Education and growth

A recent paper by Hanushek and Woessmann titled 'Poor student learning explains the Latin American growth puzzle' looks at why Latin America has performed badly, despite good educational levels. The answer lies in the quality of schooling and improvement in cognitive skills. They have put up an interesting graph linking skills to growth and not surprisingly Asia come out at the top, with Latin America and Sub-Saharan Africa at the bottom of the line.

Though this graph puts Asia at the very top, for us in India, the need for education reform and raising skills is well known. I had written a piece in the Financial Express last month, excerpts below:

As the accompanying table shows, in India unemployment is largely a problem of the youth. Experience counts more than education as labour stays in low skill jobs, learning as they go along. Just 2% of population in the age group 20-24 has had vocational training, while this percentage is more than 50% in developed countries, even Mexico and Peru are higher than India at 28% and 17% respectively. This shows up in a severe productivity problem, with low incomes for the earners, while industry faces a shortage of skilled labour.

	Unemployment rates (%) for various age groups using Usual Principal Activity Status
		Age Group
Educational Level	15-20 years	21-25 years	26-30 years
Not literate	3.1	1.3	0.5
Literate w/o formal school	6.0	1.6	1.6
Total Literacy Campaign	4.5	1.8	1.6
Others	7.6	4.0	2.4
Literate below primary	4.7	2.5	1.2
Primary	6.5	2.2	1.2
Middle	9.0	5.6	2.6
Secondary	18.9	11.2	5.1
Higher Secondary	30.8	17.3	6.2
Diploma/Certificate course	36.6	27.5	16.1
Graduate	-	31.7	12.4
Postgraduate and above	-	35.8	15.4
Total	8.7	8.1	3.5
Source: Indicus Analytics estimates from NSSO 61st round, 2004-05

As the India Labour Report 2008 pointed out, a three strand approach is needed in India:

The first strand, employment reform (to match labour supply to demand) should include changing labour laws to simplify definitions, compliance etc, that currently hinder expansion of organized employment, converting Employment Exchanges into Career Centers that offer assessment, counseling, apprenticeships, jobs and certifications etc.

The second strand is employability reform, which has already begun, to some extent, with the National Skill Development Policy 2008 and the PPP model for ITIs. Much more needs to be done though, e.g the NREGA could be used for providing apprenticeships and funding skill development.

The third strand in the strategy would be to prepare the supply for demand – education reform – which requires a policy shift from accreditation and regulation of capacity to measuring and publicizing outcomes and quality. Government financing has to be separated from delivery, which can be done through a broad based voucher programme. The list of change would include greater autonomy and governance reform in institutions, creating a performance management system for government school teachers with rewards and punishments for attendance and learning outcomes, creating a National Qualification Framework to allow two-way fungibility between vocational, college and school education with appropriate transfer of credits etc.

All this may seem a tall order, but without it, the country is destined to plod along slowly, developing internal fissures that may be beyond repair.

Changes in policy thinking forced by the crisis

Martin Redrado, Governor of the Central Bank of Argentina spoke on 'Where is global finance heading?Status of the international monetary system and the stake of emerging economies'.

Some interesting points made by him :

* For the first time in recent decades, the emerging world is not at the epicenter of a financial crisis. We, developing economies, were “learners of first resort” that financial stability is a prominent goal for central banks. And, what is most important on the way forward, we are meant to be both the engine of the world economy but also to share the driver’s seat, which is a bigger role that comes with bigger responsibilities.

* Latin America is also playing a growing role in the world economy by being a factor of stability as opposed to what happened in other times in history. Definitely, the region has been better prepared to face this crisis both when comparing with history and with the way other emerging markets are being affected.

* Speaking about financial stability, in my opinion, one of the key structural changes in economic policy is that financial stability is now ranking higher on every central bank goals worldwide. ... ..

* In this regard, the economic literature is lagging behind. If the relationship between economic theory and policy recommendations is reasonably well defined during “normal” times, in times of turmoil, this relationship becomes much weaker. We have reached a point in which economic theory is having a hard time keeping up with praxis. Literature has shown results that are ambiguous or contrary to those produced by the usual “technology”, especially in relation to the approach that relies on the interest rate as the single instrument. Same applies to managed floating exchange rate regimes. Recent empirical papers that refined the analysis started by several academics argue against sharp fluctuations in the domestic currency. Instead, mitigating excessive volatility, especially in developing countries with rather shallow capital markets and limited access to hedging, seems to be an appropriate policy.

This kind of monetary and financial framework that ensures systemic stability has been my main task during the last years. This means giving priority to avoiding "the next crisis" and building buffers to minimize the effects of disruptions. In my country, the decades of macroeconomic instability and recurrent crises were not harmless in terms of welfare.