Abstract
In view of the dualities in human capital and the inequality of income and wealth distribution that exist in general and, more conspicuously, in the third world, this paper puts forth a strategic choice model to analyze how such dualities and inequality are strengthened and sustained over time. Ignoring inertia, we argue that this is the outcome of strategic choices made by individual agents on how much human capital to accumulate as an endogenous response to technological innovations. Our analysis takes account of the fact that the various qualities of human capital are complementary to the productivity of each other, hence turning human capital accumulation by the rich and the poor into choices that exhibit strategic complementarities. Such complementarities could potentially increase the productivity of labor at its micro and macro levels, promote growth, and contribute to reducing inequality in income distribution. The model explains why the dualities in human capital arise through such choices and why such dualities get worse with economic growth if it is accompanied by inflation unless the cost of education facing the poor is reined in. The analysis is extended to explain how the dualities in health capital mirror those in human capital. We also argue in favor of the plausible multiplier effects that the human capital accumulation and ensuing innovations may trigger further endogenous growth. Finally, the analysis invites a debate in regard to the type and level of education and policy objectives that will meet the need of the technology of the time.
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Notes
Recently, in their IMF discussion note to explain the divergent trends in inequality in advanced and emerging markets and developing countries (EMDC’s) from a global perspective, Dabla-Norris et al. (2015) examined the causes and consequences of income inequality and identified education, health, technological progress and skill premium, labor market institutions, financial deepening and inclusion, trade and financial globalization, and redistributive policies as relevant factors to be considered.
What is interesting in this relation is that throughout time investigators attributed the causes of developmental failures to a number of factors but they placed the blame for the persistence of poverty in poor countries on the government and the political elites which invariably use the poor as hostages to personally benefit from the presence of resources and obtain relief from international debt (Hillman 2002). Moreover, the political elites use the status quo to extract rents and discourage any institutional change (Mill G. op. cit., Domhoff 1975).
Johanson and Adams (2004), with their team at World Bank, reviewed the progress made on TVET to meet the need of skills development of the countries in Sub-Saharan Africa. The goal of the programs was to enhance the productivity of informal employment and sectors and lists a number of diagnoses on the role of the government, non-governmental organizations, and enterprises that provide skills development programs and experience in the financing mechanisms of such programs. Their overall assessment is in accord with the notion that the division of labor à la Adam Smith develops complementary skills that enhance overall productivity. Helping workers in the informal sector is of vital importance for poverty reduction in these countries. Such development of skills calls for strategic coordination by the government, more reliable financing, and programs responsive to the market’s needs.
The duality in human capital is caused by many factors; e.g., location, availability of schooling in the region, poverty, discrimination, segregation, historical practices, and other institutionalized reasons. Here, we concentrate on the division between the rich and the poor and how the duality in human capital emerges from this division and perpetuates itself. Also, there is not any clear-cut definition of the haves and the have-nots. For our purpose, we take those in the lower two quartiles of income distribution as the have-nots and those in the upper two quartiles of the same distribution as the haves.
World Bank (1991), in their report on vocational and technical education and training, recognized the seminal role of vocation and technical education in general and, for the developing countries in particular, proposed a set of policies that would facilitate such an undertaking. It also pointed out that socially disadvantaged groups have less access to primary and secondary education, and that this is a serious shortcoming in promoting vocational schooling. On the other hand, the Asian Development Bank, in their report published in 2014, on innovative strategies for technical and vocational education and training for the purpose of accelerating human resource development in South Asia, points to the need to achieve equitable access and completion by reducing the existing disparities by income, gender, ethnic group, and place of residence (urban, rural), along with an early intervention at lower levels of education to avoid early dropouts. Also, using panel data on a cohort of individuals preceding college enrolment in India, Peru, and Vietnam, Sánchez and Singh (2018) addressed, among other questions, inequities in the patterns of access to higher education in terms of socioeconomic characteristics and gender. They found that even after the children's and parents' aspirations for higher education are taken into account, there remains a correlation between household wealth and higher education access, from which they inferred that potentially important liquidity constraints are binding at secondary school ages and afterwards.
On the other hand, vocational education and training has a number of roles to play in the accumulation of human capital nationwide. In particular, it provides a general knowledge that can be used across occupations and industries; it can improve the productivity of various sectors of the economy; it can be used as an instrument of attracting direct investments from abroad; it can reduce costs via the adoption of new technologies; it can contribute to economic development and the growth of tax revenues of the state; it can increase employment, employees' work satisfaction and reduce the dropout rate of students. Moreover, it is also the source of externalities that can diffuse across the economy, facilitate the development of other sectors, increase the employment opportunities, and help new and old industries to make use of comparative advantages.
The concept of externalities that relate companies or sectors together through vocational education and training introduces the concept of timing and critical mass. This happens when the supply of graduates in fields and the timing of their availability satisfy the demand for the same. This is a macro as well as a long-run problem, the solution of which is very expensive, front loaded and risky. Unfortunately, only the state or international charitable institutions are capable of carrying such financial burdens (Hoeckel 2008; Hunt 2012). Individual families, the employer, the state, private lenders, and international institutions carry the cost of vocational education and training in developing countries. According to the latest statistics (the World Bank Group 2016), 767 million people or about 10.7% of the world population are estimated to be living below the international poverty line which currently amounts to $1.90 per person a day. The global poor are primarily rural, young, poorly educated, employed in the agricultural sector, and living in large households with a number of children. Of them, about 389 million or about 51% live in the Sub-Saharan region. The Chinese experience is quite instructive. The fees that students of public vocational secondary schools pay in the People of Republic of China (PRC) are often over $290.00 per year. This amounts to one half of the annual income of many rural households in the country (the Asian Development Bank 2006). Earlier we mentioned the employer as a source of providing financial assistance to the students' vocational education. It can and in reality it does, but the size and the extent of it are limited in that the firms which are mostly interested in participating are themselves small and the number of students they can accommodate is limited (Moy and McDonald 2000).
Finally, combining the characteristics of vocational education regarding its benefits, costs, and timing, and also the low revenues of the states, we can understand the low ranking in priority that the states assign to this segment of education. Moreover, the same reasons, including the risk entailed in the long horizon of debt contracts, prevent the private lenders to make funds available to finance educational outlays. Therefore, the funds available for vocational education and training are fairly limited (Hasluck 2004). The remaining financial supporters of vocational education seem to be the international organizations, which, however, favor grants and fellowships for graduate work abroad rather than supporting domestic vocational programs (Ball 2005). It is quite obvious that the ability of the poor cannot substitute the financial support of the remaining sources, and this is the reason why poor economic actors do not attend vocational education in large numbers, and the duality in labor force in developing nations is still present.
In some cases, the have-nots may be lucky enough to obtain scholarships and/or student loans for higher education, if they are available. But, such opportunities are scarce in the third world and certainly not enough to resolve the existing dualities in education. Even if student loans are available, they place a heavy burden on the borrowing students as they have to be paid back. Scholarships are not a viable solution to the duality problem as they are limited and awarded only to a select few. Dualities in education in the third world attest to the widespread inequality in educational opportunities. Despite the crucial role that vocational education can and does play in the context of any economy, its demand is constrained and so is its corresponding supply. As a result, the state does not devote much of its resources, if at all, to this stage of education, and the individual support of students by the state is a rather rare phenomenon. Indeed, the post-colonial societies have evolved with the perception that societal leaders are all university graduates and parents and students prefer to go to the university despite the fact that the curricula are very dated and the class of the university graduates is characterized by very high unemployment rates. While the tradeoff between unemployment and university degrees is based on the perceived prestige despite the failure to provide jobs, the demand for university degrees keeps increasing at the expense of vocational education, which is exacerbated further by the competition among the various levels of education for the limited funds available. One of the important innovations the policy makers could introduce is to try to raise the prestige of vocational education. In the conclusions, we should add one more item, namely that the importance of vocational education at all elementary, intermediate and more advanced levels should be institutionalized and financed adequately to support future domestic demand, and foreign demand in relation to direct investments from abroad. The adequate composition of labor supply is essential to meet the rapid technological changes, and both the state and the private sector are wise to coordinate their efforts to achieve this goal.
Using polling data across 38 countries, Easterly and Fischer (2001) found that the disadvantaged households, that is, the poor, the uneducated, and the unskilled, are more likely to list inflation as a top national concern than the advantaged households, and that high inflation tended to increase poverty and lower both the income share of the bottom quintile and the minimum wage. On the other hand, Aguirre (1994) studied how the very poor households in Buenos Aires survived under hyper-inflation, and showed that despite such tried methods of coping as changing the family composition, diversifying income sources, and self-exploitation, their calorie intake could not be maintained.
In a comprehensive survey of the literature, Deaton (2003) explored the theoretical basis and the empirical evidence on how income inequality affects health in rich and poor countries. Deaton and argued that we need to go beyond this relation to a more direct one between income and health which is affected by education, wealth, control, rank, power, or other socioeconomic factors, so as to see, with more certainty, to what extent redistribution of income will improve population health. The issue of this relationship is examined again, historically and across countries, in his Great Escape (2013), in which it is argued that while the direct causality from income growth to health is weak, an important role has been played by the progress in technological and health knowledge, human capital (education), and institutions in achieving the high level of both income and health. In our paper, innovations in production technologies shift the production function upward, which results in raising the productivity of human capital, and leads strategically to an increase in the overall human capital through education, and hence to an increase in the stock of health capital as well. If, instead of assuming that human capital affects health through a functional relationship (as we assumed for the sake of simplicity), we allow both human capital and health to be determined simultaneously as the best responses to what other individuals have achieved, then we get the result that that a simultaneous increase in human capital and health of other individuals leads to a higher level of both capital of each individual, so that strategic complementarities are confirmed again. It can also be argued that increasing the human capital segment that corresponds to education results not only in a shift of the production function upwards but also in the adoption of new technologies, which improve and sustain the health of the older generations as well as that of the newly born. Either way, what we have captured is consistent with Deaton's observation that both health and income are affected by the knowledge of production technologies and education. One of the reasons for such health effects of human capital comes from the fact that higher returns of human capital, in terms of higher income through increased efficiency of labor, provide individuals with incentives to get more income and wealth by improving health through their health-conscious behavior mediated by the knowledge of healthy and unhealthy goods (Hayakawa 2017). If increased efficiency of labor earns even higher income because of technological innovations (which raise the marginal productivity of labor), such incentives are made stronger. For a discussion of the dual relationship between health and economic status, see also Smith (1999). For a case study on how health shocks affect income and employment in Germany, see Riphahn (1999).
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Acknowledgements
This paper was presented at the 24th Conference of Eurasia Business and Economics Society held in Bangkok, January 10-12, 2018. The authors are grateful to the participants at this conference for their comments and suggestions. We also thank, in particular, Professor Stavros Drakopoulos, National and Kapodistrian University of Athens; Professor Paul Zak, Claremont Graduate University; Vice President Charles Yuji Horioka, Asian Growth Research Institute; and Professor Emeritus Partha Sen, Dehli School of Economics, for their many insightful and encouraging comments. We are specially indebted to the anonymous referees of this journal for their extremely useful comments and suggestions to strengthen the argument of the paper. Finally, we acknowledge with gratitude the editing support we received from Gayle Mayfield-Venieris. The authors declare that they have no relevant or material financial interests that are related to the research reported in this paper.
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Hayakawa, H., Venieris, Y.P. Duality in human capital accumulation and inequality in income distribution. Eurasian Econ Rev 9, 285–310 (2019). https://doi.org/10.1007/s40822-018-0110-8
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DOI: https://doi.org/10.1007/s40822-018-0110-8
Keywords
- Distributional inequity
- Dualities in human capital
- Dualities in health
- Multiplier process
- Strategic choices
- Strategic complementarities