‘Education, education, education’: A possible exception to the Blairite rule

People believe that educational investment is critical to economic growth, and this is why governments allocate billions of dollars to human capital development, and why former British Prime Minister Tony Blair once chanted “education, education, education”. However, timing is of the essence: investing in education too soon risks generating a workforce whose educational qualifications exceed the local demand, causing emigration to countries where there is sufficient demand, thereby leading to a brain drain.

The standard model of economic growth identifies economic output as a product of three inputs: labor, capital (machines, equipment), and technology. It also predicts that emerging economies with abundant unskilled labor and limited capital will grow faster than developed countries. Many studies find evidence that supports this claim, with China and South Korea’s rapid postwar growth being notable illustrations.

In the 1960s, South Korea’s economy was based on agriculture, but its growth over the ensuing 60 years was so large that it has now become the world’s 11th largest economy. Economists argue that the key to this transformation was the adoption of policies designed to open the country to foreign markets, specifically the government’s decision to build a strong business environment to attract foreign investment, thereby increasing the capital base. Improving education was not part of the initial growth strategy, and it was only later in South Korea’s development that policymakers shifted their focus to the education-related domains of technological development and innovation.

China is another example of an emerging economy that, in the interests of promoting economic growth, invested in early capital accumulation instead of education, and focused on market-oriented reforms. During 1979-1994, when the effects of this policy began to materialize, the capital stock rose by 7%, raising productivity growth to 3.9%, compared to 1.1% during 1953-1978. In contrast, productivity growth in the US during 1979-1994 was a mere 0.4%.

In both China and South Korea, education played a negligible role in promoting productivity growth early in the development process, and the main causes of economic growth were economic reforms and investment in physical capital, including inward foreign direct investment. Thus, these countries achieved enviable growth for decades by first investing in factories and machines rather than schools and universities.

In contrast, in many Middle Eastern countries, Owing to the abundant natural resource income, there has been a strong emphasis on educational investments prior to the creation of a large capital base. The result has been growth in services, but a weak manufacturing sector, and the experience of China, South Korea, and other developing countries suggests that this sequencing may be suboptimal.

In particular, investing in education becomes a priority when basic industries evolve into more sophisticated ones and service sector growth begins to accelerate. In order to sustain the transition to industry of the latter kind, investment in education to the tertiary level must be made so as to create a suitably-qualified workforce. In this regard, heavy investments in education that precede upgrades to the physical capital base can be counterproductive.

Typically, mistimed over-investment causes either emigration or political instability. An example is provided by the case of the Egyptian Nobel prize winner Ahmed Zowel, who moved to the U.S for want of opportunities matching his education in his homeland.

Another example, migration of India to the US has increased by approximately 85% in the last 10 years. Sarthi Acharya, an economist once said that “best-trained minds don’t stay in the country, they go abroad.” 2% of the richest individuals moved abroad only in 2020. Owing to many reasons but mainly because they are looking for greater opportunities which India lacks. This represents a serious loss to emerging economies.

Notably, the claim that educational investments should be delayed is not equivalent to claiming that they yield zero returns. Improving the labor force’s skills does contribute positively to economic growth; however, the size of the effect depends on which stage of development the economy is in. Given the limited resources available for investment, policymakers must be judicious when deciding how much to allocate to education versus alternatives, most notably physical capital investment.

Therefore, in 2022, upon further reflection, Tony Blair may need to revise his famous chant to “physical capital, education, education.”

*Master’s degree in Electrical Engineering from the University of London

Twitter Account @Woroudaldossari