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.
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
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
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.
Rapid advances in technology are nothing new; what is new in recent decades is rapid advances in the kinds of technology that require intellectual skills. This has increased the returns to people who have high IQs and good technical education. In addition, fulfilling Max Weber’s prediction that modernity would see ever more activities regulated by rational methods rather than by authority or personality, even low-tech activities, like management and marketing, have become ever more scientific, requiring a high level of intelligence.
High IQ and technical education are complements. But people who have modest IQs also benefit from education, as does society. Education even at its lowest levels helps to instill good work habits, respect for knowledge, simple communication and analytical skills, social skills, and civic values.
Every country, therefore, can benefit from having a good educational system, including pre-collegiate, collegiate, and postgraduate education. How to organize such a system and what the optimal level of resources to allocate to it is are of course difficult questions. There probably are diminishing returns to providing higher education, because IQ provides a ceiling beyond which educational effort is wasted on students. The United States may be in that position today. Many colleges offer what amounts to a remedial high school education, postponing the students’ entry into the work force. If we had better high schools, we might have fewer colleges (or more—if better high schools improved intellectual motivation and performance). With ever-increasing specialization of the workforce, there is an argument for making education increasingly vocational.
Developing countries face a chicken and egg problem in education policy. Until there is a highly educated stratum in a nation’s population, there will not be an adequate pool from which to draw teachers of technical subjects. But without such teachers the nation will be unable to create such a stratum—internally. Presumably the way for a developing country to proceed, therefore, is to send its brightest young people abroad for advanced education. Some will remain abroad but those who return to their native country will supply the elite teachers of the next generation. This by the way suggests that the teaching of English should be a priority for pre-collegiate education in developing countries, since the best universities are in English-speaking countries.
Developing countries, wisely from their perspective, are notoriously casual about enforcing intellectual property rights. They don’t produce much intellectual property themselves, and of course consumers of intellectual property would prefer not to pay for it as long as it continues to be produced in quantity despite their free riding. (Producers of intellectual property can actually benefit from free riding if IP “thieves” become a paying market for follow-on and complementary products, as often happens.) Appropriation of intellectual property becomes a means by which technical workers in developing countires can enlarge their technical knowledge and set the stage for innovation. So the priorities should be: first education and imitation, second innovation.
I would particularly stress the importance in developing countries of education in instilling civic values in a country’s youth, values that include honesty, respect for knowledge, tolerance, and, of perhaps greatest importance, loyalty to national institutions. Intense family and clan loyalties increase the cost and reduce the efficacy of government, foster nepotism and other forms of corruption, reduce social mobility, and undermine commercial values, which depend on impersonal markets. Modernity, which centrally entails a weakening of family and clan ties, is a precondition of economic progress, and education an important factor in promoting a modern outlook, quite apart from education’s role in developing technical skills.
Many developing countries are authoritarian, and their rulers may worry that education will loosen their grip on the population. On the contrary, it is more likely to strengthen it, by weakening family and clan loyalties that compete with loyalty to the regime. Prussia, the Soviet Union, Communist Cuba, and now China are examples of authoritarian regimes that emphasized education for the masses without undermining their authority.