Human capital – a neglected factor in development

by R.M.B Senanayake

Economists used to assume away the contribution of human capital to development by including human capital stock as an exogenous (outside) factor in economic theory. They concentrate more on additions to the stock of physical capital in the form of machinery, buildings, roads, ports, and power generation. While they incorporated investment in physical capital in economic models of growth, they paid inadequate attention to the formation of human capital and its role in development. But as economic growth became more and more due to technological change (inventions and innovations) they sought to find out how such technological change can be promoted as their contribution to development was clear and visible.

Recent economic growth is largely the result of new technologies such as the personal computer, the Internet, the shrinking in the size of the computer chip and the broad band revolution. Neo-classical economic theory had sought to understand economic development as an accumulation of factor inputs such as labor and physical capital. Robert Solow and Swan formulated an economic model of growth which included human capital. It recognized that technological progress contributes to economic growth. But it does not spell out why technological progress takes place. It treated technological progress itself as an exogenous factor.

As for the contribution of physical capital, it was pointed out that such capital as a stock declines owing to depreciation and obsolescence while the population increases. Hence the stock of physical capital per worker would fall. Also, according to the law of diminishing returns each additional unit of capital used by a worker would produce less and less increase in output. So the growth in output due to increases in capital is limited.   But output will grow dramatically if there is technological progress. What contributes to technological progress? They considered it as due to the body of knowledge of the natural and biological sciences. Technological progress takes place from the knowledge produced by the public science base in universities and technical research institutes. The tendency was to explain the increase in output as due to the application of labor to capital and the increase in output not due to the labor and capital as a residual growth, due to technological changes.

In the early stages of development it was sufficient to have a labor force which was literate. As manufacturing developed, proficiency in literacy alone was not sufficient. A secondary school education was needed along with special vocational and technical training and apprenticeship schemes which developed out of the old craft guilds to which skilled workers in the different occupations belonged. Empirical studies of countries and regions where there was technological progress showed that those regions with a higher level of tertiary education tend to have a larger concentration of information and communication technology sectors including the provision of ICT services and the manufacture of ICT devices and equipment. They also tended to produce more research.

Schooling and Training

Economists view schooling and training as an investment in skill and competences. It is argued that based on rational expectations of returns on investment, individuals make decisions on education and training as a way of increasing their productivity hoping thereby to receive higher remuneration for their labor. Studies have also been conducted on the interaction between the education and skill levels of the work force and the measurements of technological activity. According to this theory, a more educated and skilled workforce makes it easier for a firm to adopt and implement modern technologies, reinforcing the returns to education and training. Empirical studies have established the benefits of education and training. One third of the growth in the U.S economy not accounted for by the increase in hours of labor input and increase in the stock of capital has been attributed to the increase in the labor force’s educational attainments.

What is the situation in our country? We attained universal literacy fairly early in our stage of economic development. But if we are to benefit from industrialization which provides for a much faster growth in per capita income, then we need to have a work force which has completed secondary school education. We have a network of schools of varying standards. But except for a few they lack teachers and science laboratories. The politicization of recruitment of teachers has meant untrained and poorly educated teachers are in service. The quality of education depends a lot on the quality of teachers. The government is setting up science laboratories in several schools in rural areas. But unless it takes action to recruit qualified teachers in English, mathematics and science the required improvement in school education cannot take place.  Qualified teachers cannot be recruited over-night. There should be the right incentives in place to induce young people to take to these professions. Before 1956 the English teachers were paid more than the teachers in vernacular schools. But having made Sinhala the official language it was socially not possible to discriminate against vernacular teachers. But economics requires higher wages to be paid to those whose supply is short and requires long period of study and training. We have always had a shortage of science teachers and even in my school days there were Indian teachers for mathematics and science.

But there are other things too wrong in our secondary schools and universities. I must refer to an interesting lecture given by Professor Lakshman Jayatilake at a seminar of the OPA a few years back under the title "Educating for Promoting Innovation" I quote him "Education is popularly viewed as the facilitation of acquiring knowledge, skills and attitudes. However, for promoting ongoing improvement and creativity, education must promote an open mindedness that develops positive but critical thinking. We also need the ability to question, inquire, reflect, receive feedback and make corrections. Formal education usually happens in classrooms that should provide the environment for the dialogue, enable thinking, development of the mind and body, and communication. It should be a place where the students and teachers can bring in their experiences in the outside world to enrich the dialogue and thinking and apply the theories and also to learn about the limitations of theories. Another useful exercise should be ‘theory’ building from the known factors - induction and deduction capabilities".

Reform of education is often opposed by teachers. Unfortunately, instead of co-operating with the Authorities on how to reform education, the teachers’ trade unions and the FUTA (Federation of University Teachers) are concerned with the issue of free education. They oppose the setting up of fee levying private schools. So they are embroiled in conflict with the authorities on an issue where they cannot be the last word on the subject.

There is a need to spend more on education; but not on the present education provided in our schools and universities. They must be reformed first before more money is thrown at them. Teachers should insist on reforming education before demanding more money. If a system is designed to fail, then it is useless pouring more money into it without getting better services out of it. With luck the extra capacity being created by the government may increase the facilities in the schools and universities but without competition from the private sector the capacity will not produce the desired results Teachers think competition is a bad word. They are hung up on Karl Marx’s ‘commodity fetishism" ignoring the fact that they themselves would not work free like the teachers during the Medieval times when education was not a commodity but a free service to the community.

Government school education is also highly centralized. Schools have to refer every little decision to the authorities in Colombo. Efforts to give more autonomy to Provincial Councils have been stymied by the central government bureaucracy and politicians. There is little authority for the school principals or the university managements. There is no exposure of our students to international evaluating agencies to know how we fare vis- a-vis the rest of the world. The deployment of teachers in schools is such that the weakest and the most remote schools get the least experienced and worst teachers. Until politicians tackle these problems parents have to push hard from below.

Improving matters means ditching the outdated notion that education happens first and employment later says Mackinsey researchers. Educators need to get employers involved in course design, teaching and assessment. Switzerland offers career advice and work experience to pupils as young as 12. The government must also address the worry of parents that they would not be able to afford education where private schools provide a superior education. It is necessary to overhaul the whole basis of allocation of funds to schools. It should be based on a per capita or per student basis for normal government schools with special funding only for the development of backward schools. The money should follow the student and if the student enrolls himself in a private school the per capita fee should be transferred to the private school. This requires a scheme of vouchers as increasingly adopted in parts of India.
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