The essence of traditional international trade theory is that poorer countries produce goods and services with resources that they have in abundance, mainly low skilled labor and sometimes natural resources. They export these goods, and import goods from the richer countries that require skilled labor, and considerable physical and financial capital. This theory provides many insights, and must be followed if poor countries are to start on the path of economic development. However, it does not go nearly far enough in mapping out how countries can continue rapid development, and go from being poor to becoming middle-income, and eventually to becoming rich.
To continue their economic progress, developing countries have to move up the product ladder and start producing more sophisticated goods. To do this, they need to import technologies from the rich counties, and increase the training and education of their populations. Advanced technologies are partly acquired through foreign direct investment and from trade with rich countries. Along with the more sophisticated goods and services imported, developing countries also acquire some of the technologies developed in the economically advanced nations.
Importing advanced technologies can carry developing countries to middle income status. To eventually reach much higher income levels, these countries must begin to innovate themselves as well. International trade and foreign direct investment are also necessary for this further stage of economic growth, but it is not sufficient. Continuing rapid development toward becoming a rich country requires skilled entrepreneurs and workers who can not only utilize and adapt technologies imported from developed countries, but who can also create develop their own technologies and processes.
Several ingredients are needed to accomplish this- of course, particularly important are competitive markets and creative entrepreneurs- but in the limited space for the present discussion I want to stress the role of education, especially higher education. In early stages of economic development, a country needs a literate and energetic population with a wide education base of perhaps only a few years. But as countries continue to grow, they need to upgrade their education levels beyond elementary school toward high rates of secondary school completion among young persons.
Economists and other students of economic development have learned only in recent years about the great significance also of higher education for countries that want to progress beyond middle-income status. Higher education has become important to the development process mainly because of the growing value in the modern world of command over information and knowledge. The spread of university education and training toward a much larger fraction of young persons is crucial to producing efficiently the kinds of products and services that would help developing countries continue to drive forward.
For several years, along with others, I have been studying the worldwide boom in higher education in both developing and developed nations. These studies document that the rates at which young men, and especially young women, have been graduating from universities have accelerated in almost every country during the past 30 years. China, for example, has had a growth in enrollments at universities of both young men and women since about 1990, and a sharp growth since the late 1990s. A similar rapid expansion of higher education has also occurred in many other still developing countries, such as South Korea. Developed countries too have generally also greatly increased enrollments at universities, although the US has fallen behind in the fraction of young men who go on from high school to receive a college education.
The signal given to young persons that higher education pays off much more now than in the past is the sizable growth during the past several decades in the average earnings of individuals with a college education compared to the earnings of those who do not go to college. Earnings of persons with college education increased faster in recent decades not only in developed countries, but also in many rapidly developing countries, such as China and Brazil, that are supposedly specializing in goods that use less human capital. Developing countries imperil their continued economic advance if they fail to provide much greater opportunities for their young men and women to achieve a university education.
To conclude, the main message of my comments is that in order for poorer countries to continue to grow at fast rates, they must move beyond specialization in goods produced with relatively unskilled labor. They need to upgrade the goods they produce by utilizing more advanced technologies, and more skilled workers and entrepreneurs. At first, most advanced technologies are imported from other countries, but eventually developing nations need to produce themselves many of the technologies required to upgrade and expand their production. To accomplish this last great stage of economic development, both public policy and private households and businesses must begin to emphasize higher education, and other ways to greatly improve the advanced human capital of working men and women.