In the debate on economic growth people usually confuse education with human capital - but there is a stark difference because the latter refers to know-how rather than mere theoretical knowledge. Mastering content suggests that one is educated, whereas human capital indicates the application of theory. A graduate with an engineering degree is educated, however he demonstrates human capital when he files for a patent or starts a business.
Schools serve a dual function in transmitting education and human capital, however, research highlights that many institutions are failing to impart human capital. Students graduate knowing how to perform complex equations but remain oblivious as to their relevance in the real world. Computer Science, for example, is heralded as a lucrative investment, yet a graduate with a degree in history or international relations who knows how to leverage human capital as an asset will be more competitive in the knowledge economy than the Computer Science graduate who doesn’t understand his potential.
Capitalizing on human capital is a daunting task when people are unaware of their skill set. A colleague of this writer with a degree in international relations landed a job in finance when many of his peers with finance degrees struggled to secure employment, because he knew how to employ his human capital. Students of International Relations study obscure theories but they are also required to pursue electives such as economics and statistics, and these courses are useful in finance.
Moreover, as analysts of international affairs, the curriculum would encourage IR students to grapple with the effects of conflict on global markets and domestic policy, and unsurprisingly my colleague earned a position as an investment analyst. In contrast to his peers, this graduate has a competitive advantage because he can identify his skill set. The average IR graduate was not looking for employment in finance since they failed to appreciate how the skills obtained as an IR student can create value in the financial sector.
Furthermore, on a national level human capital is even a more critical predictor of economic performance than education measured by the percentage of degree holders. Tracking regional disparities in economic performance across 110 countries in a 2013 paper researchers conclude that the level of human capital is a more robust predictor of development than the number of people with some education.
Likewise, skilled human capital is necessary for the formation of high-growth businesses that drive economic growth and ameliorate living standards. Economic growth is fostered by opportunity driven businesses launched by highly educated entrepreneurs who can apply expertise to solve novel challenges, rather than people pursuing entrepreneurship as a hustle or to escape poverty. Secondly, research reveals that firms with access to key managerial skills show a higher likelihood of expanding and surviving.
Growth is dependent on the ability to utilize human capital and countries that increase education levels without commensurate gains in the acquisition of human capital are unlikely to experience Schumpeterian growth. As Joel Mokyr points out in an article on the industrial revolution in England: “There is little doubt that Britain on the eve of the Industrial Revolution could rely on a larger and better-trained cadre of highly-skilled artisans and engineers than elsewhere, and while its advantage in making original breakthrough inventions was contested by other nations (especially France), there seems to be a clear-cut case that British developers and engineers were vastly superior to anyone else in making the new contraptions actually work, debug and adapt them, adding small but significant cumulative improvements to them, and have the ability to install, operate, maintain, and repair them. Between 1750 and 1850, English and Scottish engineers swarmed all over the European Continent, providing engineering and other industrial expertise to nations whose systems of producing human capital was not quite as effective as Britain’s.’’
To join the ranks of the developed world, developing countries should acquire the relevant know-how. When Singapore was embarking on its phase of industrial development, the administration of Lee Kuan Yew sent students to North America and Europe to access the expertise of leading universities and corporations. Without expertise, developing countries can never attain parity with their affluent counterparts.
A scenario illuminating the significance of human capital is the contrasting cases of Germany and Jamaica. Jamaica is the poster child for cannabis, but Germans are revered for productivity, manufacturing, and institutional know-how, so as expected research is projecting that by 2023 Germany is expected to become the world’s largest cannabis market.
The reputation of Jamaican cannabis is indeed phenomenal, but it will take more than a brand name to compete on a global scale. An interesting fact is that Jamaica ranks among the top five in the world for its level of unproductive entrepreneurship. Because Jamaica lacks the entrepreneurial know-how to exploit cannabis it has failed to become a global player.
One should also appreciate that regulations can enhance and degrade the quality of industries. Business magnate Bruce Linton praised Jamaica’s cannabis sector for being well regulated and this is precisely the problem. To participate in the industry, Jamaican entrepreneurs must comply with regulations that are quite costly. For example, an entrepreneur would need around US$10,000 to acquire a tier 2 license to cultivate the plant. Such regulations stymie the growth of the sector by limiting the opportunity for people to become entrepreneurs. If the government had promoted a free market, instead of over-regulating the industry this would have attracted more entrepreneurs to Jamaica thereby increasing the probability of access to foreign know-how.
And contrary to what some think complying with international regulations won’t provide developing countries with an advantage. Many regulations are tailored for realities in the developed world and as such are inapplicable in a developing context. Developing countries will only join the league of rich nations by acquiring first-world know how and innovating, simply following first-world laws or increasing tertiary enrolment won’t give them a seat at the table of rich nations.
