ODI Explains: Why Education Matters

Amongst several determinants of economic growth and development, capital plays a critical role. We can identify two broad types of capital important to any economy – physical capital and human capital. Physical capital comprises of buildings, machines, technical equipment and stock of raw materials; all of which are used in the production of goods and services. Alternatively, human capital is a term used to represent the collection of people’s knowledge, skills, abilities, and a gamut of productive attitudes. It is beneficial to the production process and valuable to those who own it. While it is important to acknowledge that all forms of capital have balancing roles, the importance of human capital over physical capital is especially worthy of note. One of the ways by which economists have emphasised the importance of human capital over physical capital is by comparing the distribution of income among those who own physical capital vis-à-vis those who own human capital.

Just as physical capital accumulation is important to the growth process of a country, so is its stock of human capital to the level, pace, and pattern of economic development. Why should a country be concerned about developing and accumulating its human capital?  Human capital development is required to meet the current and future production needs of a country as well as the global economy. Education, one of the main instruments for human capital development, facilitates development of human skills and knowledge of the labour force. Therefore, in other for a country to increase its human capital stock, there must be a quantitative expansion of its educational opportunities and qualitative improvements of its various educational processes. Thus, developing human capital through education and training, will influence labour participation, supply, and productivity, thereby increasing productive output in the economy.

In a similar way by which returns to investment in physical capital differ across social and geographical contexts, so does returns to investment in human capital (via education) varies from context to context. Souboutina identified a few such factors that tend to account for differential returns to investment in education. According to her, returns to education tends to be lower if: knowledge and skills transmitted through the educational system do not match market demands; education quality is low; labour demand is truncated because of growth slows.

Since the 1990s, the concept of a knowledge economy has gained recognition as a new stage in global economic development. This concept of the knowledge economy has been introduced to the development economics parlance, because economists have identified the supremacy of human capital in driving development and sustainable growth experiences. How did this recognition materialize? It was observed that countries which prioritize investment in knowledge creation and adaptation (through investment in research and development) as well as in knowledge dissemination (through investment in education and information communication technologies, ICTs) are most successful at tackling their development challenges. Accordingly, poor countries, with insufficient resources to invest in knowledge creation, could leapfrog in their development process if they succeed at absorbing advanced global knowledge and adapting it for the needs of their developing economies.

The pivotal role of human capital development (via education) in driving sustainable development across countries is flagged by global governance institutions.  As such, the fourth sustainable development goal, SDG-4 is to ensure inclusive and equitable quality education and promote lifelong learning opportunities for all. In addition, the following excerpts from the SDGs 2030 Blueprint, endorsed by UN member nations and their representatives, are indicative:

“WE envisage…a world with equitable and universal access to quality education at all levels.”

“Women and girls must enjoy equal access to quality education, …at all levels”

“We commit to providing inclusive and equitable quality education at all levels —early childhood, primary, secondary, tertiary, technical and vocational training.”

Having now established the importance of education, we need to be acquainted with the economic agents which bear the cost of human capital development and why they make such investments. All economic agents – households, firms, and governments – contribute to human capital development. Driven by its primary objective to promote social welfare, public spending on education is mostly towards providing free primary, free secondary, free vocational and subsidized tertiary education. Governments of developing countries with relatively low human capital profiles expend in order to achieve universal basic education because literacy tends to produce desirable social outcomes and a vibrant economy.

Households’ spending on education covers primary, secondary, technical, vocational and tertiary levels of education. These private investments of time and financial resources into education is driven primarily by prospects of higher future earnings and better quality of life.

Firms contribute to human capital development via on-the-job training they provide their employees. Some specific skills are best developed through training during employment. While employers may offer on-the-job training, they also provide high-quality pre-employment education geared towards spurring employees’ productivity. In addition, such education guarantees the individual’s ability to learn new skills throughout an occupational lifetime.  When relevant to firm’s goals and objectives employers finance training of employees in vocational schools. Public sector financing of vocational training is generally considered justified when employer training capacity is weak (as in the case with small and medium-sized firms) or absent (as with retraining for unemployed workers.

           

Let us now consider the importance of levels of education in turn. Primary education is designed to provide knowledge and skills required for future education. The knowledge and skills acquired during primary education tends to improve productivity, impact ability to learn new skills throughout a working life and reduce risks of unemployment; consequently, leading to welfare improvements for the poor. There are ample empirical studies which demonstrate that increased access of girls and women to primary education have resulted in healthier families, smaller household sizes and fewer infant deaths. According to conventional wisdom, basic education yields higher economic and social returns than other levels of study.

There are several issues with primary education attainment. For instance, even though the global goal is universal basic education (UBE), the achievement of UBE is subject to the constraint of public funds. As a result, in many developing countries, there are persisting urban-rural, rich-poor, and boy-girl inequities in primary school enrolment levels. In addition, provision of access to primary education does not imply that everyone benefits. There are poor out-of-school children who ‘must’ rather work than attend school. In countries with lower per capita incomes, where the incidence of child labour tends to be higher, provision of free access to education does not coincide with enrolment levels.

The most daunting impediment to secondary school enrolment is child labour. Amongst other things, child labour damages health, impedes development of social skills, decreases future earning power, and perpetuates the vicious cycle of poverty. While in high income countries enrolment is almost universal, for many developing countries secondary school enrolment is much lower than primary school enrolment. Primitive customs, early motherhood, limited employment opportunities for women, traditional expectation of girls’ larger contribution to household work are some of the factors that account for the persistent gender gap in secondary school enrolment.

At the tertiary level of education, the gap between developed and developing countries is wide with respect to both enrolment and quality. Since, higher education stimulates research and development (R&D), it has a positive effect on technological change and raises productivity. The quality of tertiary education therefore is significant for innovation, technological progress, and productivity.

It is pertinent to note that enrolment levels and expenditure on education are merely indicators of educational achievement and public commitment to human capital development respectively; they are not indicators of education quality. The World Economic Forum’s Human Capital Report has identified several measures of human capital across a number of sub-pillars. Indicators of access to education include: enrolment rates at the primary, secondary and tertiary levels as well as the education gender gap. The quality of education across countries has been measured by: quality of the education system, quality of primary schools, quality of math and science education, quality of management schools and internet access in schools.

What is the relationship between education and economic growth? Even though empirical studies have shown the importance of education to economic growth, it is pertinent to note that human capital investment alone is not sufficient to ensure sustained growth. It is imperative that investments in human capital be accompanied by appropriate and complementary development strategies for positive growth to be achieved and sustained. To increase the quality of education, there needs to be increases in expenditure on education, improvements in curriculum and pedagogy, as well as advances in the management of education. Countries can also leverage ICTs, internet access to bridge digital divide and gain access to innovations in information and knowledge.

Considering the high levels of illiteracy and rural underdevelopment in developing countries, education could be used as a vehicle for rural development. How can education contribute to rural development? Education could enhance agricultural and rural development if it is adapted and suited to the peculiarities of rural populations. As such, education for rural development besides just general education ought to be focused on vocational education, community development education, family improvement education and occupational education.

To sum up:  

•      Human capital is critical to a country’s level, rate, and pattern of economic development.

•      Investing in education builds a country’s human capital, moves it closer to a knowledge economy and improves its prospects for economic growth and higher living standards.

•      The stock and growth rate of human capital is a determinant of a country’s ability to produce and adopt technological innovations.

• Private benefits of education include access to income-generating opportunities, health-promoting attitudes, and far reaching personal satisfaction.

•      Primary education is the bedrock for returns that accrue to all other levels of education, hence the goal of universal basic education.

•      Deliberate policy and public funding commitments are required to improve the quantity and quality of education in any country.

•      Education can be a vehicle for accelerated rural development.

The discussion continues…

References

Souboutina, T. P. (2004). Beyond Economic Growth: An Introduction to Sustainable Development (2nd ed.). Washington, D.C.: The World Bank.

Todaro, M. P., & Smith, S. C. (2004). Economic Development (8th ed.). Delhi: Pearson Education Singapore.