This article first appeared in The Edge Malaysia Weekly on January 29, 2024 - February 4, 2024

Human capital is a critical factor of production of a country, more so than financial capital, natural resources and machinery, which can be far more easily acquired from global markets. An educated and skilled workforce is the foundation of the economic success and wealth of nations. This is the reason why investing in, and improving accessibility to as well as quality of, public education and a training-upskilling system is so very important. And why we cannot overstate the urgency to depoliticise our education policy and reverse the secular deterioration in the quality of public education in Malaysia.

To successfully attract high-value investments and move up the value chain, the country needs people with the necessary skills and knowledge to meet the demands of the jobs to be created.

There is no question that higher levels of education will boost productivity, raise wages and the standard of living, stop the brain drain, improve the distribution of income and wealth as well as drive the economic growth, competitiveness and progress of a country. Additionally, an overall better educated workforce will typically lead to stronger aggregate economic growth. We discussed these in our last article.

What’s more, in today’s increasingly digitalised global economy, shaped by rapid technological changes, the need for an educated workforce — with the flexibility and adaptability to keep pace with the changing skill demands (for example, routine-based jobs will increasingly be replaced by artificial intelligence [AI]) — is all the more critical so as to benefit from technological advancements and drive innovation.

This relationship — where technological advancements disproportionately favour those with higher levels of education — is well researched and articulated in the book, The Race Between Education and Technology, co-authored by the 2023 recipient of the Nobel Prize in Economics, Claudia Goldin, and her husband Lawrence F Katz. To quote from Chapter 1, “Simple literacy and numeracy are no longer sufficient”. This week, we would like to share some key excerpts from the book.

Why? Because we could articulate no better. And we believe the quality of education will be the game changer, the most important determinant of who succeeds and who fails, especially as the world is increasingly digitally transformed. Digitalisation is no longer a promised future. It is here and now. Be part of it or be responsible for condemning your next generations.

At the dawn of the 20th century, the US became the world’s richest nation, and its people had a higher average standard of living than those in Britain, the previous leader. America’s lead over the rest of the world would continue to widen, cementing the country’s economic supremacy by the end of the century, and beyond. In economic terms, the 20th century was “The American Century”.

The 20th century was also “The Human Capital Century”. For much of the first half of this period, education was primarily a privilege of the relatively rich and the elite. But by the end of the century, all nations, even the poorest, were providing elementary schooling and beyond to most of their citizens.

That the 20th century was both the American Century and the Human Capital Century was no historical accident. America understood the importance of an educated workforce far earlier than the rest of the world. It has always embraced an education system that was egalitarian — compared with the then elite systems in many European countries — and central to this is the commitment to equality of opportunity.

By the 1900s, if not before, the US had begun to educate its masses at the secondary level. This was an extension of the remarkable success it had with providing primary education to its people in the 19th century. Schooling was, by and large, publicly provided and funded (free), accessible, open, forgiving, gender and race neutral, and secular.

A hallmark of education in the US is its decentralised control (by states and local districts rather than top-down at the federal level). Hence, schools are more flexible, less bureaucratic and faster to respond to change, for instance, in the demand for certain fields of study or curriculum. And there is enormous competition — for students, funding, faculty and so forth — between and within private and public institutions as well as between and within states/districts. Monopolistic and bureaucratic institutions can become lazy, just like monopolistic and bureaucratic producers. Its embrace of mass education was a critical factor in America’s technological dynamism, rapid economic growth and more equal income distribution, at least until the last quarter of the 20th century.

The US proved to the world the importance of universal education — and general training (formal schooling) instead of specific training (apprenticeship and on-the-job training) — that was soon mimicked by countries in Europe, Asia and Latin America.

The book compared secondary schooling rates and per capita income in more than 100 nations at the start of the 21st century with the historical trends in the US. Unsurprisingly, the data showed a positive correlation between per capita income and schooling.

The data also found that at the same level of per capita incomes, many low-income nations today have higher education rates than the US back then. In other words, even poorer nations understand that education is key to operate in today’s global economy — and they are investing in education to a far greater degree than richer countries of the past.

Based on extensive analysis of the data, the authors concluded that US labour productivity grew at an average 2.47% annually over the 90-year period from 1915 to 2005. While this is a moderate pace, because of the compounding effect of continuous improvements, the overall results are impressive. Further analysis showed that education directly contributed an average 0.34% a year to economic growth and explains about 14% of the annual labour productivity gains (other factors include experience, sex, nativity and race).

In short, education increases productivity and thus economic growth. And these figures exclude the indirect effects — primarily, a better educated workforce facilitates the adoption and diffusion of new technologies. The increase in scientists, engineers and other highly educated workers are also instrumental to research and development, as well as the creation and application of new ideas.

Notably, though, America’s history over this period contains two inequality tales: one declining and one rising. For the first three quarters of the 20th century, rapidly rising productivity translated to widely shared prosperity and increases in standard of living across income distribution. But post-1970s, there was a sharp rise in income and wealth inequality — driven by increasing economic returns on education (college wage premium) and resulting in a widening wage dispersion between income groups.

The authors explained the divergence for the two periods (pre- and post-1970s) using a supply-demand-institutions framework, to understand the factors that produced these historical trends.

New technologies increase the relative demand for more educated, skilled and advantaged workers. Nonetheless, the evidence also shows that the skill bias of technological change and the growth rate of demand for more skilled relative to less-educated workers were fairly constant and continuous between 1915 and 2005. In other words, skill-biased technological advancements in recent decades (in the era of computerisation) were not significantly different from that of the past.

The major difference driving the widening wage differentials was in the change in supply of skills (educational growth), not demand. To be sure, institutional factors were important at various junctures, especially during the 1940s (World War II) and the late 1970s. Post-1980, globalisation and shrinking relative demand for the less educated, decline in unionisation as well as in the real value of minimum wage were contributory factors.

attainment since 1980 that was the single most important factor driving the rise in college wage premium. For cohorts born between 1876 and 1951, the increase in years of schooling was substantial and continuous — by 0.82 years per decade. However, after 1951, there was a significant slowdown and stagnation. The education attainment for a child born in 1975 was just 0.5 years more than his parents born in 1951 — compared to the 2.18 years for a child born in 1945 to parents born in 1921. Relative supply of college workers increased at 3.77% annually from 1960 to 1980, but dropped to just 2% from 1980 to 2005.

The authors suggest that some of the virtues of America’s education system that worked so well in the past may have become obstacles in today’s environment, especially for the disadvantaged, minority and poorer-income families. Public policies — including more and transparent financial assistance and greater access to quality education (starting from pre-school) for these groups — are needed to correct its current trajectory.

In summary, education raced far ahead of technology, reducing skills premium (and narrowing the educational wage differentials) from 1915 to 1980. The resulting economic growth was fairly equally shared, with high income mobility underpinning the rise of the middle class. A big reversal happened around 1980, when education lost the race to technology — and for shared prosperity.

America’s indisputable economic supremacy taught the world the importance of universal education. It led the world in free and accessible mass elementary education in the 19th century and secondary schooling at the turn of the 20th century. By around the 1950s, higher education (college) became a middle-class entitlement, and its universities are among the finest in the world. The higher levels of education for its workforce directly contributed to long-term labour productivity gains and economic growth, which were also fairly equitably shared — underpinning the country’s technological dynamism and advantage over the rest of the world.

Its experience in the last three decades too hold important implications, particularly as the global economy is poised for yet another leap in technologically-driven productivity gains. By the 1970s, educational attainment in the US had started to plateau — by various metrics such as years of schooling, college completion and high school graduation rates — even as the rest of the world caught up. (In many countries, especially in Europe and Asia, acceleration in education attainment has even surpassed that of the US, most notably 

in college graduation rates). This slowdown is the single most important factor driving the observed increase in wage differentials since 1980 — and a major contributor to widening income-wealth inequality, to a much greater degree than in most OECD (Organisation for Economic Co-operation and Development) countries where education advanced more rapidly over the same period.

Here is the key takeaway: There is no doubt that a better educated workforce is closely tied to increases in productivity, income levels and economic growth. Throughout history, there has always existed a relentless race between technological advancements (demand for skills) and level of education in society (supply of skills). Economic growth as well as the well-being of the people depend on the balance between the growth rates in the demand and supply of skills.

As technology progresses, especially in a world of rapid digitalisation with the expected advancements in AI, it will be the supply of quality labour that will drive economic growth more and more. Thus, investing in education is crucial. If technology races ahead of education — if governments fail to lift the quality (as opposed to simply quantity) of education and skills of their people — economic growth will suffer, and inequality will rise. And as we are already witnessing today, growing inequality in the world is leading to greater economic anxiety, social discord and unrest, and an increasingly polarised world. Historically, extreme inequality has often been a powerful catalyst for revolutions.

The Malaysian Portfolio continued to outperform the broader market last week. Total portfolio value was up 3.8%, driven by top gainers Insas-WC (+15.8%), Insas Bhd (+5.0%) and Oversea-Chinese Banking Corp Ltd (+2.4%). All stocks in our portfolio ended higher for the week. Total portfolio returns finally breached the 200% threshold, rising to 202.4% since inception — equivalent to annual returns of 21.8%, on average. This portfolio is outperforming the benchmark FBM KLCI, which is down 17.8%, by a long, long way. 

Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views  to influence readers to buy/sell stocks. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.

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