Economic Studies Series: Building a Knowledge Based Economy Starts

, 2019 Studies 20192202119 Economic Studies Series: Strategic Strategic September Building a knowledge based economy starts from the school: What can Bahrain learn from the Finnish experience? Author: Ghada Abdulla Abstract Like Bahrain, Finland was a resource dependent economy with a mediocre educational system in the 1980s. In just a couple of decades Finland was able to transform its educational system and become a global leader in education. This rapid improvement in education coincided with accelerating economic growth and an impressive transformation from an agrarian economy into a modern industrial knowledge based economy. The Finnish experience provides many lessons for Bahrain, as it shows how education and knowledge production can spearhead economic growth. Bahrain realizes that the shift to a knowledge based economy is the only way to achieve sustainable economic growth. This paper discusses how simple educational reforms can help Bahrain move closer to becoming a knowledge based economy through lessons learned from the Finnish experience. Ghada Abdulla ([email protected]) is an analyst at the Bahrain Center for Strategic, International and Energy Studies. The author would like to thank Mr. Pasi Sahlberg for his helpful comments regarding the paper. Views expressed in this study are those of the author and do not necessarily reflect the Bahrain Center for Strategic, International and Energy’s point-of-view. 2 Building a knowledge based economy starts from the school: What can Bahrain learn from the Finnish experience? 1. Introduction Bahrain is focusing on shifting from a hydrocarbon economy to a knowledge based economy (The Economic Vision 2030 for Bahrain, 2008), which is reflected in the Bahrain Vision 2030. A primary goal is to transform the economy by increasing productivity and innovation. It identifies education as the key component to achieving this goal: “Because education is essential for making this Vision a reality, we need to develop an education system that provides every citizen with educational opportunities appropriate to their individual needs, aspirations and abilities. Education and training need to be relevant to the requirements of Bahrain and its economy, delivered to the highest possible quality standards, and accessible based on ability and merit” (The Economic Vision 2030 for Bahrain, 2008). For most countries, a knowledge economy structure is the most likely source of sustainable development (Harris, 2003), as technological progress has been the most important driver of economic advancement over the course of the last three centuries (Islam, 1995). Powell and Snellman (2004) define the knowledge economy as: “production and services based on knowledge-intensive activities that contribute to an accelerated pace of technical and scientific advance”. They also identify intellectual capabilities rather than physical inputs or natural resources as the main component in a knowledge economy. Similarly, according to the OECD: “The knowledge based economy is an expression coined to describe trends in advanced economies towards greater dependence on knowledge, information and high skill levels, and the increasing need for ready access to all of these by the business and public sectors” (OECD, 2005a). The World bank has identified four pillars that forms the base of the knowledge economy: Economic incentive and institutional regime, Innovation and technological adoption, Education and Training, and ICT infrastructure (World Bank, 2013). 3 This paper discusses how Bahrain can increase its innovation level and move closer to becoming a knowledge-based economy through lessons learned from the Finnish experience in educational reform. Finland is chosen because, like Bahrain, Finland was a resource-dependent economy with a sub-elite educational system in the 1980s (Darling- Hammond, 2009). In just a couple of decades Finland was able to transform its educational system and become a global leader in education (Salhberg, 2014). This rapid improvement in education coincided with an accelerating economic growth and a remarkable transformation from an agrarian economy into a modern industrial knowledge-based economy (Schienstock, 2007). The Finnish experience is highly instructive as it shows how education and knowledge production can spearhead economic growth. 2. Overview of the Economy This section describes the economies of Bahrain and Finland. The discussion below shows that the economy of Bahrain today is similar to the economy of Finland in the 1980s. After the economic and educational reforms that were undertaken in the 1990s, Finland’s economy today is what Bahrain aspires to become. 2.1. Bahrain Bahrain is a small country with a total land area of 760km2 and a population of 1.5 million (World Fact Book, 2019). Bahrain has a GDP of 33 billion USD (Information and eGovernment Authority (IGA), 2017), and a GDP per capita of $24,000 (World Bank, 2017). Natural resources play an important role in the Bahrain economy: in 2017 the mining sector, which includes crude oil, natural gas, and quarrying, constituted 18% of GDP (IGA, 2017). Bahrain was one of the earliest countries in the Gulf Cooperation Council (GCC) to focus on diversifying its economy away from hydrocarbons. In the 1970’s Bahrain established itself as a regional financial center (Gerakis, 1983). Today, the second largest contributor to GDP after mining is financial services which constitutes 17% of GDP. The third largest sector is the manufacturing sector (15%) – which is 4 dominated by aluminum related products – followed by transport and communications (7.3%) and construction (7.0%) (IGA, 2017). Even though Bahrain was able to reduce the share of mining in GDP from 28% in 2005 to 18% in 2017, the economy remains dependent upon natural resources (Neumann et al., 2018). The government has become the main driver of economic activity in Bahrain, as oil revenues accrue to the state (Kotilaine, 2018). The share of oil and gas revenues in the government budget in 2017 was 76% (Ministry of Finance, 2017). One of the main ways used to redistribute oil revenues is through public sector employment: approximately 35% of employed Bahrainis work in the public sector (IGA, 2017). The private sector’s contribution to the economy remains limited (Kotilaine, 2018), resulting in a heavy dependence on imports. These imports are financed through exports which are dominated by hydrocarbons and resource-based manufactures, such as petrochemicals and aluminum. In 2018 oil exports constituted around 63% of the total goods exported in Bahrain (CBB, 2019). The government of Bahrain realizes that this model of economic growth is unsustainable, as the future of oil prices is uncertain (Callen et al., 2014), and oil reserves are finite and therefore will be depleted eventually (Shafiee &Topal, 2009). Bahrain Vision 2030 was launched in 2008, with the goal of diversifying the economy and empowering the private sector to become the main driver of growth (The Economic Vision 2030 for Bahrain, 2008). The government hopes to effect a transformation into a knowledge-based economy. 2.2. Finland Like Bahrain, Finland has a small population of 5.5 million (World Fact Book, 2019), and a high GDP per capita. Finland’s GDP per capita in 2017 was $46,000 (World Bank, 2017). Finland is a highly diversified and industrialized country, and consistently ranks highly in economic indicators, such as economic competitiveness, good governance, transparency, technological advancement, and innovation (see section 3 below). Finland ranks eighth in the Economic Complexity Index, which measures the knowledge intensity of an economy by gauging the knowledge intensity of the products it exports (OEC, 2019). 5 Like Bahrain, Finland’s economy was highly dependent on natural resources and imported technologies. In the 1960s, around two thirds of Finland export revenues came from its most important resource: forest and timber (Dahlman et. al, 2006). In 1988, wood constituted 41% of Finnish exports (World Bank, 2019). In the early 1990s Finland experienced a severe economic crisis (Honkapohja & Koskela, 1999), with unemployment levels reaching 17% in 1995 (World Bank, 2019) and debt levels rising from 10% of GDP in 1990 to 58% in 1994 (World Bank, 2019). Finland responded to this crisis by diversifying away from the forest-industry and investing in innovation and high technology industries such as mobile communication (Dahlman et. al, 2006). Finland started focusing its production, exports and R&D on knowledge-intensive goods and services. Rather than direct investments in research and development (R&D) by the government, the government focused on encouraging private sector innovation and reciprocal collaboration between the private and public sector (Van Beers et al., 2008). Finnish universities became closely connected to research and development in the private sector (Dahlman et. al, 2006). The privatization of public organizations accelerated (Dahlman et. al, 2006). At the same time education policies were introduced in the 1990s that focused on improving mathematics, science and technology and in encouraging creative thinking and problem solving (Sahlberg, 2014). As a result, the economy grew rapidly driven mainly by the Information and Communications Technologies (ICT) sector (Dahlman et. al, 2006). The share of manufacturing sector started to increase and the production of high-tech products and electronics accelerated. The share of exports in GDP increased from 21% in 1991 to 36% in

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