-driven than if the funding for all projects would be solely covered by the state government. Experiences from organisations such as Brainport Development show that demand-driven projects tend to be more successful. As such, public-private funding models are desirable.

Developing a strategic vision

In addition, the Council may ensure it develops strategic foresight. The CCH can position itself as an intelligence arm of the state government of Morelos, not only to serve public policy making but also the wider community. Investigating labour market trends, engaging in sector growth and skills forecasting can prove effective to inform training and employment actors of changing occupational needs, both in terms of the share of workers and competence profiles for which demand will be growing or decreasing. Collecting this type of information would allow the CCH to develop better targeted interventions and programmes in each sector. Undertaking labour market and skills analysis can prompt more evidence-based policies and generate key information that employers and educational institutions will be able to use. The Expert Group on Future Skills Needs in Ireland is entitled with those responsibilities and works hand-in-hand with public government, charities and private institutions to which it communicates key findings and suggested policy directions.

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Box 2.17. The Expert Group on Future Skills Needs, Ireland

In Ireland, the main state agency for data analysis is the Expert Group on Future Skills Needs (EGFSN), which advises the Irish government on the current and future skills needs of the economy, as well as other labour market issues that impact on Ireland’s enterprise and employment growth. Established in 1997, the EGFSN is funded by the National Training Fund and reports to the Minister for Jobs, Enterprise and Innovation, and the Minister for Education and Skills. Forfás provides it with research and secretariat support while the FÁS Skills and Labour Market Research Unit (SLMRU) provides it with data, analysis and research and manages the National Skills Database. A number of main sources are accessible for regional and local data collection and analysis. An annual National Skills Bulletin provides estimates of skills shortages across the full range of Standard Occupational Classifications and is carried out by the EGFSN. This Bulletin contains a short section on regional skills profiles but does not provide a high level of detail, and sector specific analyses are likely to be ad hoc. In 2012, the EGFSN also published regional labour market profiles, which have significant potential to support regional decision making by education and training providers, as well as career guidance and immigration services. Source: OECD (2014b), Employment and Skills Strategies in Ireland, http://dx.doi.org/10.1787/9789264207912-en.

In relation to this, the CCH could work together in improving the permeability of Morelos’ current education and training system. Building more permeability across education systems such as between academic and vocational programmes may help individuals navigate better across it. It is with this same objective in mind, the PES offices, charities and further education and training institutions of many OECD countries have developed their modular courses and programmes in alignment with a national qualifications framework. In addition to greater permeability, the state of Morelos is missing an integrated education and work training system, one that is responsive to labour market demand. The development of a regional qualifications framework may strategically serve education and labour market stakeholders as a quality standards reference system. National qualifications frameworks intend to identify clearly what the learning and skills development outcomes are for each qualification. A regional qualifications system would facilitate the revision and updating of training programmes across the state’s institutions. Qualifications frameworks tend to be the result of multiple consultations with stakeholders from the business sector, among others. Requiring active involvement of employers and the industry, the framework may facilitate education-to-work transitions and the process of hiring young people in firms as employers develop greater assurance of the responsiveness of education to industry needs and of the quality of the skills graduates are equipped with. Another positive outcome is that skills mismatching could be reduced significantly.

Towards the development of an economic development board? The state of Morelos is currently focusing on human capital, or skills issues. However, interviews with various stakeholders from the public and private sector revealed that additional issues needed to be tackled in the region in conjunction with that of skills. Some of those are related to attracting FDI for the region, strengthening the local ecosystem of original equipment manufacturers (OEMs), encouraging exports, ensuring safety and appropriate infrastructures, but also retaining high-skilled talent. In light of

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this, the Council for Human Capital may want to adjust, or broaden, its institutional structure and realm of work so as to encompass and take better into account the interconnectedness of different challenges related to skills and economic growth. More than a Council for Human Capital, adopting the structure of an economic development board may facilitate this endeavour.

Box 2.18. A Framework for Action

The OECD's main recommendations to the Council for Human Capital of the State of Morelos are the following: • better defining the Council’s mission and operating mode • ensuring a more varied composition of sectorial representatives • adopting a demand-led approach • adopting an approach to sectors that allows for effective cross-fertilisation • reaching consensus over programme design and goal setting • engaging in regular evaluation and monitoring • securing resources from private sector stakeholders to ensure a minimum level of commitment to agree on programmes and projects • developing a strategic vision.

2.6 Concluding remarks

Education and labour market training policies Building higher-skilled human capital requires that education policies are developed to improve the quality of students' learning environment and to reduce territorial and socio-economic disparities, which have been reflected in performance thus far. While Morelos is engaging in policy actions to improve quality and equity in education, further policies it should consider include: • Centralising the collection of information/data about schools and student performance in Morelos. Data-driven school information systems are valuable instruments for increasing school quality and monitoring student performance. • Introducing measures to identify low performers early and provide remedial policies, particularly in schools located in municipalities at the periphery of metropolitan areas as well as in lagging rural areas where a high share of underperforming schools are located. Such measures should rely on the mobilisation of experienced teaching professionals and specialised school staff. • Providing teachers in low-performing schools with additional training and mentoring but also incentives to remain in those schools. • Expanding quality early childhood education coverage, especially for children in low-income families, as a cost-beneficial, strategic investment to improve learning outcomes and strengthen the development of a foundation comprised of social and emotional skills from a young age. Participation in early childhood

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education can significantly contribute to reducing the share of low-performers at higher levels of education. To address the challenge of early dropouts and incentivise young people to stay in education, the state of Morelos has created a scholarship which it systematically grants to all public school students enrolled from lower-secondary education onwards. However, Morelos may want to revise the “universal” dimension of the Beca Salario scholarship programme in order to better target students at high risk of dropping out for financial reasons as the resources of the programme currently go to all students regardless of their socio-economic status or drop-out risk. To produce effective labour market outcomes, education policies should not only seek to increase participation in education but also ensure that the education and training being delivered is of relevance to the needs of the economy. Because skills mismatches are being observed by Morelos' employers, the state government should also engage in policies that may help improve the alignment of skills supply with skills demand, potentially including: • Increasing private sector involvement in the updating of TVET training programmes and the provision of work-based learning opportunities for young people. • Promoting entrepreneurial skills development early in the education system. The integration of current curricula with business insight would promote entrepreneurship and a closer relationship between education institutions and the private sector. While forming future skilled and resilient human capital is crucial to enhancing social cohesion and economic competitiveness in the years to come, supporting current workers in upgrading their skills is just as critical. Morelos is engaging in labour market training, job placement, self-employment and entrepreneurship support policies that reflect an intention to make the most of its young population and support the available pool of skills in becoming more productive. However, better evaluating and monitoring programmes and services, and improving counselling and skills profiling services would help achieve more sustainable outcomes in matching supply and demand, while also better informing the design of future programmes. Targeting training and employment support to the informal sector too would maximise the latent skills present in the informal market. This may involve making better use of the process of validation of previous learning experiences and certification of skills acquired in non-formal and informal environments; defining comprehensive outreach strategies in marginalised areas; supporting and incentivising impact work from social enterprises and NGOs. Morelos would benefit from taking a more strategic approach to training and employment policies. This would imply developing a vision whereby labour market training policies are not just a reactive tool that try to meet the short-term needs of employers, but rather so that they help build the future economic structures of the region. Attempting to develop a medium- to long-term vision of how occupational and training needs may evolve would be relevant in this context.

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Innovation and entrepreneurship policies Focusing on the supply of skills alone will not generate positive labour market results. Policies should also focus on fostering the demand for skills. Innovation policies are necessary for businesses to become more productive, more competitive and to create jobs. Large public investments on tangible and intangible knowledge-based capital reflect Morelos’ willingness to build a regional innovation ecosystem. However, this ecosystem is incomplete. While it gathers the infrastructure for effective knowledge generation, Morelos is weaker when it comes to knowledge diffusion and exploitation. Creating the conditions to improve spillover effects to local businesses will also be critical to boosting the regional economy. Policy measures Morelos could take to improve this include: • Supporting the development and emergence of innovative companies by creating structures which can provide legal and business advice for the commercialisation of innovative ideas. • Improve access to capital for knowledge-based start-ups. The public administration can help new firms access financial institutions, providing guidance and sharing part of the business risk by providing collateral for credit. • Bridging the existing gap between public research facilities and the business sector, by promoting platforms of co-operation between public and private stakeholders. • Make better use of the presence of multinational companies and attracting FDI to i) increase productivity by strengthening linkages amongst firms and ii) enhance FDI for R&D while managing a transition towards higher-value activities. • Adopt a place-based approach to innovation by engaging in smart specialisation and fostering innovation across sectors in a more territorial perspective.

A holistic approach to human capital policy development The state government of Morelos has established the Council for Human Capital, a regional governance body to co-ordinate education, training and innovation policies. A major challenge for Morelos, through this Council, will be to develop a coherent framework for human capital development and learn how to exploit policy complementarities to enhance regional productivity and competitiveness. A number of recommendations can be formulated to support the Council's development and include: • Defining the Council’s mission and operating mode better. • Ensuring a more varied composition of sectorial representatives. Officials from the state government and the education sector are currently over-represented to the detriment of business professionals. • Adopting a demand-led approach guided by a clear and highly responsive sense of employers’ needs, and accounting for the needs of firms of all sizes. • Adopting an approach to sectors that allows for effective cross-fertilisation. Organising sectorial and thematic areas around a matrix may ensure that sectors and thematic areas meet. Working groups on thematic areas should participate in all sectorial activities in order to develop a common vision. • Evaluating and measuring programme outcomes according to agreed targets which allow for the revision of programmes, when necessary.

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Notes

1 The workshop was organised by the OECD in the city of Cuernavaca, Morelos, on 1 June 2016 and gathered members of the sectoral groups so far formed by the Council for Human Capital.

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