Remarks, State Department Conference on Russian Intellectual Capital, Rosslyn, VA, September 14, 1999

I have been asked to talk about education, globalization and the demands of the 21st century. I have three simple points. First, at the individual level, human capital is the critical asset in a global world. By human capital, I mean education and the ability to acquire knowledge. Second, at the country level, good education policy, though necessary, is not sufficient for economic growth. And third, for a nation, the key to more relevant and better education is not only, or even primarily, the education system; the demand for education, a function of the economy, is what matters.

Education is the critical asset at the individual level

Private returns to education, in the form of wages, are up everywhere in the world. In the United States, the ratio of wages of college graduates to wages of high school graduates has increased tremendously since 1980. It is only in the last year that the ratio has begun to level off. It is the same story in Latin America. In almost all Latin American countries, real wage growth for skilled labor has far outpaced that for unskilled labor.

The general trend of market reform is behind this. As countries liberalize their economies, education becomes a more important asset. This is most visible in Russia and other economies in transition, where the return to education has gone up in recent years. In Russia, the return to a year of education more than doubled between 1991 and 1994.

Private returns to education are rising because education is a scarce commodity in the global market. With economic integration and technological change, opportunities for educated workers are increasing faster than opportunities for the unskilled.

Finally, returns to education are not only going up on average; the premium to education is rising more for those with more education. This is a partial explanation for increasing wage inequality in the US and elsewhere.

Two theories explain increasing demand for skilled relative to unskilled labor and thus increasing returns to education (and increasing inequality of wages) around the world. The first blames trade and economic integration (globalization). The second blames changes in technology (the demands of the 21st century). It is no doubt some combination of the two?with trade and international investment the vehicles for the rapid dissemination of new technology and thus constantly rising demand for educated labor.

In the information age, the critical question is whether, in the long run, computers and the Internet will complement education and skill, as seems now to be the case, or substitute for education. In the U.S., technological changes seem to have been skill-biased, though in the case of computer and Internet use, it could certainly also be that the increase in educated workers is a cause of more computer use.

Education is necessary but not sufficient for growth

At the country level investment in education is necessary, but not sufficient for increased growth or decreased inequality.

Education is an investment in human capital that, like investment in physical capital, can lead to higher economic growth. Additionally, education can increase growth by increasing the likelihood of innovation and technological change in an economy. Education enhances the value of other assets, including itself. But there are countries with high investment in human capital but poor growth. This was the case in the former Soviet Union, and has been true in Argentina, Egypt, and Cuba. Education alone doesn?t contribute to higher income if uncertainty and market distortions undermine the harnessing of potential skills in the labor market. In East Asia for three decades prior to the recent crisis, growth was the output of a combination of macroeconomic stability, markets that worked and human capital investment.

Demand matters

In the former Soviet Union, wage compression distorted the market and decreased the incentive for people to invest in education. In Latin America, government-subsidized incentives for physical capital put education and other forms of human capital at a relative disadvantage and led to a lower return to investing in education. Labor market regulations that reward seniority rather than mobility and public programs that encourage rent-seeking and reward cronyism all decrease the economic return to education and thus the incentive for families and individuals to invest in education. These distortions undermine the potential for education to improve growth prospects, and by discouraging household and employer investments in education, eventually reduce the level, quality, and relevance of education in a society.

Concluding remarks

A few lessons for Russia from experience elsewhere: first, for Russia, a caution about heavy reliance on natural resources to generate income and wealth. That kind of reliance is associated elsewhere with concentration of wealth and political power, which is in turn associated with the reluctance among economic and political elites to finance the education of the majority. Second, we know from parts of Western Europe that guaranteed jobs and labor entitlements tied to education are an inefficient vehicle for broad social justice. Third, we know from Latin America that vocational training, seen by many as a quick fix for lousy education systems, can be a sinkhole for wasteful public spending. Vocational training works when employers pay for it. This is because training is a complement, not a substitute, for general education. Finally, it is useful to keep in mind that the critical areas for public sector investment in human capital are basic (primary and secondary) education and basic research.