Abstract
•Skills development is the outcome of a complex political economy process characterised by conflicting objectives, trade-offs and mis-aligned incentives among stakeholders.•Firms have different skills needs but also different organisational capabilities, hence they respond to policy incentives differently.•Building on a multi-staged research process, we conduct three Discrete Choice Experiments with over 200 firms to test the feasibility of different incentive packages in Tanzania.•We uncover latent preference structures differentiated by observable firm characteristics, most strongly by differences in technical capabilities, existing training provision and firm size.•We find that an effective strategy for the Tanzanian skills sector would need to include a differentiated approach – that is, an incentive package prioritising the quality of VET outcomes for high capability firms and complementary measures for low capability firms aimed at graduating from low to high capability status.
Skills gaps and mismatches are widely documented as a hindrance to inclusive structural transformation across developing countries, especially in Africa. What is often overlooked, however, is the fact that skills development is a complex political economy process challenged by institutional and financing problems on the supply side, and inadequate demand, that is, a shortage of firms that can organise skilled labour and provide on-the-job training effectively. In such adverse contexts, rent seeking and corruption may arise from conflicting objectives, trade-offs and mis-aligned incentives among stakeholders – public sector skills providers and firms. With a focus on Tanzania, we (i) analyse the incentive structures underlying such rule-breaking behaviours and processes, and (ii) empirically test alternative institutional design strategies that would better align the interests of different stakeholders towards improved skills development outcomes. Building on over 30 in-depth stakeholder interviews in 2018, we conducted three Discrete Choice Experiments with over 200 firms to test the feasibility of different incentive packages in 2019. Our main hypothesis is that the successful re-alignment of stakeholders’ incentives must consider both the different and potentially conflicting objectives of public training institutions and the heterogeneity in skills needs and capabilities of different types of firms. We uncover latent preference structures differentiated by observable firm characteristics, most strongly by differences in technical capabilities, existing training provision and firm size. We conclude advancing an evidence-based tailored skills policy reform.