JEDDAH — A leading American academic and economic expert has said Saudi Arabia is investing significantly in its human resources, particularly in identifying and educating the next generation of financial leaders. She however said education in itself does not create large-scale employment, but the scholars should instead use the knowledge and tools they come equipped with to participate in and shape the economic environment to create opportunities.
Deborah J. Lucas, the Sloan Distinguished Professor of Finance at the MIT Sloan School of Management and the director of the new MIT Center for Finance and Policy, participated in the MASIC Annual Investment Forum 2015 in Riyadh. Her recent research has focused on the problem of measuring and accounting for the costs and risks of government financial obligations. Her published papers cover a wide range of topics, including the effect of idiosyncratic risk on asset prices and portfolio choice, dynamic models of corporate finance, financial institutions, and monetary economics.
Professor Lucas spoke to Saudi Gazette in an exclusive interview during her recent visit to Saudi Arabia. Full text of the interview:
Q: What is the reason for your visit to Saudi Arabia?
I am here to learn. Saudi Arabia is investing significantly in its human resources and particularly in identifying and educating the next generation of financial leaders. At MIT Sloan we have devoted significant resources to better understanding how we can contribute to the future development and improvement of the global financial system. As a part of that initiative, and in recognition of the central role policymakers will play in that process, we set up the MIT Center for Finance and Policy.
The financial education programs at MIT Sloan are designed to bring together the best students in the world, regardless of nationality, and train them for a broad range of financial careers in both the private and public sectors — careers requiring analytical rigor and the ability to innovate around market challenges. The purpose of my trip is to meet financial leaders in the country, learn more about the development of the financial industry and financial policies in Saudi Arabia and the Middle East, and incorporate that improved understanding into the work we do at MIT.
Q: Saudi Arabia has invested significantly to construct a financial hub in Riyadh that follows global business standards and employs high caliber leaders. How can the government leverage the financial system and its individual mechanisms to realize growth and provide a return on that investment?
Businesses of all sizes need access to capital to grow. Developing a world-class financial system is essential for creating the kind of vibrant private sector that will bring widespread prosperity to the Kingdom. Saudi Arabia's leaders have shown great foresight by putting that process in motion with the creation of the financial hub in Riyadh. In order to realize the system's potential, the government will need to institute a regulatory structure that provides sufficient oversight, but at the same time allows for financial innovation and risk-taking. The financial system also needs leaders and professionals with a deep understanding of its workings and can manage the risks that arise.
To achieve those objectives, financial professionals need the training and skills to work effectively in the modern financial world. Saudi Arabia has recognized this, which is why the Ministry of Education in 2014 provided placements for 10,491 scholars through the 10th Custodian of the Two Holy Mosques King Abdullah Bin Abdulaziz Scholarship Program. About 17 percent of these students will be studying subjects related to finance and economics.
In the short term the Saudi financial system can be modernized by relying largely on senior overseas talent and expertise. The foundation for long-term success, though, is for the Kingdom to invest in the necessary research and skills to establish its own talent pool.
Q: What roles can academic institutions play in developing and reforming the global financial system?
Obviously education and training are at the forefront, together with research aimed at identifying best practices and areas where changes are needed. A major benefit of financial education is that it provides financial leaders from around the world — in government and in the private sector—with a common language of finance. That is really what MIT Sloan is seeking to achieve and why we are attracting the top students from around the world. Of course, speaking a common language is not the same as agreeing on every point. The manner in which policies and practices are implemented will depend to a great extent on the unique attributes of each individual market. However the global conversation around the financial system is best carried out with reference to a common understanding of the core principles and practices that contribute to its continued development. That is what we are seeking to instill at MIT.
Q: What is the connection between investment in business infrastructure and the development of the next generation of leaders?
Everyone wants to work in an environment that is attractive and modern in its facilities and that has a well-functioning legal and regulatory infrastructure as well. The provision of modern workplaces and the creation of an open and equitable regulatory framework are key to attracting best-in-class talent. That talent will in turn act as a magnet to attract other professionals, encouraging the flow of ideas and the exchange of best practices.
A parallel can be drawn with the development of Silicon Valley in California. This was not the result of a sustained government program, but a natural progression from the existence of world-class centers of learning in the area. IT businesses came to Silicon Valley initially because it provided ease of access to the best emerging talent in the industry. As these businesses grew they shaped the information technology industry and Silicon Valley became a byword for progressive technology. This reputation in turn attracted more businesses that wanted both the cachet of working in Silicon Valley but also the proximity with the leading thinkers in the field.
Q: The King Abdullah Foreign Scholarship Program is an initiative to enhance the knowledge and capabilities of the next generation of Saudi leaders. How effective is spending on educational infrastructure projects as a tool to generate large-scale employment opportunities and, more significantly, train talented leaders?
Education in itself does not create large-scale employment. What it does is equip students with the knowledge and tools they need to participate in and shape the economic environment to create opportunity. From the perspective of the financial system this means training both private and public sector professionals in the proper application of modern tools and technologies to enhance the operation of financial institutions. From a public sector perspective, for example in central banks and regulatory bodies, it means developing an understanding of the complexities of the global financial system and best practices to support the effective functioning of that system.
The financial system then can be leveraged to support growth in the wider economy through the efficient distribution of capital and the parallel management of risk. Large scale growth will be driven by the ability of established companies to tap into the capital markets to fund their growth, and for new companies to access start-up capital and financial support to build up their businesses. It will also be supported by the ability of companies to hire easily the skills and manpower they need to develop their operations. Education is a starting point but at least as important is the development of a business and regulatory environment that supports growth and encourages entrepreneurial activity.
Q: Following the death of King Abdullah, how confident are you in the future of the Kingdom's vision to enhance the investment environment and infrastructure?
I extend my condolences to the people of Saudi Arabia on the passing of King Abdullah. However it was encouraging to note the smoothness of the transition of leadership and the sustained commitment of the government to the development of the non-oil economy and to education. Saudi Arabia is the largest economy in the Gulf and this is not going to change in the foreseeable future. As long as the government remains focused on its vision, and especially on that component of the vision that related to the development and education of new talent and leadership, I see no reason why it should not succeed.
