Irrefutable correlations: Economic growth and the education system

Canute Thompson

Sunday, September 02, 2018

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In an article published on August 19, 2018, entitled 'Macroeconomic stability, productivity, and the education system' I argued that in order for Jamaica to make the best use of the macroeconomic stability it has been experiencing for the last five years, it has to focus on productivity.

I suggested further that increasing productivity requires a new culture (one that sees productivity as a way of life) and a revamping of our education system. This revamped education system would, among other things, have the following features:

(a) More focused research by the universities, which will lean towards informing and supporting production and productivity pursuits;

(b) Repositioning teachers' colleges so that their faculties are more capable of training teachers to facilitate students' creativity (which is the heart of innovation); and

(c) Expansion, and more strategic deployment, of community colleges in training young graduates in key skills areas to serve the developmental needs of a diverse global, service-driven, economy.

One of the points I did not make explicitly is that in my conception of the partitioning of the tertiary education sector, not every tertiary institution must seek, or (in the case of publicly owned entities) be allowed to become a university. This position is not to suggest that we should not have an abundance of universities, rather it is to suggest that tertiary institutions should be fit for purpose, and public resources should be deployed to enable them to serve their strategically defined purposes.

In this regard I lamented the fact that despite an exponential increase in the number of tertiary graduates over the last 40 years, Jamaica has experienced declines in both multifactor productivity and labour productivity. The concern over the fact that the increase in the number of university graduates has not had an impact on economic growth is not an argument against universities but an argument for fit for purpose.

Educational attainment and economic growth

I contend that the lack of growth in the Jamaican economy (in the 40 plus years since secondary and tertiary education was opened up to the masses, thanks to the educational policies of the 1970s), is largely attributable to fundamental weaknesses in our education system. Ours is not an education system which promotes creativity, self-reliance, collaboration, and the value of owning one's business. On the contrary, the system stifles creativity, supports dependence (rather than interdependence), glorifies self-defeating competition rather than collaboration, and praises getting a job rather than creating one.

Some readers of the August 19, 2018 article raised questions and comments about the logic of my juxtaposition of lack of economic growth and declining productivity, on the one hand, with deficiencies in the education system on the other. One reader asked: “Should an increase in university enrolment and graduation rates automatically imply an increase in a country's productivity?” Another reader suggested that I had failed to show a correlation between economic growth and educational attainment.

Wan-hua Ma, in a 2003 article entitled 'Economic reform and higher education in China', traces the parallel developments of the Chinese economy and the tertiary education system. Wan-hua notes that 1976 marked a turning point in China's political, economic, and higher education philosophies. With respect to its political and economic philosophies, China shifted focus from privatisation of enterprises to the creation of new enterprises, and from promoting property rights to promoting market competition.

In relation to its higher education philosophy the developments were phenomenal. In 1976 there were 392 higher education institutions in China; in 1985, the total number grew to 1,010. In addition, a number of existing colleges and universities were upgraded. According to Wan-hua, in 1977 there was only one institute in economics and finance; in 1987 there were 74.

In the areas of politics and law the number of higher education institutions moved from one in 1977 to 25 by 1987. The number of higher education institutions in China has increased by over six and a half times (6.6 times) in the 40-year period between 1976 and 2016, from 392 in 1976 to a whopping 2,596 as at 2016.

With that phenomenal level of expansion in his education system, Wan-hua cites many examples of the impact on Chinese society and economy. He notes, for example, that China has been able to not only solve its local food shortage but also attain the status of feeding 22 per cent of the world's population with less than seven per cent of the world's farmlands. He notes further that some 10 years after the reform of its higher education system in 1976, annual GDP growth in China was 11.8 per cent in 1988. In 1993 the annual growth rate peaked at 13.4 per cent, but fell sharply to 9.0 per cent in 1997 and fell further to 7.8 per cent in 2002.

In the quarter of a century between 1977 and 2002, China has experienced annual average GDP growth of 9.4 per cent. Though its growth has slowed considerably since, falling by about 50 per cent, China continues to be the fastest-growing economy with its 2017 rate of growth being 6.8 per cent and projected to be 6.4 per cent in 2018.

Mi Zhou and Louis Vaccaro, in a paper entitled 'Strengthening the relationship between higher education and regional economic development', point to the correlation between education and economic development, noting that the essence of the relationship between the Chinese economy and its education system is that the latter prepares research personnel, business leaders, and entrepreneurs; provides small business support, invents cutting edge technologies and business development innovations; develops new products and services; and provides investment assistance.

Downsides to growth in the number of tertiary graduates?

The exponential growth in the number of higher educational institutions in China has not been without its actual and perceived negative consequences. The growth has seen the graduate population move from 12.3 million 2000 to 34.6 million in 2013, thus making China an exceptional example of increasing access for students to higher education, according to William Morgan and Bin Wu of the China Policy Institute, University of Nottingham, in a December 2014 blog.

But one of the consequences of this exponential growth, according to Morgan and Bin, is that the supply of graduates is likely to exceed labour market demand. On the other hand, Wei Chi, Richard Freeman, and Hongbin Li, in an article entitled 'Education attainment and the labour market in China, 1989-2013', contend that China's labour market has shown amazing flexibility in responding to the changes in the demand and supply factors of graduates. This, they attribute in part to continued rapid growth of China's economy and a high rate of employee turnover.

Thus, the answer to the concern of some Jamaicans that there is not enough jobs for university graduates is that not only is it the obligation of university graduates to create, rather than seek to get jobs, but also that there are countless opportunities to create and get jobs across the globe.

Services: The expanding frontier in economic growth

Jamaica's trade deficit in 2017 was US$4.38 billion. A country's trade deficit is the difference between the total value of its imports and its export. This statistic means that Jamaica imported US $4.38 billion worth of goods and services more than that it exported. This figure of US$4.38 billion is also the average (mean) of the 10-year period 2008 – 2017. During this period of there were four years during which the deficit fell below the US$4-billion mark and five in which it was in the US$4-billion range (US$4.4 to US$4.82). On one occasion (2008) it entered the $6 billion territory at US$6.03 billion.

As long as Jamaica continues to produce low levels of GDP growth (which has averaged about one per cent for the last 40 years) while at the same time importing so much more than we export, the majority of our people will experience a diminished quality of life. The solution to this back-straining trade deficit is the expansion of the service sector. But I do not use that expression in the lousy and everyday way in which we have grown accustomed to using it.

Very often when the term “service sector” is used some people think of barbers, waiters, drivers, cooks, and technicians, and many wonder how can the services of these professions be the drivers of economic growth. The Groningen Growth and Development Centre in the Netherlands has found that the top five intermediate global services in highest demand are transport, storage and communication, financial, real estate, and business services.

Adilson Giovanini and Marcelo Arend (2017) of the University of Brazil articulate the depth and complexity of a value added service sector in developed economies, and its relationship to higher education. They note that developed economies manufacture increasingly more sophisticated products that require increased amount of knowledge. In this context, industrial sector productivity growth is characterised by its diversification, which includes low technological intensity products to higher-level, more complex products — and at each stage increasing volumes of knowledge are required.

Let's use a local example. When a craft vendor shapes a piece of wood into a doll using a carving knife, he or she is applying a certain level of knowledge to add value to a primary product. But the same tree that is used to make a wooden doll can be used to make various forms of writing paper; however the process of transformation requires a more advanced level of knowledge — from the farming process of tree planting, to cutting, transportation to the factory, and the chemical engineering process of turning the wood into pulp and the pulp into paper. It is in these respects that service becomes the frontier of economic development.

But the said craft vendor could become a more astute, efficient and economically prosperous craft entrepreneur by drawing on a higher level of knowledge and manufacturing dozens or hundreds of wooden dolls per day — no longer only in Fern Gully but in some sort of Silicon Valley where exotic dolls which look a certain way are in demand.

Leveraging human capital

It is not without profound significance that among the top five most productive countries — Luxembourg, Norway, Switzerland, Denmark, and Iceland — are two of the countries which are most effective in leveraging human capital — namely Norway and Switzerland which rank at number 2 and 3 respectively on the Human Capital Leveraging Index. The other three countries in the top five of are Finland at # 1, and Canada and Japan at positions 4 and 5, respectively.

It is equally instructive that the length of the work week in the top four most productive countries is 29.75 hours, with Norway, which is # 2 on the list of most productive countries, having a 27-hour work week. The number 5 on the list, Norway, is an outlier at 48 hours, including maximum allowed overtime. This fact confirms a basic concept of productivity, that it is output per hour which counts, not the number of hours one spends at work.

The Economic Growth Council

Lee Chin's Economic Growth Council, which cannot be credited with Jamaica's 1.8 per cent growth for the April to June quarter of 2018, would do well to seek to examine how the countries discussed above are achieving real economic growth.

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