Economics of Education in the East Asian Region

Subject: Economics
Pages: 13
Words: 3612
Reading time:
13 min
Study level: PhD


The connection between economy and education has always been inevitable because these two spheres of human activities are interrelated and interdependent. The contemporary society may be defined as a society of the future due to numerous innovations which are invented daily and which help this society to develop. According to Coleman 1972, the society of future is “a society that attempts innovations as solutions to problems, that has explicit mechanisms for evaluating these innovations, that goes on to attempt further innovations, engages in further innovations, and through such processes attempts to resolve those problems that arise.” (Coleman, 1972) Going through all of these processes requires erudition which can be obtained only through getting the proper education. Thus, education becomes the only zero-risk investment that a person (or government) can make. It is well-known that education requires high expenses, but, as any enterprise of this kind, it brings much more profits than the costs it takes. Many countries opt to invest in education trying to improve their economies, and they get the desired in most cases. The connection between investments in education and the economic success of the East Asian countries has not been researched much by economists this is why this paper aims to explore the benefits that investments in education bring to the economies of the East Asian countries.

A group of East Asian countries whose investments in education and economic success are considered in this paper includes the Philippines, Korea, Indonesia, Malaysia, Singapore, China, Thailand, Vietnam, and others. All of these countries are developing and have approximately the same levels of economic welfare. This is why the research paper will address them collectively, occasionally providing the data for each of them separately. Exploring the connection between the successfulness of economies and investment in the education on the example of East Asian countries is extremely interesting because activities which are based on human knowledge become more and more widespread in the global economy, “and East Asian national policymakers are well aware that effective educational policies are key to helping their economies participate in the potentially large gains from such knowledge-based production and services.” (“Critical Discussions on Education,” 2006) It is clear that the higher the economic welfare of a country is, the more it can invest in education, as well as in other spheres of human activities, which with time will bring it to return and economic success. One of the biggest challenges here is to find the right way to assess the economic welfare of the country. This is one of the issues the paper is going to address before evaluating the economic welfare of the group of developing countries in question and the benefits of investment in education. This paper will explore the economic and educational development of the countries belonging to the East Asian region, taking into account different methods of analyzing the governments’ investments in education and their impact on the economic prosperity of the region in question.

Investment in Education

Economic Welfare

When assessing the economic conditions and welfare of any country, one should take into account a number of factors that directly affect it. Despite the common idea that “earnings provide a good indicator of the person’s overall economic welfare,” (Betts, 1999) some scholars assert that cultural nuances play an important role in assessing the economic welfare of a person and the country this person lives in correspondingly. For instance, Fry 2002 states that considering only individual earning may be misleading because most of the families in the developing countries are extended and their members often pool their earnings. (Fry, 2002) After considering the following examples, Fry defines cultural factors as the ones which influence economic welfare in the first place:

The cost of taking an air-conditioned luxury bus from the Cambodian capital of Phnom Penh to its major point, Sihanoukville, is less than $2. The same bus trip of equal distance in Japan or the United States would cost $50 or more. Similarly, a (subsidized) lunch at a factory producing Nike shoes in Vietnam may cost the equivalent of 5 U.S. cents in 1998, while lunch at a student union on a U.S. college campus may cost $5. Thus a teaching assistant on a U.S. campus pays 100 times more for lunch than the Vietnamese factory worker. (Fry, 2002)

Such situations puzzle a number of researchers because they make them wonder which of the workers are more poorly paid and the economic welfare of which country is higher in each of the abovementioned cases. Therefore, cultural factors may be regarded as playing a decisive role when carrying out the analysis of the economic welfare of the countries.

Moreover, the economic welfare of the country may depend on the number of immigrants who work there. This is where the connection between the investments in education and economic success can be traced. East Asian countries are often regarded as less perspective in terms of job opportunities. This makes a number of native inhabitants leave their countries and move to Canada, United States, Australia, and the like countries where the working force is always needed: “For them, first-generation immigrants like the Chinese and Indian engineers of Silicon Valley, who have the language, cultural, and technical skills to thrive in both the United States and foreign markets, are invaluable.” (Legrain, 2007) This shows that the quality of education in the Third World countries is high enough for the graduates of their higher educational establishments to be employed by foreign firms and companies. Immigration from these countries simply testifies to the fact that the level of their economic development does not allow providing the graduates with enough working places. Immigration to work in the foreign country reveals the connection between education and economy, because people who get education in their own country contribute to the economy of the foreign country applying the knowledge they obtained in educational establishments; though in this case the investment in education was made by one country and the benefits were gained by another (foreign) country, the fact that the return did take place cannot be denied. This may serve as a plausible explanation that the economies of such countries as the United States and Canada are better developed; to be more exact, educated people incessantly contribute to the economies of these countries, though the countries themselves did not invest in their education.

Even though East Asian countries are not so successful economically as the United States or even countries belonging to the Second World, they try to boost their economies through investments in the education systems, which can be seen from their rapid educational and economic growth in the past three decades. (“Critical Discussions on Education,” 2006) The educational systems of these countries also “face significant and interesting challenges in realizing greater equity and efficiency.” (“Critical Discussions on Education,” 2006) They use educational policies and introduce a number of reforms in the sphere of education, which results in the highest test scores in the world and bigger amount of professionals who after graduating start actively contributing to the economies of their countries. The data on the education expenditure of the East Asian countries are presented in Table 1.

Educational Expansion

Like in a number of other countries, the East Asian region chose educational expansion as the basic strategy for the educational changes. The rapidity of this expansion was quite unexpected, but, without any doubt, successful. By the year 2000 more than 90 percent of East Asian elementary school students (except for the Philippines) reached grade 5 (Table 2); thus, “East Asia as a whole has almost achieved universal attainment in its youth population of at least five years of schooling.” (“Critical Discussions on Education,” 2006) No less striking was the enrollment growth in secondary school:

From 1970 to 2001, gross enrollment rates in secondary education more than doubled in six of the largest developing countries in the region. Mongolia and Vietnam have similarly high secondary GERs (65 percent in 2000). Cambodia, Lao PDR, and Myanmar form a group of societies with much lower secondary enrollment rates (35 percent in Lao PDR and Myanmar in 2000, and only 17 percent in Cambodia). (“Critical Discussions on Education,” 2006)

These differences in enrollment rates, as well as in the educational expansion may be explained by the fact that in different East Asian countries different proportions of students attend public and private schools. For instance, private schools are attended by 45% of students in Korea, 36% in the Philippines, 16% in Thailand, and 49% in Indonesia. In contrast to these data, almost all the students of China, Vietnam, Mongolia, and Malaysia attend public schools. (“Critical Discussions on Education,” 2006) Thus, such countries as Korea are on their way to universal post-secondary education, because most of the students of higher educational institutions finance their education by themselves. Despite uneven development of expansion rates, East Asian countries differ in the financing of higher educational establishments:

The Philippines and Korea have 80 percent of their students in public universities. Indonesia likewise has a very high percentage privately financed (60 percent). However, in many countries, higher education is mostly publicly run. Thailand and Malaysia have more than 80 percent of their students in public universities. In China, Mongolia, Hong Kong, and Singapore, the rates are much higher. Yet, increasingly countries with mainly public higher education are charging fees. (“Critical Discussions on Education,” 2006)

The data on the public expenditure on education are presented in Table 3.

Economic Success of the Countries of the Third World

Getting Returns from the Investments in Education

The division between those students who prefer public institutions and those who prefer private ones is important for calculating the returns to investment in education, which is necessary to define how beneficial these investments are for the economy of a definite country. The matter is that private returns are, as a rule, higher than the public ones “because of the public subsidization of education and the fact that typical social rate of return estimates are not able to include social benefits.” (Psacharopoulos & Patrinos, 2004) provide the evidence that private rates-of-return are higher than public rates-or-return in East Asian countries. At large, the research conducted by Psacharopoulos & Patrinos 2004 indicates that “returns to schooling for Asia are at about the world average,” which is much better than the rates shown by the Middle East, non-OECD European, and North African countries. At this, the Caribbean, Sub-Saharan Africa, and Latin America regions have shown the highest rates of return to schooling. In addition, the choice between private and public institutions often depends on the quality of education the students wish to get. According to Friedman M. & Friedman R. 1980, “the increased role of government has had many … adverse effects on higher education… It has fostered an atmosphere that both dedicated teachers and serious students often find inimical to learning.” (Friedman M. & Friedman R., 1980) Such an atmosphere in public schools makes students transfer to the private institutions. This means that by choosing private institutions the students pay fees not to the government, but to the private individuals who then pass a certain percentage of these fees to the government in the form of taxes. Hypothetically, this fact may explain lower rates of return on investments in the countries where public institutions prevail; however, this is only an assumption, though a quite sufficiently grounded one.

Cost-Benefit Analysis of the Investments in Education

Cost-benefit analysis is one of the techniques of investment appraisal which has attracted special attention of researchers in the recent years. It has almost fully replaced the manpower planning and the social demand approach which have been used before it, especially when assessing the investments of the countries of the Third World. Calculating costs in education involves the same principle as calculating costs elsewhere, even though computation of educational costs takes much time and effort. Economists tend to accept as the evidence that the incomes of people with higher levels of education are higher than the incomes of people with lower levels of education. In other words, the benefit of the investments in education may be roughly calculated by comparing the numbers of educated and uneducated people. (Table 4 and Table 5)

Cost-benefit analysis may be carried out from the perspective of the individual and the perspective of society as a whole. At this, it is necessary to define average and marginal private rate-of-return (in terms of the former) and average and marginal social rate-of-return (in terms of the latter). (Hough, 1993) In the research about cost-benefit analysis, Hough 1993 notes that “social rate-of-return should be important for educational planning since it gives the return to society as a whole but the private rate of return shows the basis on which individual students make their investment decision.” (Hough, 1993) All rates-of-return calculations may be also referred to as marginal due to the fact “that they measure the costs and benefits of a marginal increase in investment in education.” (Hough, 1993) It is also possible to use the workers’ earnings differentials as a proxy when calculating the benefits of social rate-of-return, because, as a rule, they reflect the differences in the marginal productivity of the workers. As stated by Hough 1993, “this point may also be important in connection with public sector employees, who in many Third World Countries comprise large percentages, often 50% or more, of the more highly educated people.” (Hough, 1993) Some economists deny the reliability of the data obtained through this calculation due to the idea that the workers’ education rarely has any effect on their productivity. This idea may be regarded as truthful, though it can be objected to because education “enables employers to identify workers with different levels of ability, one consequence being that an increase in the supply of educated workers leads to “credentialism” as employers demand higher and higher levels of education.” (Hough, 1993)

Age-earning profiles can also be used when making the calculations of this kind. This is one of the alternatives for the cost-benefit analysis and it has its advantages and disadvantages. Its biggest disadvantage is that it is rather time-taking. Hough 1993 states that such profiles should contain the data which have been collected for forty years, which is the usual working life of a person. (Hough, 1993) This explains the fact that such profiles are rarely used because carrying out such research will take a significant amount of time. This being the reason, most of the researchers use cross-section data, or “snapshot evidence of cross-sections of society at one moment in time.” (Hough, 1993) The greatest disadvantage of this method is that the data can be biased because they do not reflect fluctuations in the economy of the country and, correspondingly, in the earnings of the participants of the research:

… cross-section data may be unduly affected by short-run cyclical changes in the economy, they ignore future changes in the demand and supply of educated manpower and they fail to capture the effects of trends over time, the major one of which in most countries is the of economic growth. (Hough, 1993)

However, the advantages of using this method are also significant. The main one is that the data does not have to be corrected every year because of the effects of inflation. Hough 1993 notes that Psacharopoulos (1985) who used this method for calculating the return on investments in education “found evidence that over time the rate of return to education declined slightly in developing countries but remained relatively stable in developed countries.” (Hough, 1993) This may be connected with the fact that developing countries have unstable economies, which reflects on their investments in education and, naturally, on the returns on these investments (the amounts of the investment and the return on it are proportional, which means that the more the investment is, the bigger the return will be; because of instability of the economies, developing countries cannot spare large sums of money for educational investments, which leads to lower returns with time).

Conducting cost-benefit analysis of the investments in education of the developing countries is complicated by different external factors. Standards of living are rather low in almost all of the countries in question this is why income foregone should be taken into account when performing the calculations of this kind:

A significant point in developing countries is that the student’s family will often suffer loss of his/her income, either monetary income or in terms of practical work done, and that primary school children, particularly girls, are often withdrawn from school because their parents need their services at home. The importance of allowing for income foregone may be seen when it is realized that, when it is included, it frequently exceeds the whole of the direct cost of the education in question. (Hough, 1993)

The problem of gender often affects the results of studies when it comes to developing countries. The findings regarding the rates-of-return are highly dependent on the level of education of women, because “the rates-of-return to educating women may be considerably higher, perhaps by two percentage points, than the standard computations will show.” (Hough, 1993) This happens because of the impact of different factors, such as returning of women to work after giving birth to children, facing less market discrimination in case of having high level of education, and positive economic value of women’s non-market work. (Hough, 1993) Another power factor is that women tend to choose the occupations in the public sector “where the value of earnings as a measure of marginal product was more than usually suspect, combined to suggest that rate-of-return studies typically understated the returns to investment in the education of women.” (Hough, 1993) This explains the fact that most of the researchers opt to use male data when calculating the rate of return on the investments.

Findings and Conclusions

In general, the paper has found out that the governments’ investments in education have positively affected enrollment and literacy rates of population. As stated by the UNESCO Institute of Statistics 2009, nine of the fourteen East Asian countries spent approximately 5% of GNP on the investments in education in 2006. At this, the variations within the region were quite tangible (for instance, Cambodia invested 1.8%, while Vanuatu invested maximum of 10%). East Asia’s total public expenditure was about 16%, which is even higher than the world median. This resulted in the increased rates of literacy among the population and better economic performance correspondingly.

Currently, East Asian region can be characterized by 5% increase in enrollment in preliminary schools in the period from 1999 till 2006. (UNESCO Institute for Statistics, 2009) The number of out-of-school children has significantly decreased and continues decreasing in Cambodia, Myanmar, and Korea. According to the data obtained by UNESCO, 162 million students were enrolled in secondary education in the East Asian region in 2006, which resulted in the increase of the net enrollment ratio by 8%. In addition, literacy rates have considerably improved over the recent years:

An estimated 113 million adults in the region were considered illiterate in 2000-2006, nearly two-thirds of these were in China and 13% in Indonesia. Between 1985-1994 and 2000-2006, the average adult literacy rate increased from 82% to 93% mainly due to reduction of illiteracy in China. The rise was more pronounced among women whose literacy rate climbed from 75% to just over 90%. (UNESCO Institute for Statistics, 2009)

Increased literacy and higher levels of education of the population have positively influenced the overall economic development of the region. The rate of development of each country of the region partially depended on the rate of investment in education (the paper proved the fact that education and economy of the country are interrelated). In sum, the East Asian region has experienced rapid economic development in the past decade. The increased literacy of the population and the continually increasing number of people with high levels of education are likely to ensure the region with the expected level of economic prosperity if the governments of the separate countries forming the region do not stop investing in education.

Table 1: Governmental Expenditure on Education (%) (1999-2006)

Country 1999 2000 2001 2002 2003 2004 2005 2005
China 22.9 21.9 23.3 23.3 23.0 23.9
Indonesia 11.5 14.3 16.0 14.2 14.9 17.2
Korea 13.1 14.7 15.5 15.0 16.5
Malaysia 25.2 26.7 20.0 20.3 28.0 25.2
Thailand 28.1 31.0 28.3 26.8 25.0
Cambodia 8.7 14.6

Table 2: Survival Rate, Grade 5 (Male and Female) (1999-2005)

Country 1999 2000 2001 2002 2003 2004 2005
China 99.6 99.9 99.5
Indonesia 95.3 89.2 89.1 92.1 89.5 84.4
Korea 99.9 99.7 99.6 99.1 99.9 98.1 99.1
Malaysia 87.1 98.4 99.3
Vietnam 82.8 85.7 89.0 86.8 92.1
Cambodia 56.3 62.8 70.4 60.9 59.7 63.1 62.2

Table 3: Public Expenditure on Education (percentage of total expenditure on education) (1999-2006)

Country 1999 2000 2001 2002 2003 2004 2005 2006
China 86.1 88.5 85.5 82.2 82.8 82.0
Korea 80.3 80.0 80.7 87.6
Malaysia 66.0 63.5 58.7 68.3 88.2
Cambodia 89.7 95.3

Table 4: Adult Literacy Rate (%) –Total (2000-2007)

Country 2000 2001 2002 2003 2004 2005 2006 2007
China 90.9 92.6 93.0 93.3
Indonesia 90.4 90.6 91.0 91.4
Malaysia 92.0 93.7 93.9 94.2
Thailand 92.6 93.7 93.9 94.1
Philippines 92.6 92.6 93.2 93.3 93.4
Singapore 92.5 93.9 94.2 94.4

Table 5: Adult Illiterate Population – Total (2000-2007)

Country 2000 2001 2002 2003 2004 2005 2006 2007
China 86.355.845 75.839.178 73.231.567 70.582.807
Indonesia 15.290.638 15.179.243 14.772.425 14.367.057
Malaysia 1.749.105 1.557.512 1.526.782 1.496.301
Thailand 3.412.416 3.099.239 1.945.912
Philippines 3.509.978 3.795.284 3.676.332 3.710.532 3.746.244
Singapore 232.451 211.222 206.926 202.589


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