Sunday, January 20, 2008

Skill-biased technological change and quality of education in India

Arindam Banik and Pradip K Bhaumik

The geographical contours of global production of goods and services have seen significant shifts in recent times. This has been caused as much by forces of globalization as by technological changes. In fact, the interaction of the two have caused impacts which are an order of magnitude greater than that of either alone. While globalization has made almost all product markets and all factor markets except labour global, technological change is bringing equally massive upheavals in its wake – all of which is still not fully understood. In the midst of such massive changes, the immobility of labour will perhaps continue and all our policy decisions will have to be based on this given feature of the international political economy for the foreseeable future although even fewer services will need to be produced locally.
Most newer technologies entering the market through newer products as well as newer processes are skill-biased in the sense that they use skilled workers more intensively than the older technology. Economists have found that adoption of new technology is affected by relative supply of skilled workers in the region – regions having a higher supply are likely to be quicker in new technology adoption. Also, the real wages of skilled workers are expected to increase as new skill-biased technology is adopted whereas the wages of unskilled workers may remain unaffected or even fall. The issue of supply of skilled labour has therefore been rendered a subject of immense interest in recent time largely due to the rising inequality in the relative wages of skilled and unskilled labour.
At the firm level or even at the level of the economy, new technology can be developed endogenously through innovation. New technology could also be developed exogenously and adopted later in a local firm. As mentioned earlier, the market for technology is slowly emerging as a global market and newer technologies are improving the product quality, improving productivity and in many cases have superior capabilities. To survive in globalized markets firms have no option but to use global technologies. Being skill-biased, the new technologies have bred increased wage inequalities at household level as well as regional level in the Indian context.
It is observed that new technology accompanies certain forms of inward investment which also brings new ideas and processes to a country. But at the initial stage it benefits the relatively skilled and consequently the relatively well-off. Accordingly, higher-skilled people gain by way of better jobs and higher wages at the expense of the lower-skilled. As a result, the adoption of new technology furthers the wage divide between the skilled and the unskilled. Interestingly, the removal of trade barriers has reduced inequality of different kinds including the skill inequality. Incidentally, with foreign direct investment, the increasing income inequality among various skill levels is emerging as a source of concern.
For rich economies, the net outflows of FDI tend to reduce the relative wages of lower skilled workers, while in poor economies inflows of FDI benefit the highly-skilled. This is also prevalent in the Indian context. For example, a company shifting a call centre from a developed economy to India aggravates inequality in both the economies.
The anti-globalisation lobby will then jump into recommending the policy prescription through protectionism. Such policies may be harmful for both the countries. The developed country firms prohibited from pursuing FDI cannot guarantee long-term employment to uncompetitive workers and in fact may endanger their own survival, the consumers of their product or services will have reduced purchasing power as they buy the same product or service at higher than global prices. Similarly, the relatively poor country stopped from receiving the FDI would have lost the chance of receiving investment, creating output and employment. So suppressing FDI or technological change may not be an ideal case and other options to reduce the wage divide may be called for.
One such option would be to increase the supply of skilled workers and a prerequisite for this would be to raise the general educational standard. In general, the level is below the performance required to integrate entrants to the labour force. Productivity levels in India are generally low partly explained by ineffective education. The fact that the poor have low levels of education in India highlights the need to address educational issues. Let us not forget that primary education generates the highest rates of return; secondary level has lower returns while the tertiary level has returns higher than that of the secondary level.
Experts argue that skill-biased technological change is responsible for increasing inequality within the top portions of the income distribution. Evidently, most of the growth in inequality between the highest and lowest earners is due to poor educational performance of the unskilled and their quality available in the market. At the household level, ample evidence reveals that the poor face credit constraints which prevent them from investing optimally in their children's education. But this is only part of the story.
On the supply side, the government is equally to be blamed. In the Indian context mostly the government educational institutions are responsible for providing quality education from basic to higher educational level. In general terms they are abysmally poor. At the school level, the difference between the government schools and the private ones is too glaring to be emphasised. Similarly, although there are private institutions offering tertiary education, the regulating bodies are all government controlled. Research and publications wise, the performance of the teachers are abysmally poor even in the leading engineering and management institutes. One will have to struggle hard to find an Indian educational institute among the top 250 in the world. In future the country must compete through the quality of her human capital, her innovation and her research and development. Sound educational institutions will be a basic premise for meeting the challenges of skill-biased technologies.
At the primary level the story is even more pathetic. It is not just at the top of the ladder that the rungs are missing – a significant number of schools lack the most basic infrastructure, let alone access to the Internet. In addition non-availability of quality staff aggravates the situation. If we do not quickly upgrade our educational institutions, the demographic advantage that we proclaim so loudly may suddenly appear to be a burden.