Huge investment in education is a precondition for economic take-off

It is an article of faith among some of our development aficionados that there was a time a few years after independence, that we were on par, regarding development, with countries that latterly became known as Asian Tigers.

Not quite. In 1970, South Korea’s income per person measured in real purchasing power (i.e. inflation adjusted) was one third higher, Thailand was 40 per cent higher, Malaysia’s was double and Singapore’s was three-and-a-half times higher than ours.

For over the next four decades, Thailand’s income per person increased five-fold, Malaysia’s increased six times, Singapore’s increased 11 times and South Korea’s 14 fold.

DIVERGENT PATHS
Ours increased by 10 per cent, which, over four decades, is virtual stagnation. Thus, by 2010, Thailand’s income per person was six times ours, Malaysia’s 10 times, South Korea’s 17 times and Singapore a mouth-gaping 36 times ours.

Thus, looked at with hindsight, the contention that we were on par seems to have merit.

To put the issue in perspective, think of two wazees, Kamau, the father of Wairimu, and Kioko, the father of Mwikali, who earned the equivalent of Sh7,500 and Sh10,000 per month, respectively, in their youth. Kamau and Kioko are retired.

Wairimu is doing marginally better than her father, earning Sh8,250 per month. Mwikali, on the other hand, has done pretty well for herself, earning Sh170,000 a month. That is Kenya and South Korea.

What would make countries follow such divergent paths? More importantly, what stops the laggards from copying the transformers?

As Robert Lucas, 1995 economics Nobel laureate, put it: “The consequences for human welfare involved in questions like this is simply staggering: Once one starts thinking about them, it is hard to think about anything else.”

ECONOMIC GROWTH
Until the mid-80s, we did not have a satisfactory explanation. Economic theory was only able to explain about a third of the difference in income between countries.

It would be like saying Mwikali earned a lot more because she works in a factory while Wairimu is a casual labourer on a farm. In effect, Mwikali is more productive because she has a lot more capital to work with.

This is plausible up to some point — it is why educated people from poor countries migrate to the West to make more money doing lowly regarded jobs .

The income per worker is higher there because the economy has more capital.

But differences in capital per worker only explained one third of the productivity, that is, it can account for Mwikali earning Sh60,000, leaving a difference of Sh100,000 unaccounted for.

Economists Robert Lucas and Paul Romer independently developed economic models that could explain “economic miracles”.

It is not that economists did not understand economic growth — they knew all along that technological progress was the key driver of economic growth.

INCREASED PRODUCTIVITY
The problem was to explain why some countries took off and others did not.

Some people argued it was export orientation, others it was due to market-friendly policies, yet others maintained that it was because of state interventions, but none of these variables survived rigorous testing. The key to economic miracles turns out to be remarkably obvious — knowledge.

To fix ideas, think of several village economies that till land with hand hoes, which then suddenly discover ox-ploughs.

Productivity will rise as people adopt ox-ploughing. But to adopt ox-ploughing, resources will have to be diverted from tilling the land to making of ploughs and enough oxen have to be reared for all the farmers.

The wealth of the different villages will depend on how much they are prepared to save and invest. It will be apparent to any visitor that the wealth of each village is proportional to the percentage of farmers using ox-ploughs.

Once all farmers have adopted ox-ploughs, productivity growth will stop, until tractors are discovered and another growth trajectory will follow until all farmers have adopted tractors and so on.

TECHNOLOGICAL PROGRESS
Now consider that ox-ploughs are not the ones that have been discovered but a different method of crop husbandry, for example, that planting seeds in rows deep in the soil, instead of broadcasting them, gives double the yield.

This knowledge can be adopted by all the farmers as soon as it is demonstrated to work. No saving or investment is required, just changing how to do things.

The discovery can be adopted by all the farmers next season, doubling output.

Unlike our previous visitor who observes that wealthier villages have more capital — ploughs and oxen — a regular visitor to the village who comes after the harvest will find double the grain in the granaries compared to previous harvest periods, but she will not see how this came about.

You can now see why economists could not explain technological progress. Knowledge, which economists call human capital, is not observable.

Robert Lucas has a remarkable example of this.

EDUCATION, GROWTH
During the Second World War, 14 US shipyards were commissioned to produce a cargo vessel called the Liberty Ship. The yards produced close to 2,500 over three years, from 1942 to 1944, using exactly the same blueprint.

At the beginning, it took on average 1.2 million man hours to produce one ship. This falls steadily with every ship. In two years, it was down to half-a-million man hours.

No investment was involved. The workers got better by, as Lucas calls it, “learning-by-doing”— experience.

The link between knowledge and economic miracles is education. The more educated a workforce is, the more it is able to absorb knowledge and translate it into economic growth.

Simply put, education is the engine of economic growth, and in many ways, of development.

We can now revisit the contention of our parity with Asian Tigers. Recall that in 1970, South Korea’s income per person was only 30 per cent higher than ours.

Well in 1970, our workforce had on average 2.2 years of education per worker. South Korea’s workforce had 6.2, Singapore’s 5.2, Malaysia 4.2 and Thailand 2.5.

The only country we can claim some parity is Thailand. The other three had between two and three times the human capital. We only reached South Korea’s 1970 level of six years per worker around 2005, by which time South Korea had increased its level to 12 years per worker.

ECONOMIC TAKE-OFF
You will notice that the pecking order of the Asian Tigers’ growth mirrors their initial human capital stock.

South Korea was the highest at six years, and its 14-fold income growth also the highest. was Singapore second with five years and 11-fold growth, and Malaysia third with four years and its income has grown six-fold.

Thailand’s five-fold growth is the lowest as is its initial human capital at 2.5 years. There is no other factor for which such a strong readily apparent correlation with economic growth.

A huge investment in education is a precondition for economic take-off. No ifs, no buts.

In my last column, I narrated the Easter Island tragedy, of a society whose leaders diverted its resources from productivity to monument building and perished.

A number of commentators took issue with my comment on unwillingness to pay teachers while we had no qualms borrowing 20 times that money to build the standard gauge railway.

They took it to mean that I was comparing the railway with Easter Island monuments, their contention being that the railway is a productive infrastructure investment, not a monument. They misunderstood the analogy.

ENGINEERING INGENUITY
It is not the statues that depleted the Easter Island forests — the statues were made of stone. It is the infrastructure to transport them, which, incidentally, were very similar to railways, that consumed the forests.

The statues were status goods, the equivalent of the big cars and palaces for which we are building the railway (this is how clever students fail examinations they thought were easy!).

Mesmerised by their great feats of artistic and engineering ingenuity, Easter Island’s leaders did not realise they were squandering their natural and human capital.

It is noteworthy that none of these critics found the observation that our maize production had only increased by a third in a decade, while cement production has increased threefold, something to worry about.

Can we afford to pay the teachers? I have written about the Jubilee administration lying about the public wage bill in the past, a contention it did not challenge. It is doing so again.

There is no point debating lies. Let us do the math. Our tax revenue is in the order of Sh1.2 trillion.

We can afford to borrow between 3 and 4 per cent of GDP sustainably, which is about Sh250 billion presently, and we can count on about Sh50 billion in grants from donors. This gives us a budget of Sh1.5 trillion.

DEVELOPMENT EXPENDITURE
As an economist, I would be happy to spend Sh500 billion on salaries, use Sh600 billion on other recurrent expenditure and Sh400 billion on capital.

The terminology we use, which we equate “capital” with “development” is wrong. As I have demonstrated, education is the most important development expenditure and most of it is recurrent.

We need 350,000 teachers (we have 280,000), 50,000 health workers (we have 35,000), 100,000 security personnel and 50,000 other public servants — 550,000 in total. If we spent Sh500 billion on 550,000 public servants, the average pay works out to be Sh75,000 per month.

The average public pay in 2014 as published in the Economic Survey was civil service Sh40,000 per month, teachers Sh43,000, county governments Sh51,000 and parastatals, Sh68,000.

We should be able to afford more and better paid teachers, as well as doctors, nurses and security personnel. So why is the Government whining and lying? Under Jubilee, our debt service has nearly doubled, from Sh186 billion in 2012 to Sh340 billion last year.

The cost of foreign debt more than doubled last year, from Sh45 billion to Sh98 billion on account of the Eurobond and other expensive, mostly Chinese loans — infrastructure mania.

A leadership that thinks that railways and laptops are more important than teachers is no different from Easter Island chiefs.

The writer is Managing Director, Africa Economics. ([email protected])