The destiny of any nation begins in its classroom where young people are equipped with knowledge and skills to lead the nation. Higher education is the corner stone in development where the work force is trained to lead the social, economic, political and cultural change. In such a competitive global economy the human capital is the most valuable asset. Higher education institutes are training units, where labor force is made. These institutes are also incubators of scientists and technologists where researchers are qualified to make the scientific and technological change. This role is absent in higher Arab Education Institutes; so this paper aims at specifying the internal and external challenges that are facing higher education institutions in the Arab world; in addition to searching the degree of responsiveness of these institutions to face these challenges, and how to integrate them with the requirements of development and labor market needs.