East Asia’s human capital key to continuing growth

Authors: Emmanuel Jimenez and Elizabeth M. King, World Bank

Economists don’t always get things right. In the late 1950s Gunnar Myrdal predicted that Burma and the Philippines were the two Asian countries most likely to inherit the mantle of rapid growth in the Asian region.

South Korea, by contrast, failed to make Myrdal’s list.

This inaccurate prediction, which many shared, was based partly on the fact that the Philippines and Burma (now Myanmar) accumulated more human capital than other countries in the region. In 1960, the secondary school enrolment rate in the Philippines was 26 per cent — higher than that of Malaysia and Hong Kong and, in fact, higher than that of Portugal and Spain. At 10 per cent, secondary school enrolment rate in the poorer parts of Burma was much lower, but still exceeded the rates of countries that are now significantly richer, such as Indonesia and Thailand.

In the decades since, some East Asian economies have seen sustained growth, especially between the early 1960s and 1990s. The growth of the so-called East Asian Tigers — Hong Kong SAR (China), Singapore, South Korea and Taiwan (China) — was built on astute investments in schooling and training and enhanced by a demographic dividend made possible through falling fertility rates. The demographic dividend meant that when young people became workers they not only had more schooling but they also had fewer dependents to support.

But are the gains from demographic change likely to persist in the future? The demographic window of opportunity does not last forever and, in fact, middle-age bulge is rapidly becoming an old-age spread in the region’s more advanced countries, such as Japan.

In East Asia the demographic shift from a region that reaps the gains of a demographic dividend to one that will have increasing numbers of old age dependents is arriving sooner than some may have expected. In China, Korea, Malaysia and Thailand dependency rates will continue to decline for the next few years. But as the population ages, in the next 10 or 20 years these rates will increase again.

The ‘tiger cubs’ — Indonesia, Malaysia, the Philippines and Thailand — are well placed to emulate the Asian tigers. But if they are to avoid a possible middle-income trap, they must adjust to dramatic demographic shifts and ensure that education systems deliver the skills needed to boost productivity and meet the needs of a changing global economy.

Raising productivity in these emerging economies will require a vigorous response from the education systems. Yet the track record of these systems is mixed. Enrolments have certainly expanded, as in case of the early years of Korean development. In 1950, about half of the population in the Asian tigers had no schooling; by 2010 this fraction had shrunk to less than one-tenth. In 1950, one-tenth had secondary education, increasing to nearly half of the population by 2010.

But Asia’s track record on quality has been much more mixed. Indonesian and Thai students’ performance in standardised tests like PISA lags behind that of those in more advanced Asian countries.

People with skills will be productively deployed only if the labour market values their skills and they can find the ‘right’ job. In the Asian ‘cubs’ youth unemployment rates and employers’ views indicate that people may not be finding the right jobs. Recent surveys suggest that despite the growing number of more educated young people, a significant proportion of firms operating in Asia perceive skills as a significant obstacle in their growth.

Higher education will be a key provider of skills in the future, including technological and managerial knowledge that could spur the type of innovation that can drive growth. But East Asia’s tertiary education enrolment rate is low relative to that in OECD countries that might serve as role models. Universities are not providing the innovative research needed to power the transition of the East Asian ‘cubs’ to high-income status, and skill gaps point to shortfalls in the quality of higher education.

There are other important issues that require further study if they are to inform policies designed to sustain economic progress. These include: matching the skills being acquired today with those that will be needed in tomorrow’s global markets; stimulating demand for human capital formation among excluded groups; providing second-chance learning opportunities; reforming higher education; and facilitating the movement of educated labour to where it can be used most productively.

The message for East Asian ‘cubs’ is decidedly mixed. The policy directions to avoid missteps on the road to sustained growth are well known and widely accepted, as is the fact that implementing them poses significant challenges. Focusing on improving the quality of education rather than just expanding quantity is one of these well-rehearsed policy solutions — but it is by no means out-dated nor is it the only one.

Emmanuel Jimenez is the Director, Public Sector Evaluations at the Independent Evaluation Group, World Bank Group and Elizabeth M. King is the Director of Education of the World Bank. This article is a digest of a paper presented to the Thirty-Fifth Pacific Trade and Development Conference in Vancouver in June 2012.

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