Themes / Topics

Flagship Lecture/Talks (FLT)

An Investment in education is the best option

As we hurl into the Knowledge Economy, all the economies are speculating upon their possible fates in the future, and what would be their rightful places in the New World Order.

The modern economy is closely linked to stocks as a major means of investments, and we have seen from time to time irrational exuberance in stock prices followed by corrections or sometimes even large scale crashes, where large amounts of capital are simply wiped out. The recent sub-prime crises and its roll-over effect have had a chastening effect on investors. The hall of fame for stock market manipulators includes controversial figures such as Ivan Kreuger, Mike Millikan and our own Harshad Mehta and Ketan Parikhs. Real estate also does not always give great returns and it fact it was the erosion of real estate value that triggered the loan defaults.

Contrary to what most of the Indian middle class considers axiomatic, investments in gold, real estate, stocks or mutual funds do not give great returns. Great returns are always the result of investments in education, acquisition of high value skills, and creation of intellectual property by way of application of these skills in creative and innovative contexts. Illiterate or uneducated business leaders are a thing of the past. The current and future leaders will be working at the frontiers of knowledge, in science, technology including bio-technology and cutting edge discoveries. Google is an example. There are many others.

Human capital, a concept introduced by Nobel Laureate Theodore W. Schultz and elaborated on by Nobel Laureate Gary Becker, is the notion that individuals acquire skills and knowledge to increase their value in labor markets. Experience, training, and education are the three main mechanisms for acquiring human capital, with education being primary for most individuals. Education facilitates the acquisition of new skills and knowledge that increase productivity. This increase in productivity frees up resources to create new technologies, new businesses, and new wealth, eventually resulting in increased economic growth. Education is a "public good" in that society benefits from increased education as well as the individual.

An investment in education is therefore the best option. Whether it is the education of your children, your own education or the investment in the education of the community, they all yield better returns than any alternative investment. And of course you can always invest in creating or promoting organizations that create, design, develop and deliver educational products and services.

At various points of times in the past, competitive advantage has accrued from domestication of animals, harnessing various sources of energy, developing successful business and governance model, but in the post WTO post Internet continuously flattening and shrinking world, the strategic advantages will come from continuous creativity, innovation, efficient strategies of creating and deploying intellectual property, all of which will flow from the ability of a population to use education effectively.

As of now, high quality and modern education was useful to only a small proportion of the population, and was fulfilled by the classical traditional tribal way of education. The system looked for naturally occurring good learners, naturally occurring researchers and knowledge creators (faculty), put the together on nice campuses, and hoped that good education would happen. It happened and there are a few splendid examples of the success of this model all over the world. The key word here is 'few'. And we could add the phrase 'and far between'. The problem with the model is that it is not replicable. It is not scalable in any meaningful terms. And lastly it is not even sustainable. Somewhat along the principles of increase of entropy, most splendid Institutes lose their luster over a few decades, if not earlier.

In countries like India, a huge dose of over-regulation ensures that they do not stand a chance of survival.

And herein lies the opportunities in education. One can draw an analogy between the Government's efforts of providing drinking water or electrical power to that of providing education. For both water and power, if a consumer wants to be able to use it meaningfully, additional arrangements have to be made so that the water is potable, the electricity is available and the education is usable.

It is generally emerging in various studies that only about 40% of MBA's are employable, only about 25% of Engineering graduates are employable and of the General B.A.,B.Sc. or B.Com graduates, only about 5% are employable. So, again either the parent, the learner or the employer has to make the additional effort of making them employable. One idea that could help is like the statutory warnings on Cigarettes, there should be a statutory warning in all University announcements and brochures, web-sites giving full disclosure of the unemployability ratios of their graduates over the last 2 to 3 years. This information should be mandatory under the RTI Act. Why on earth, should taxpayer's money, and a special supplement collected under the education-cess be spent on creating unemployable graduates?

Maybe there should be a mandatory requirement of a warning sign at the entrances of Universities and on all their documents like those required on cigarette packets along the following lines "Investing 3 years of your youth in this campus is likely to make you more unemployable than you are now."

The biggest opportunity in the education business is to augment the employability potential of such people. Like the old adage that prevention is better than cure, there could be an even more huge opportunity in preventing unemployability, by appropriate education and training. The opportunities for employment would not come through the Rozgar Yojana schemes of the Government, but through empowering the young boys and girls with skills that are required by the global work-force.

The amount of education acquired by workers has an important impact on labor market experience. The most direct way that education affects the labor market experience of workers is by increasing their productivity, thus increasing their earnings. The more education individuals acquire, the better they are able to absorb new information, acquire new skills, and familiarize themselves with new technologies. By increasing their human capital, workers enhance the productivity of their labor and of the other capital they use at work.

Calculating the return on investment in education has intrigued economists since early this century. Initial analyses of the effects of education on earnings were done by estimating tuition and foregone costs for given levels of schooling and then discounting the earnings differentials between workers at those different levels. Most estimates showed rates or returns on education comparable to rates of return on investment in physical capital.

The amount of education an individual receives not only affects his earnings, but the quality of his employment as well. In his book Studies in Human Capital, Jacob Mincer stated that educated workers have three advantages relative to less-educated workers: higher wages, greater employment stability, and greater upward mobility in income. Increased earnings by workers with higher education levels are a result of two factors. First, as discussed earlier, increased human capital results in higher productivity that allows workers to extract higher hourly wages. Second, increased education increases labor force participation, decreases the probability of unemployment, and decreases job turnover. The result is that highly educated workers labor a greater number of hours annually for higher hourly wages than their less educated labor market competitors.

Educational needs are not confined to the traditional school and college going stage, but now span the entire life-span.

We are now getting around to accept that learning in the future will not be limited to the compulsory school education, which is part of the Sarva Shiksha Abhiyan, for all, followed by a tertiary education for a few, but will move towards a life-long learning phenomenon, with well demarcated stages spanning early childhood to well beyond the standard retirement age. In other words life-span learning will stretch from the cradle to the grave, from the womb to the tomb.

The traditional Hindu life-span is considered to be of 4 stages, Brahmacharya, grihastha, vanaprastha and sanyas. Shakespeare in this stages of life has categorised life as comprising 7 stages. A more detailed classification of the stages of life could be as shishu, bala, kishore, yuva, vayask, praudh, vriddha etc again probably 7 stages.

From a modern perspective taking account of longer life-spans, rapid growth in knowledge, obsolescence of erstwhile knowledge skills, and the need to learn, un-learn and re-learn throughout the life, maybe we could look at the continuum of life-span learning as comprising the following stages :

1. Pre-natal, neo-natal and pre-school learning : 5 years

2. Classes 1 to 5 of schooling : 5 years

3. Classes 6 to 10 of schooling : 5 years

4. Senior secondary school : 2 years

5. Traditional University degree : 3 years

6. Additional years in professional education/ P.G. Degree : 2 years

7. Specialized training/qualifications/ preparations for career : 2-3 years

8. First job adjustments : 5 years

9. Job changing period : 5 years

10. Settling down to a career/ lifestyle : 10 years

11. Mid-life crises : 10 years

12. Retirement Planning : 5 years

13. First phase of post- retirement : 5 years

14. Second Phase of post-retirement : 5 years

15. The final years : 5 to 20 years

The total need per person over a lifetime is about 50 years compared to the minimal 20 to 25 years for educated persons now, that is almost a 100% increase. Multiply this by the relatively larger fraction of the population that needs to be educated, say about 70 crores. And an average of about 200 hours of learning per year , we have a need of 700,000 crore-hours of learning to be developed. Even at a very modest average cost of Rs20/- per hour of learning over the entire range, we are talking of a market opportunity of Rs 14,000,000 crores. If this sounds too much, just recall that a 2 year Management program to which the admission ratio is a very small percent, the tuition fee is Rs 11 lakh, and that too in a Government created Institute in India, not at the London School of Economics. Therefore, if anything the above is an under-estimate of the market opportunity in the education sector.

As for the benefits arising from having acquired the right skills, we only have to look at the 7 figure salaries being offered to the few students coming out of the premier Institutions. For the ordinary, Ernst and Young in a study some years ago had found that by acquiring basic skills in English and the use of ICT, an average graduate could move his income potential from the range of $50 per month to about $250 per month. If he has skills in let us say legal matters such as contracting, drafting or Intellectual Property it can move up to several hundred dollars per hour.

India has over the last decades initiated reforms. While we are still dragging our feet in some ways, the fact is that India was one of the founding members of the WTO, and education is one of the 12 services that are covered under the services agreement, and within education 4 modes of deliveries have been agreed, while testing is also being actively considered as an educational service. There is already considerable movement in promoting 'for-profit' education, and some members of the Planning Commission have supported the idea. Of course a number of people oppose it on some alternative philosophy. In any case, in the education business opportunities that are coming up, all economies that are making the transition to knowledge economy (and who isn't doing so ?) need education desperately in larger numbers.

Apart from the large foreign players such as Pearson and Kaplan taking an interest in India, apparently Mukesh Ambani has decided upon entering the education space, and this will also transform the face of education.

Access to funds should not be a problem, as there is already a weary population disillusioned by the traditional businesses. Funds from abroad are accessible, and Indian ventures can also now invest and buy companies abroad. So we have a tremendous opportunity of really going fast, going worldwide, and creating another success story.