Should emerging economies build more schools or build highways?
Photo: Jogi Don. Source: Wikipedia
The short answer would be “both.” Moving goods and services around is critical to an economy, but developing human capital is also essential. An educated populace is going to be able to operate complicated equipment, manage more effectively, develop new products and respond to markets more readily. But unless you can deliver your output where it’s needed, your improved skills aren’t very useful. When I lived in North Africa I knew a number of under-employed engineers managing their family’s storefront.
But in a world of limited resources, you can’t get everything you want. Public policy is about making choices, and there are different short-term and long-term effects. Studies have shown that a permanent scale-up of spending on schools in developing countries results in a much larger increase in economic growth than when the government invests in roads. But it takes almost a generation for this to take effect. For about 15 years, an economy does better if it just builds more roads, airports, and shipping terminals.
Port of Shanghai. Public Domain. Source: Wikipedia
If a country can only borrow short-term money, it makes sense to spend it on transportation infrastructure. But to the extent that funding sources are more long-term, a country should develop its human capital. We get a much bigger bang for the buck by investing in ourselves. This, of course, assumes that a society is stable enough and has the institutions necessary to encourage people to work.
Because there’s always a risk in education. If people learn that there are better forms of government, politicians could find themselves unemployed. Shipping terminals don’t revolt. An educated mind is dangerous.
Douglas R. Tengdin, CFA