The Role of School Education in the Economic Catch-up of Developing Economies: Yujiro Hayami Foundation for Advanced Studies on International Development A perspective from East Asia

2 Empirical studies of histories of advanced economies show: Accumulation of human capital (skill and knowledge embodied in humans) accounted for a dominant portion of modern economic growth A new paradigm = “Investment in human capital rather than in physical capital is the engine of economic growth.” catch up in education → economic catch-up 19 th century catch-up of Germany & USA with UK Compulsory elementary education system Agricultural/engineering colleges East Asian Economic Miracle

3 Three waves of globalization under Western hegemony: Monopoly trade/plunder of precious metals, natural resources & humans Free trade & foreign direct investment 1 st wave: late 15 th – early 19 th Century Merchant capitalism based on navigation/military technology 2 nd wave: late 19 th – early 20 th Century Industrial capitalism based on manufacturing technology Industrialization of West + Specialization in: Manufacture Primary (agriculture/ mining) De-industrialization of non-West 3 rd wave: late 20 th – Knowledge capitalism based on IT, life sciences, etc. Free trade & foreign direct investment De-industrialization of West + Industrialization of non-West

4 East Asian Economic Miracle ∥ success of Industrial technology borrowing ∥ Mass production of standardized products Mass education in schools workers capable to perform standardized tasks according to work schedules ● able to understand production manuals ● regimented to rules & schedules Scientists, engineers and managers who can translate foreign technologies into local production layouts Factory system: Division of labor within a workshop organized around large automatic machineries under the supervision of hierarchical management

5 International comparison of the average number of years of schooling, 2000 Average schooling (years) Increase in average schooling (years) (GY) (GE) GE = GY, (t=2.4) Ko Ch Is Th Ja In US Pe Ar Ke Fr UK Ba Et P Br Growth rate of GDP per capita, (% per year) E = lnY, (t=4.1) (Y)(Y) (E)(E) GDP per capita converted by exchange rate (US$) US Ja Ko UK Fr Ar Br Pe Th Ch Is In Ke Pa Ba Et r = 0.93 r = 0.55

6 a. Average number of years of schooling per person in the total working-age (15 to 64 years old) population. b. Labor is measured by total employment. Capital is measured by gross nonresidential fixed capital (excluding that for military use). GDP is measured in PPP 1990 US dollars. c. Data for Korea in the postwar period are for the Republic of Korea. Source: Godo (2004). The Japan/USA and Korea/USA ratios in average schooling, per-capita GDP, and capital-labor ratio

7 The experience of Japan and Korea is consistent with the consensus view that investment in school education is the key for developing economies to catch up with the advanced. However, it also implies that developing economies cannot expect quick harvesting of fruits from education. They must be prepared to endure the heavy burden of investment in education relative to their income level for many years before the stock of human capital together with physical capital reaches a sufficiently high level for rapid economic catch-up. It is still likely that education may prove to be the investment outlet of the highest economic return in the long run. Yet, the return might not be quite so attractive in the short run for political leaders in developing economies, relative to their high discount rates. The hard choices that policy makers have to make are: (1) What would be an optimum investment mix between human and physical capital? (2) What forms of education (such as primary versus higher-level education and general versus vocational education) should be given priority considering their different investment gestation periods? Implications