INTERNATIONALBANK FOR WORLD BANK R E T C N O E N STRUCTION PM AND DEVELO May 2003 No.25 A regular series of notes highlighting recent lessons emerging from the operational and analytical program of the World Bank`s Latin America and Caribbean Region CLOSING THE GAP IN EDUCATION AND TECHNOLOGY Guillermo Perry Rapid skill based technological change and higher stocks of human capital. As late as 1950, the United its implications for growth States was perhaps the only country where the median school-leaver was a high school graduate. By the time countries in Europe--seeing the rapid rise of the United Over the last fifty years, the income gap between rich and States as an economic powerhouse--learned their lesson, the poor countries has grown. Between 1950 and 2000, annual United States had expanded its lead in tertiary education, and per capita income in OECD countries tripled from US$7,300 most European countries have only recently begun closing to US$23,000, while income in Latin this gap. Many East Asian countries were America only doubled, from US$3,000 quick to see the importance of investing in in 1950 to US$6,200 in 2000. This is education: Korea, for example, has second- largely due to widening gaps in knowl- ary and tertiary education indicators that edge and technology. The North has are already better than many European continued to generate new technologies countries. But in much of Latin America, that statistical studies suggest drive at this recognition has come more slowly. least half of economic growth; most of the South has been unable to take full Second, technological change in the twen- advantage of them. tieth century has been increasingly biased in favor of skilled workers and appears to The newly industrializing countries be the strongest force driving the increas- (NICs) of Asia, and other countries such ing skilled/unskilled wage differential in as Finland that are closer to LAC in industrialized countries. There is some evi- resource endowments, were able to achieve dramatic tech- dence that this is partly a result of the information and nology driven increases in living standards. Their national communication technology (ICT) "revolution". innovative capacity and ability to learn from abroad sets apart the successful resource abundant countries- Australia, Canada, Scandinavia- from the disappointing LAC experi- Productivity, educational and technology gaps ence. Early on, the successful countries recognized the need in Latin America and the Caribbean for an explicit, efficient and sustained policy to move the private sector to the technological frontier. Second, they engaged in one of the most rapid and dramatic build ups of The report focuses on Latin America's gaps in education and national human capital in human history. technology. The central premise is that skills upgrading, technological change and interactions between the two are "Closing the Gap in Education and Technology", (de major factors behind total factor productivity (TFP) growth, Ferranti, Perry, Gill, Maloney, Guasch, Schady and Sanchez- and that TFP is a key determinant of long term growth. Skill- Paramo; World Bank, 2002) looks carefully at what it takes based technological change is being transferred faster today for countries and firms to learn how to learn. Education is to LAC countries that are more open to trade and foreign vital, for at least two reasons. First, it has always been a direct investment (FDI) flows and have increased the educa- critical complement to technological advance. Emerging tion level of their work force. The report presents empirical evidence suggests that the knowledge transfer benefits of evidence that technological change has been complementary FDI and trade liberalization, for example, are enhanced by with skill in Latin America in the last two decades, as in more 1 developed countries. As a result, firms have substantially not access or benefit from the large university subsidies, and increased the demand for educated workers, especially work- tertiary students are drawn from a narrow talent pool. ers with tertiary education, and this rise in the demand for educated workers has bid up their relative wages. The increasing returns to tertiary education suggest that the technological transition will require more workers of this This process creates challenges and opportunities. Demand skill level. One option is for public policy and resources to for higher skills, and in particular for workers with tertiary focus on increasing secondary places, while facilitating education is rising faster than demand for less skilled private expansion of tertiary education. The high potential workers in most of the region. Hence the challenge: demand for university education signaled by the high returns inequality in wages tends to increase as long as major does not necessarily translate into high effective demand inequalities in access to education remain, and lack of skills because of liquidity constraints and information asymme- may become a real constraint on fast and efficient technol- tries. More information about the quality of private tertiary ogy transfer, and thus on potential growth. The opportunity education providers (through state exams for graduates, lies in the possibility of accelerating productivity growth in labor market observatories and sound accreditation pro- the economy if increased demand for education helps close grams) and less uncertainty should facilitate better choices the educational and technological gaps between Latin by households and increase effective demand. America and other countries. Policy must respond swiftly so that the potential de- Second, the report ar- mand for higher and LAC Deficits in Technology and Education Relative to East Asia are gues that development better education is Reflected in Slower Rates of Productivity Growth of the ICT sector is an translated into higher essential complemen- and better educa- tary instrument to de- tional levels of the Income-adjusted Comparisons velop technological work force and capability. Yet the higher productivity at region's technological the firm level. gap relative to East Technology Asia more than tripled Productivity differ- Latin America East Asia during the 1990s. ences between coun- tries and between Education Third, the report com- firms within coun- pares domestic spend- tries are profoundly ing on research and de- affected by differ- velopment (R&D) and Productivity ences in skills and payments for licens- technology.1 It is ing, to countries of therefore no surprise similar income levels that countries with and to the superstars well-above-average Technology: Capital Stock of domestic private R & D per worker (1995 US$) like Finland, Korea, Is- rates of TFP growth Education: Mean years of education: population 25+ rael or Ireland. De- (the East Asian tigers Productivity: TFP growth per year (1990-99) spite extraordinary re- and some of the suc- turns to innovation in- cessful natural resource based economies) also outperform vestments, R&D by firms in Latin America is strikingly low. Latin America in technology and skills. The best-performing This is partly due to weak credit markets, ICT infrastructure country in Latin America, Chile, concurrently had positive or explicit government policy toward encouraging innova- increases in productivity, substantial skill upgrading, and tion. Also, until the recent opening of LAC economies to increases in all indicators associated with technology trans- competition and foreign ideas, firms had neither the motiva- fer and innovation. tion nor the ability to look outside for relevant technologies. For historical reasons and to compensate for the low private Despite progress in the region, educational gaps have sector effort, governments have tended to provide a dispro- increased and are particularly wide at secondary level, with a portionately large part of financing and implementation of few exceptions (Chile, Argentina and the English-speaking R&D (much of the latter being concentrated in public Caribbean). This is linked to the way that educational Universities). transition has taken place and the way in which resources are allocated in the education sector in Latin America. A very LAC countries have not given innovation and science and large share of resources go to public universities, frequently technology a central role in their development strategies until of low quality, leaving little funding for secondary educa- recently. So although their technology absorption and tion. These policies have constrained tertiary education innovation have increased, these countries have fallen expansion, and led to large gaps in secondary education. This behind more aggressive economies like the Asian Tigers, causes inefficiency and inequity: talented, poor students do Israel, Ireland and Finland. The opening of the LAC 2 countries has given them greater access to various nologies--should keep step. There is no "one size fits all" technologies developed abroad. However, access to recommendation; policy priorities should depend on each technology is not enough for rapid sustainable growth. country's progress in the educational and technological Countries also need capabilities and institutions to use transitions from "knowledge absorbing" towards "knowl- technologies efficiently and eventually to steer themselves edge creating" societies, and should correct imbalances in onto a path of innovation-based development, which allows progress in these areas. for sustainable long-tem growth. Even in economies where most enterprises are stagnating in The complementarity between education and terms of technology, some firms will create important adap- technical change tations and even significant technological innovations. This is more probable in sectors where the country has held a comparative advantage for a long time. It is important that Empirical experience suggests that countries that attempt to government policies support these leadership initiatives. close education and technology gaps in an unsynchronized Natural resource-based sectors are especially important, as manner suffer low or erratic economic growth. The reason is technology transfers normally require significant adaptations the strong complementarity between technology and skills, to the characteristics of indigenous natural resources and explained by three facts. First, skilled workers are needed to their particular environmental conditions. Major examples implement new technologies because they are better at are successful development of fresh fruits and salmon in dealing with change. Second, the availability of more skilled Chile and cut flowers in Colombia. Moreover, there is little workers creates incentives for firms to develop new R&D in tropical agriculture in OECD countries for obvious technologies that are more skill intensive (so-called reasons; this puts the onus on Latin American countries "directed" technological change). Directed technical change themselves or productivity growth will stagnate. requires even faster upgrading of education systems in developing countries, to support continued skill-biased Successful countries have consistently taken an active technological change. Third, skilled workers, engineers and approach to integration in the world economy through scientists are required to produce significant adaptations of upgrading the learning and training capacity of firms, existing technologies and even more to create new ones. selectively financing private R&D, encouraging licensing of Even adoption and diffusion of existing technologies require foreign technologies and protecting intellectual property a minimum level of education of the work force (at least rights, stimulating development and access to ICTs and some secondary education) and of training and R&D in progressively deepening and tuning up their National firms. Innovation Systems rather than passively waiting for multinational corporations or imports to transfer technology. Thus, countries with low education levels remain in a trap of technological stagnation, low growth and low demand for In all the higher performing countries, increasing the education. If countries strongly subsidize tertiary education, technological absorptive capacity of firms has required a but do not open to trade and FDI, and firms are not subject to supportive set of policies and institutions ranging from well- competitive pressures that stimulate technological progress designed fiscal incentives and subsidies to the active and hence demand for education, then a high proportion of promotion of incubators, technology parks and clusters, and educated people will emigrate, and effective demand for creation and coordination of industrial consortia that share education will be weak. Similarly, low R&D by firms may the costs and risks of R&D and skill upgrading, act as limit adoption of new technologies and innovation and learning laboratories for the less advanced firms and help undermine growth of demand for education; and efforts by identify ideas from abroad. Government to subsidize R&D may fail to achieve their goals when low levels of education prevail and/or economies An integrated approach and a coordinating, even leading, are not open to trade and FDI and firms face no competitive role by government is needed. In highly successful countries, pressures to innovate. governments have not been shy about financing and under- taking R&D that has broad spillovers. At a minimum, the Synchronized elimination of the education and state needs to ensure a consistent and coherent set of incentives. An active and efficient "innovation policy" is technology gaps required. This offers a challenging policy agenda. The implication is that countries can close skill and technol- ogy gaps more easily and with stronger effects on productiv- ity and economic growth, if policies in these two areas are synchronized. Phases in the educational transition--from low basic and secondary education levels and quality to high _________________ 1 levels of secondary and tertiary education--and the techno- Of course, differences in skills and "technology" do not explain all differences in productivity levels. Many other factors contribute, including logical transition--from reliance on adopting simple foreign differences in quality of institutions, depth of financial sectors, and macro/ technology to major adaptations and creation of new tech- fiscal performance. 3 Table 1. The Gaps that matter most... Observed East Income-adjusted Income-adjusted Observed Income-adjusted Observed NRA Asian "tiger" surplus in East surplus in NRA LAC mean deficit in LAC country mean mean Asian "tigers" countries Productivity TFP growth per year (1990-99) 0.45 -0.21 1.42 0.76 0.78 0.12 Educación Mean years of education, population 5.8 -1.4 9.7 1.0 11.1 1.4 aged 25+ Net secondary enrollment rate (percent) 46.7 -18.7 93.3 17.8 93.2 6.0 Gross tertiary enrollment rate (percent) 20.0 -10.0 47.3 5.1 67.0 14.0 TIMSS score (points) 387 -81.2 584 86.3 524 + (n.s.) Tecnología Capital goods imports as a fraction of 7.7 -3.6 29.5 18.1 12.6 2.0 GDP, 1999 (percent) Domestic R&D expenditures per worker 35.6 -26.4 329.5 116.5 725.4 152.5 (1995 US $) Patents registered in the US, 1996-2000 0.8 -1.5 54.4 48.3 114.8 80.9 average (per million) Mean number of computers per 1,000 37.7 - (n.s.) 172.0 + (n.s.) 404.2 + (n.s.) workers Source: Data on TFP from Loayza et al (2002); data on educational attainment of adults from Barro and Lee (2002); data on enrollment rates from UNESCO; data on TIMSS scores from TIMSS; data on imports, imports of capital goods, GDP, GDP per capita, and population from World Bank data bases; data on R&D and patent registration from Lederman and Saenz (2002). World Bank Latin American and Caribbean Studies Closing the Gap in Education and Technology Investing in education, opening up to new technologies through foreign trade and investment, and encouraging private sector research and development (R&D) are the keys to unlocking the potential of technology to speed up economic growth in Latin America and the Caribbean (LAC). In Closing the Gap in Education and Technology, principal authors David de Ferranti and Guillermo E. Perry advise Latin American and Caribbean governments to address the region's deficits in skills and technology, and thereby boost productivity, which is essential to improving growth prospects. Visit http:// www.worldbank.org/lac to download About the Author About "en breve" Guillermo Perry is the World Bank's Chief Economist for the Subscribe to "en breve" by sending an email to Latin American and the Caribbean region en_breve@worldbank.org 4