Developing human capital for economic growth

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To a layman, the relationship between education and economic growth is relatively straightforward. An educated population is a productive work force, and higher productivity equals higher economic gains. Therefore, a country should invest in education to develop its ‘human capital’ — the ability of a population to perform labor to produce economic value.

The esteemed American economist and winner of the 1992 Nobel Prize in Economic Science Gary S. Becker popularized the term. Mr. Becker theorized that an individual’s education can result in a payoff in terms of higher wages. Education, in a nutshell, is an investment.

“Education and training are the most important investments in human capital,” Mr. Becker wrote in his book Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education.

“Many studies have shown that high school and college education in the United States greatly raise a person’s income, even after netting out direct and indirect costs of schooling, and even after adjusting for the fact that people with more education tend to have higher IQs and better-educated and richer parents. Similar evidence is now available for many years from over a hundred countries with different cultures and economic systems.”

The earnings of more educated people, Mr. Becker added, are almost always well above average. The role of education in those countries less developed than the West is even more pronounced, as such gains are generally larger in these countries.

Private returns to schooling — what individuals receive in the labor market — have been increasing, according to an article published by the World Bank on its Web site in 2016. Returns are increasing by more than 20% in Africa and more than 14% in East Asia and the Pacific. Recently, the biggest changes have been the returns to tertiary education now being the highest.

The Asian Development Bank, which seeks to help develop nations in Asia to reduce poverty and improve quality of life, in a study published in 2010, proposed that developing Asia’s stock of human capital — in essence its well-educated work force — would be one of the critical factors in the region’s rapid economic development.

“There are several ways through which human capital — the ability and efficiency of people to transform raw materials and capital into goods and services — affects economic growth,” ADB wrote in A Survey on the Relationship between Education and Growth with Implications for Developing Asia.

“The accumulation of human capital improves labor productivity and increases the returns to capital. A well-educated workforce is also essential for the adoption and diffusion of technology to take place,” it added.

This is proven, ADB continued, by the region’s record in educational attainment over the past four decades. In 2010, its population aged 15 years and over had an average of 7.8 years of schooling, from just 4.1 years in 1970.

The relationship between technological and industrial progress, which continues to this day, and the educational requirements to adopt them play a part. Mr. Becker wrote that the continuing growth in per capita incomes of many countries all over the globe during the 19th and 20th centuries is partly due to the expansion of scientific and technical knowledge that raises the productivity of labor and other inputs in production.

“The increasing reliance of industry on sophisticated knowledge greatly enhances the value of education, technical schooling, on-the-job training, and other human capital,” he wrote.

“New technological advances clearly are of little value to countries that have very few skilled workers who know how to use them. Economic growth closely depends on the synergies between new knowledge and human capital, which is why large increases in education and training have accompanied major advances in technological knowledge in all countries that have achieved significant economic growth,” he added.

To note, economies in Asia like Japan and Taiwan have posted stellar growth records during these decades, countries that had lacked the natural resources and political power traditionally required for a competent economy. These countries have mostly built global economic powerhouses on the back of human capital alone.

“Lacking natural resources — they import almost all their energy, for example — and facing discrimination against their exports by the West, these so-called Asian tigers grew rapidly by relying on a well-trained, educated, hardworking, and conscientious labor force that makes excellent use of modern technologies,” Mr. Becker wrote.

According to the World Bank, one of the reasons for the growing returns on education is the race between technology and education, as labor markets adjust to automation.

“In this new world, the ability of workers to compete is handicapped by the poor performance of education systems in most developing countries.  Technological change and global competition demand the mastery of competencies and the acquisition of new skills for many,” the World Bank wrote.

To promote success in today’s labor market, a country needs to invest early and in the relevant skills. Most importantly, countries need to invest smartly by promoting attention to an education system’s autonomy, accountability, and assessment procedures.

“Education systems that do well prepare children early on, reform continuously, and use information for improvement and accountability,” the World Bank wrote.

“Education is truly one of the most powerful instruments for reducing poverty and inequality and it sets the foundation for sustained economic growth. Let’s start investing in it more.” — Bjorn Biel M. Beltran