By Dinesh Weerakkody
We know that investment in education contributes significantly to economic growth and is key to our current and future competitiveness. Indeed, if the private returns are so high on these investments, most households on their own accord are likely to make adequate investments in human capital development.
However, the difficulty of borrowing to send children to school affects especially the poor. Creditors cannot easily stake a future claim on embodied human capital as they can for other types of collateral and therefore many low-income families are forced to invest less in their children’s schooling. These Free market failures in principle, suggest making concessionary loans available via the state. A more common, alternative is for the government to reduce the direct costs for schooling by making quality public schooling available free or at subsidized rates. Most interventions generally consist of making schooling available free and sometimes even compulsory. Research suggests the difference between social and economic returns from education at a macro level is probably higher at the primary and secondary levels than at the university level. Many positive spillovers come from literacy acquired at lower levels of schooling, while the returns from training at the university level are almost fully captured by the higher income of university graduates. Vocational training also has high economic payoffs, if it improves worker productivity. More importantly, evidence suggests that vocational training is most cost-effective if the trainees have a solid base of primary and secondary education. All of this argues for primary and broad based secondary education as a means to improve a nation’s productivity and income distribution.
Policies that promote human capital formation
Interestingly, higher shares of national income devoted to education cannot only explain the larger accumulation of human capital in some of the East Asian economies. In the 80s, public expenditure on education as a percentage of GDP was not much higher in East Asia than elsewhere. In 1960s the share was 2.2 % for all developing economies, 2.4 % for Sub-Saharan Africa, and 2.5 % for East Asia. During the decades that followed, the governments of East Asia markedly increased the share of national output they invested in formal education, but so did governments in other developing countries. In the late 80s the share in Sub-Saharan Africa was around 4.1%, and was higher than the East Asian share, 3.7 %, which barely exceeded the average share for all developing economies, 3.6%. Research suggest that allocation of public expenditure between basic and higher education is perhaps one of the top public policy factor’s that accounted for East Asia’s Extraordinary performance in the area of providing basic education. Low public funding of secondary education results in poorly qualified children from low-income backgrounds being forced into the private sector or entirely out of the education system. Research suggests that the share of public expenditure on education allocated to basic education has been consistently higher in East Asia than most other regions. By giving priority to expanding the primary and secondary bases of the education infrastructure, East Asian governments have stimulated the demand for higher education, while relying to a large extent on the private sector to satisfy the demand at the skills formation level. In most developing regions government have subsidized university education which has also benefited families with relatively high incomes that could afford to pay fees closer to the actual cost of the university education.
Vocational training
For most successful export economies the training provided jointly to upgrade the skills of their work force has been crucial since high-level skills are essential for manufacturing related activities. But while vocational training is widely recognized as important, such training is rarely cost –efficient when provided by the state systems. Most firms therefore prefer to do their own training, partly because many skills are company specific.
There is ample research to show that the return on the training investment is higher in industries that engage well-educated workers and also in environments where there is rapid technological change. Singapore’s use of training to promote the information technology sector through a concerted program that involved educational institutions, providing training subsidies to schools and office workers, and digitizing of the civil service, helped the country to achieve leadership in technology related services.
This success illustrates the importance of a government’s ability to foresee a major opportunity and then promote public-private partnership to invest in human capital formation. However, to make it a success, businesses must also stand ready to take advantages of the support the government is willing to provide to promote human capital formation. In addition, the state should ensure that they maintain the per student share, in real terms, of government funding education. (The writer is in director boards of leading companies)
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By Dinesh Weerakkody
