The Hindu Business Line : Capitalising on human skills

HOW is economic development related to education policies? Before answering that let's try and conceptualise matters a bit. Let us go over the products and services we consume commensurate with our incomes. Our first needs are food and clothing. As our income rises, the list of our needs expands into products of entertainment and leisure such as radio and television and luxury goods such as cars and the like.

With an even higher income we begin to demand services such as banking, tourism, hospitality and tourism. Not surprising then that developed countries allocate a large part of their labour force to the services sector. Countries such as Australia, the United States, Norway and Sweden have about 70 per cent of their labour force in the services sector.

The high growth rate of the Newly Industrialising Countries (NICs) of East Asia — . Singapore, Hong Kong, South Korea and Taiwan — may be explained by the development of skills and quality education. This contrasts with the traditional view that `export is the engine of growth'.

For long economic growth in the developed countries has been attributed to the accumulation of both physical and human capital. The human inputs into economic processes can be divided into two groups: One with basic education providing `labour' and the other with knowledge, skills, competence and attributes complementary to the structural conditions of the country.

Human capital is a factor of production just like — but distinct from — physical capital and unskilled labour with basic education. And unlike basic education, development of human capital will depend on changes in technologies and current requirements.

In the global market, there is a strong demand for better product and service quality. Only a highly-skilled workforce can meet this demand.

In most developing countries, including India, there is a shortage of human capital and a surplus of labour resources.

It should also be remembered that unlike basic education, development of human capital is not a static phenomenon. As people's preferences change and as newer technologies develop, today's skills may become irrelevant tomorrow. In the Indian context, the Southern States have benefited immensely from their governments' indirect but effective institutional support for development of human capital. Governments in these States have encouraged private technical, medical and other professional education.

And they are reaping the benefits in the form of availability of efficient government services, spread of information on agriculture and resources pooling that facilitates easy participation in the formal credit market.

This corroborates the observation that primary education generates the highest rates of return; secondary level has lower returns while the tertiary level has higher returns than the secondary level.

For many years, now Tamil Nadu, Karnataka and Andhra Pradesh have been able to attract relatively large foreign investments thanks to their excellent mix of low labour costs and decent levels of productivity. Investors have shown a preference for States that have a well-developed infrastructure and are governed well. Other factors that determine a State's capacity to attract FDI are: availability of manpower, power supply, raw material, transportation facilities, appropriate incentives for industry, water supply, availability of finance and tax holidays and subsidies.

Foreign companies are now leveraging the clear advantage of a huge pool of English-speaking, computer literate and relatively low-cost college graduates as well as R&D, healthcare and software professionals.

Many States are adopting this model, though Gujarat, Maharashtra and Delhi, with a strong base of traditional manufacturing, follow a path similar to that of China. During the past 10 years these three States have been growing at the rate of the Asian `Tiger' economies in their better days.

In a globalised world, the future of India lies in effective government policies — direct, indirect as well as innovative. In the competitive market, what is true for today's advanced countries is also true for India. We cannot depend only on wage cost differentials, which can at best provide an initial foothold and a transient competitive advantage. The country has to compete through the quality of its human capital, its innovation and its research and development. Are all we ready for that?

(The authors are professors at the International Management Institute, New Delhi.)