The Hindu Business Line : Improving human capital

Instead of lamenting the negative consequences of quotas, industry captains must plough back some of their wealth to endow engineering and medical colleges so that students from poorer sections can study without forking out absurdly high fees.

Since the likely economic consequences of quotas for the labour market are substantial, it is worth highlighting some of them.

One reason employers prefer to employ graduates of the IIMs, the IITs, the ISIs and the IISc is that they have entered the institutions after a rigorous screening process. A graduate from such an institute signals high quality. If the rigorous admissions criteria were to be watered down, then the immediate signal to the job market would be of a lower quality average entrant. This would devalue the intrinsic worth of all graduates, en bloc, and have a large negative economic impact on the lifetime earnings of the graduates.

Adverse consequences

A second labour market problem is the creation of the problem of adverse selection. Since reservations could lower the average quality of graduates, a potential employer would feel justified in offering lower emoluments.

A potential employer could obtain someone of very superior ability at those lowered emoluments. The marginal benefits so generated would then possibly offset the marginal costs associated with employing someone of considerably lower intrinsic abilities but paid as much.

This phenomenon would lower the average emoluments across the board . A rapidly downward shifting wage curve would depress income generation in the economy and reduce the motivation among the youth for obtaining higher education. In a review of a 2003 book The Anatomy of Racial Inequality written by distinguished African-American economist, Mr Glenn Loury, legal scholar at the University of Chicago, Mr Richard Epstein, highlights several job market phenomena associated with quotas and affirmative action.

An economic consequence of quotas relates to employment protection. In the US, Title VII of the Civil Rights Act of 1964 legislates against race-based discrimination in employment and conditions of employment. If the quota beneficiaries were to receive protection against loss of employment, then employers would be reluctant to employ such candidates, unless mandated by law, for fear of litigation by those discharged. If they were required to by legislative mandate, then a second consequence, described below, would be felt.

Stereotyping problem

The labour market consequence of a quota regime is stereotyping. Employers will start out with a belief that quota candidates are likely to be less effective than their peers. The employers will attempt to eliminate these candidates, by raising implicit standards of performance for them, relative to others, and even minor shortfalls will not be tolerated. Obviously, these candidates will feel that they are under continuous scrutiny and thus not expend energies to meet performance standards that they perceive as draconian and unfair. The consequence is a self-fulfilling prophecy creating substantial agency problems.

Quota candidates will have a low success rate, thus confirming the initial assumption about lesser capabilities. This was the experience of many professionals who immigrated to the UK after Independence.

How do employers handle these critical conundrums? Economic history is replete with accounts of entrepreneurs using their wealth for programmes of far-reaching social import. A business helps transform its social context; it not only does good deeds but also assures itself of its own longevity.

For example, men like Andrew Carnegie, a penniless Scots immigrant, who created the US' modern steel industry and was one of the world's richest men. Andrew Carnegie gave away the bulk of his wealth to education and peace efforts.

While his US Steel Corporation may be a mere shadow of its former self, Carnegie-Mellon University and the Carnegie Endowment for International Peace are respected institutions.

Social conundrums

The wealth of Henry Ford and the Rockefeller families too was distributed for social causes via the Ford and Rockefeller Foundations. The Ford and Rockefeller Foundations financially and organisationally supported the Green Revolution in India and around the world.

These are but two examples in the US where corporate wealth was used for the benefit of society. In a country where the average annual college tuition fees can be $40,000, Cooper Union, which is a private engineering college in New York City, charges no tuition fees. The endowment that created it provides fee subvention for all students. This is an immeasurable benefit for a poor but qualified applicant, who can enjoy the highest quality education that money can buy.

In the last decade, a new institute called the Olin School of Engineering was set up in Boston, with an initial endowment of $250-350 million, to provide world-class free engineering education to students meeting the merit-based admission criteria. Instead of lamenting about the negative consequences of quotas and the non-availability of quality staff, should not India's industry captains plough back some of their wealth in endowing engineering, science and medical colleges throughout the country so that poor deserving students can study free and not fork out the absurd capitation fees that private educational entrepreneurs charge?

Indeed it makes eminent business sense to endow colleges, research institutes, and schools across the country so as to ensurea better quality human capital and enhanced capability levels across the board. The positive consequences of such activities can be profound and actually make India a knowledge power of the world.

(The author is Professor of Technology Strategy, University of Texas at Dallas. He can be contacted at majumdar@utdallas.edu)

More Stories on : Human Resources | Education | Politics

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Decision reserved

Scientist who revolutionised India's greening

Why the SEZ policy needs a re-think

US economy wobble

Lure of TV

Roars so loud, and thunders in the index

Improving human capital — A role for Corporate India

Quota debate

Setting goals