Tuesday, August 30, 2011

We don't need no education

Come July and on most university campuses across India, the fear is as palpable as the excitement. For weeks altogether, students-to-be rush from college to college desperately scanning admission lists for their names. Never before has India offered a shot at a better life after graduation. But again, never has getting a seat been so difficult. And for those who do land a spot, ironically the troubles are just beginning.

Though by all standards, the long-term prospects of the Indian economy and job markets are promising, the university system, which has been struggling for years, has recently hit a full-fledged crisis. Our post-secondary schools today only have enough seats for about 7% of college-age citizens (half the Asian average) and face a dire shortage of faculty. According to a recent regulatory report, 25% of teaching positions nationwide are vacant, and 57% of professors lack either a Master’s or a Ph.D. degree. Curriculums are outdated; infrastructure is crumbling even at the reputed Indian Institutes of Technology, where once cutting-edge laboratories are now dinosaurs. And incompetent (or, as many allege, corrupt) regulators have let fly-by-night colleges run riot while keeping out elite foreign universities keen to enter a highly attractive education market (the size of which according to bullish estimates will be about $70 billion by 2013 and $115 billion by 2018).

In the same breath as America fighting its own economic battles with rising unemployment, Europe grappling with the 50:50:50 paradigm which suggests that 50% of the population in Europe would be 50 years or older by 2050, and Japan and the East coming to terms with the Silver Century, much mention is made of India’s “demographic dividend.” With a median age of 25 years, and about 35% of the population under the age of 15, it is estimated that around 25% of the global workforce will be Indian by 2030. What this means is that the quality of education that young Indians receive today will impact us all in the near future.

For this, the Indian polity has committed to significantly enhancing outlays for the education sector and has even come up with some radical, interesting proposals for education reform. Indeed, there has been spirited debate in the country on the measures needed to be taken but the government is yet to walk the talk on key policy decisions. There is, for instance, considerable opposition to allowing foreign investment in higher education.
Unsurprisingly, the government has responded by commissioning studies and setting up a maze (haze?) of committees to decide the best course of action. These are but convenient tools to delay any sort of commitment and to buy time. And unfortunately, an arcane regulatory framework and a fractured political class only help matters in this case. It would be difficult to overstate how important it is for India to act swiftly in order to reap the full benefits of its demographic slant. The scale of education reform required in India is massive and, yes, sustainable change will take time as well as a broad-based consensus. But to get the ball rolling, there are a number of short-term steps that the government can begin immediately:
Commit to spending more on QUALITY education: Way back in 1968, the Kothari Commission recommended that India spends 6% of its GDP on education; but in the 43 years since, India’s total educational outlays have never exceeded 4.3% of its GDP in any given year! Setting aside more funds for education is a critical first step that will demonstrate the government’s commitment to educational reform. But hamstrung by India’s unwieldy bureaucracy and by ideological opponents, we may manage to dramatically expand the size of our higher education system without addressing many of its underlying problems. For example, the Prime Minister has promised to open 72 new post-secondary schools over the next five years, including eight new Indian Institutes of Technology, seven new Indian Institutes of Management, five new Indian Institutes of Science Education and Research and 20 new Indian Institutes of Information Technology. To fund them, the government’s higher education spending will be boosted nine-fold, to $20 billion annually. But these changes may wind up addressing India’s quantity problem without affecting its quality crisis. About 75% of India’s 400,000 annual technology grads and 90% of its 2.5 million general college grads are unable to find work – this is not due to a lack of jobs, it is due to a lack of skills. While the employment issue may have been addressed, the employability problem also needs a solution. Loosening the purse strings will undoubtedly help improve infrastructure and expand access for students, but it will take more than money to solve the faculty shortage, revamp outdated courses, encourage innovation and crack down on diploma mills. Rapid expansion could exacerbate these problems.
Fix PRIMARY education first: There are two major tasks here: raising enrollment to 100% in urban as well as rural areas; and then minimizing drop-outs. Both need to work in tandem to be meaningful. In Mumbai, for instance, enrollment rates are very high – above 95% — but only a fraction of these students actually finish school due to absurdly high drop-out rates. In addition, eliminating gender gaps at this early stage must be a priority. In rural areas, thousands of young girls do not attend school because there are no separate toilets for them – disgraceful, but true nevertheless. Other girls do not attend because the walk to school – often in a neighboring village – is unsafe. Yes, part of the answer is building more schools with better infrastructure. Here it is encouraging to see the number of NGOs that are rushing to help and address this void but most efforts are still confined to urban areas and large metropolitan cities – there are quite literally many more miles to go.
Prioritize SCHOOLING over higher education: In the first half of the 1950s, Jawaharlal Nehru, India’s first prime minister, laid the foundations of India’s higher education platform to compete technologically in the Cold War era. Institutions such as the Indian Institutes of Technology were expanded and the country focused on producing more engineers and scientists. But the expansion of higher education was accompanied by a neglect of school education. This elitist system of education continues even today, with new engineering colleges mushrooming every day. Schools are often viewed as little more than a means to gain access to a solid engineering program. This remarkable trend has had far-reaching effects. What we need to realize is that it is impossible to produce high-quality graduates who are capable of competing globally, not just in the Indian economy, without sturdy foundations at school. We need a paradigm shift in how we view education in the first place, and focus on building it from the bottom up – not the other way round.
Begin to AUDIT regulations:  In 2005, a dream team of academics, planners and business executives were appointed to the National Knowledge Commission with a mandate to redesign India’s entire education infrastructure by this October. This commission published a comprehensive set of recommendations in January 2007, focusing on “expansion, excellence and inclusion.” Among its proposals, the commission advocated not only expanding the state university system but also diversifying sources of financing to include private participation, philanthropic contributions and industry links. It also suggested introducing frequent curricular revisions, moving away from the present system of standardized university-wide exams in favor of internal assessments of students by their professors, and setting up an independent regulatory authority. While the government has allocated a huge sum for building more universities and improving inclusiveness by expanding the quota system, it has yet to make progress on the crucial regulatory elements of the commission’s plan. That could prove disastrous. At present, India has no less than 16 different supervisory bodies for higher education, few of which are independent and all (sic) of which are of questionable efficacy. Mostly due to bureaucratic inertia, they’ve so far blocked attempts to modernize curriculums and methods of evaluation. They haven’t done a good job at policing, either. Shoddy for-profit colleges have proliferated even as internationally respected foreign providers have been barred from opening up branch campuses and have struggled to get their joint programs certified. The All India Council of Technical Education, for example, has approved thousands of substandard private engineering colleges – many of them founded by profit-minded politicians. But it has refused to recognize the Indian School of Business. And political wrangling at the parliamentary level has stymied legislation to allow foreign universities to set up campuses, even though Cornell, Columbia, and Stanford universities have all sent high-ranking delegations to the country on exploratory missions.

Perhaps the most important piece of the Indian education puzzle is a change in mindset. This, finally, will be the crucial lever in reforming the system and creating sustainable change. How do we view education? What should we expect from it – at school and, later, at university? These are questions which are inevitably fuzzy but which will require serious thought and introspection – not just among ordinary citizens, but among politicians and bureaucrats as well.

Make no mistake – we are in the midst of a severe education crisis. And it is for this reason that we need to be talking about the subject more and encouraging debate. Because let us be sure that, without a significant change in mindset, education reform is a non-starter and the “demographic dividend” will just remain a fancy term confined to political journals. And we need to do it before our mantra is: “We don’t need no education!”

Saturday, August 6, 2011

America's (alphabet) soup

All that the Finance Minister of the world’s tenth largest economy had to say after the downgrading of the US sovereign credit rating to AA+ by Standard & Poors was: “The situation is grave – we need to analyze”. I could have done better.

S&P cut the US credit rating for the first time in history, from the first-class AAA to one notch below at AA+. The rating’s agency said that the US politicians were increasingly unable to handle the country’s huge fiscal deficit and debt load. Going from bad to worse, it added a negative outlook, saying there was a chance the rating could be downgraded further within two years if progress is not made in cutting the huge government budget gap. S&P said the “political brinksmanship” of recent months shows that governance in the country is becoming “less stable, less effective, and less predictable,” raising the risks that one day it might not honour its debt. The move - which came late Friday after US markets closed, allowing the world to digest the news over the weekend - was the first time the US was downgraded since it received an AAA rating from Moody’s in 1917. Predictably, the White House called S&P’s analysis of the economy deeply flawed and politically-based. A Treasury spokesperson alleged that there was a “two trillion dollar error”, arguing that S&P admittedly used the wrong baseline and erred on spending plans and debt projections.

S&P had first warned Washington of a possible downgrade in April. Then in July, during the protracted political standoff over raising the government’s debt ceiling, S&P placed the United States on credit watch and warned of a possible cut within 90 days. The White House, Democratic and Republican lawmakers battled for months until the country was on the precipice of default last week before they finally agreed to a deal to raise borrowing limits and slash the deficit. The fiscal consolidation plan finally agreed calls for $US917 billion in cuts over 10 years, but also mandates an as-yet unnamed Congressional panel to come up with another $US1.5 trillion in cuts by the end of the year. That fell short of what S&P has been saying would merit retaining the AAA rating: $4 trillion in deficit reduction over 10 years that includes both cuts and revenue increases, which Republicans refused to accept.

Let’s put these numbers in perspective – using the present $14.772 trillion US economy as the baseline, an average annual expenditure cut of $91.7 billion is about 0.6% of the total size of the economy. With the projected GDP growth as 2.8% and inflation at 2.1%, in my “simple” model this ipso facto means a stagnant US economy (with all else being constant). Of course, I am willing to reconsider my figures once the Congressional panel figures out what to do for its $1.5 trillion in cuts.

And for those who wish to trash my “simple” model, let me digress a bit. Milton Friedman defended models with untrue premises by suggesting that it does not matter how unrealistic the assumptions of a model are, as long as those models predict accurately. An analogy might be Newton’s laws of motion which depend on false assumptions about how the world works compared to quantum mechanics. Nonetheless Newton's laws of motion are practically useful for some applications, especially since those are much easier to intuitively understand and use rather than quantum mechanics. What matters, or so argues Milton Friedman, is the truth of the predictions produced by the model more than whether the premises built into the model are true.

Now what effect would this 0.6% spending cut have on India’s trade figures with the US?

The final figures on Indo-US trade in merchandise goods for 2010, which were released recently, are both encouraging and sobering at the same time. But, first, the hard, cold statistics: the volume of trade in goods between the world’s richest country and the 10th largest economy was worth $48.8 billion last year; US exports to India accounted for $19.2 billion and its imports from the country totaled $29.5 billion. Exports to the United States comprised roughly 14 percent of India’s exports last year, and its imports from the United States were just under 7 percent of its overall imports. Significant numbers, but yet not large enough for India to press the panic button.

Now whilst the much anticipated $50 billion milestone was missed by a whisker, 2010 turned out to be the best year for bilateral trade in goods. This $48.8 billion was a 30 percent increase over the previous year, when for the first time in many years the bilateral trade declined mainly because of a nearly $5 billion dip in US imports from India, in the aftermath of the financial meltdown. The good news is that Indo-US commerce is more or less a two-way trade, with the balance of trade – which is in favor of India – a manageable $10.3 billion.

Trade with India accounted for 1.5 percent of all US trade in goods, which totaled $3.2 trillion. In comparison, its trade with China accounted for 14.3 percent of America’s overall trade in goods. In November last year alone, the United States and China traded in goods worth $45 billion, close to a whole year’s worth of India-US trade. Last year, India was America’s 12th largest goods trading partner, sandwiched between the Netherlands at 11th and Singapore at 13th, both much smaller economies. The Dutch GDP is approximately half the size of India’s and Singapore’s less than a sixth. I suspect the Dutch and the Singaporeans should be worried more than the Indians.

Trade in services with India (both exports and imports) totaled $22.3 billion in 2009 (latest data available for services trade). Services exports were $9.9 billion, with imports of $12.4 billion. The US services trade deficit with India was $2.4 billion in 2009, again manageable.

The sobering aspect of last year’s trade data is that, while the Indo-US merchandise trade is on the upswing, the two countries have not been able to put it on a fast track. Though India recognizes the importance of the US market, its size and scope for the expansion of exports, it is struggling to meet even the modest goal of increasing its market share to 2 percent. Ironically (and possibly perversely) this is good news today.

Some other numbers: India received the maximum FDI from Mauritius, Singapore, and the US pegged at $56.31 billion, $13.25 billion and $ 9.71 billion, respectively, during April 2000-May 2011. In the last year, about 36 per cent of FDI came via Mauritius – mainly because most of the investors want to take advantage of the double taxation avoidance agreement between Mauritius and India and Mauritius-based investors do not have to pay capital gains tax in India. Singapore was the second largest contributor of FDI after Mauritius, accounting for nearly 9 per cent of the investment during the same period. Japan came in third with 8.3 per cent, followed by the Netherlands and the USA with 6.1 per cent each, and Cyprus with 4.5 per cent. So what are we looking at for the US? Just about $1.1 billion of the total FDI inflows of about $27 billion.

Yes indeed, I agree one can never overestimate the role of US consumers in underwriting Asia’s rise as a global, should I say, production house. And oh, I also do know about globalization and free markets and financial debris cascading across borders et al, but I daresay tongue-in-cheek, India needs to focus on S&P’s rating for Mauritius and Singapore, and not lose too much sleep over America’s (alphabet) soup! That’s for the Chinese.

Any thoughts Mr. Finance Minister?