metadata: authors: 0: author: Jimenez,Emmanuel Y.
1: author: Nguyen,Vy T.
2: author: Patrinos,Harry Anthony
count: Malaysia,Thailand
docna: 0: docna: Stuck in the middle ? human capital
            development and economic growth in Malaysia and Thailand
docty: Policy Research Working Paper
subtopic: Economic Theory & Research,Industrial Economics,Tertiary Education,Educational Sciences,Educational Populations,Education for Development (superceded),Economic Growth,Education For All
teratopic: Education
abstracts: cdata!: The challenge of sustaining economic
            growth over the long term is one that only a few countries
            have been able to surmount. Slowing momentum in countries
            like Malaysia and Thailand has led analysts and policy
            makers to consider what it would take to lift them out of
            middle-income status, where other countries have arguably
            become stuck. The paper examines the role of human capital
            formation in the quest to sustain economic growth in these
            two countries. It argues that a good education system is
            fundamental to equip workers with marketable skills.
            Malaysia and Thailand have successfully expanded access to
            schooling, but the quality of education remains an issue.
            Modern education systems should aim to provide
            universally-available quality education using the following
            policies: prioritize budgets to deliver quality and
            universally-available basic education before expanding
            higher levels of schooling; provide appropriate incentives
            and rewards to teachers; permit school autonomy and ensure
            accountability for results; invest in early childhood
            development; and consider implementing income-contingent
            loan financing schemes to expand higher education.
geo_reg_key: 517198,517191
repnme: repnme: Stuck in the middle ? human capital
            development and economic growth in Malaysia and Thailand
display_title: Stuck in the middle human capital
            development and economic growth in Malaysia and Thailand
listing_relative_url: /research/2012/11/17019302/stuck-middle-human-capital-development-economic-growth-malaysia-thailand
topicv3: Education, Skills Development and Labor
            Market m1326135 1484,Economic Growth m1326241 471,Quality of Education m1326344 491,Tertiary Education m1326349 482,Education m1327048 470
publishtoextweb_dt: 2012-11-01T00:00:00Z
historic_topic: Education
no_of_pages: 24
author_keys: 0: author_key: 90117
1: author_key: 957939
2: author_key: 95903
model_extractions: WPS6283 Policy Research Working Paper 6283 Stuck in the Middle? Human Capital Development and Economic Growth in Malaysia and Thailand _Emmanuel Jimenez Vy Nguyen Harry Anthony Patrinos_ The World Bank Human Development Network Education Unit November 2012
Policy Research Working Paper 6283

# **Abstract**

The challenge of sustaining economic growth over the long term is one that only a few countries have been able to surmount. Slowing momentum in countries like Malaysia and Thailand has led analysts and policy makers to consider what it would take to lift them out of middle-income status, where other countries have arguably become stuck. The paper examines the role of human capital formation in the quest to sustain economic growth in these two countries. It argues that a good education system is fundamental to equip workers with marketable skills. Malaysia and Thailand have successfully expanded access to schooling, but the quality of education remains an issue. Modern education systems should aim to provide universally-available quality education using the following policies: prioritize budgets to deliver quality and universally-available basic education before expanding higher levels of schooling; provide appropriate incentives and rewards to teachers; permit school autonomy and ensure accountability for results; invest in early childhood development; and consider implementing income-contingent loan financing schemes to expand higher education.

This paper is a product of the Education Unit, Human Development Network. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at hpatrinos@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
1

# **Stuck in the Middle? Human Capital Development and Economic Growth in Malaysia and Thailand**

Emmanuel Jimenez Vy Nguyen Harry Anthony Patrinos<sup>1</sup> JEL codes: I20, I21, I25, I28 Keywords: Education; Government Policy; Economic Development; Growth; Middle Income Sector board: EDU

> 1 The authors are Director, Economist and Sector Manager, respectively, World Bank.  This research was supported in part by the World Bank-Government of Korea Trust Fund.  The views expressed here are those of the authors and do not reflect the views of the World Bank Group.  We are grateful to Chia Siow Yue, Vo Tri Thanh and Wendy Dobson and others for very useful comments.
2 Several emerging Asian economies face the challenge of sustaining current high growth rates for long enough to attain and maintain high per capita incomes.<sup>1</sup> Success in meeting this challenge cannot be taken for granted since of 71 countries classified by the World Bank in 2010 as highincome countries only 15 were not already in this category by 1987.

When the Commission on Growth and Development analyzed 13 cases of developing countries sustaining high growth rates in the post-war period (of which ten were Asian), it found five striking points of resemblance among them: committed, capable and credible governments; open economies; market-based systems; high rates of savings and investment; and the maintenance of macroeconomic stability. The Commission also stressed that in all cases governments put substantial effort into schooling their citizens and deepening their human capital (Commission on Growth and Development: 21-37). While these policies cannot necessarily be imported wholesale because of differing country circumstances and a different global context, there are useful lessons to be learned.

In this paper we focus on the role of human capital development in sustaining growth of per capita incomes in two of the 13 cases, Malaysia and Thailand. In both cases, while per capita incomes have risen markedly in the post-war period, they have “lost momentum” as the Growth Commission puts it. We examine one of the possible reasons by benchmarking their performances against other fast-growing Asian economies with an emphasis on South Korea. In the next section we review recent literature on the role of education in sustaining growth. In the third section, we present case studies of Malaysia and Thailand, asking whether their education systems are producing the ‘right’ skills as measured in the second section. In the fourth section we examine options for improving their prospects, such as setting budget priorities, rewarding teachers appropriately, providing appropriate educational choice, ensuring that the education system is responsive to changing labor market demands, investing in early childhood education and financing for higher education. The final section concludes.

# **The Role of Education in Sustaining Economic Growth Rates**

The development economics literature emphasizes the contribution to growth made by moving surplus labor out of low-productivity jobs in agriculture into labor-intensive manufacturing and higher-productivity agriculture. But the fact that many countries lose momentum in making the transition from middle- to high-income status has fueled debate about whether they may risk falling into a ‘middle-income trap’. If such a trap does exist, education that provides the right skills to make people more productive may be one of the keys to avoiding the trap.

If a country reaches a certain level of living standards but growth rates lose momentum, then it may be in a ‘middle income trap’ and would not advance to high-income status. The ‘trap’ may be caused by rising labor and capital costs that hinder competitiveness with lower-income countries producing low-cost manufactured exports. It may also prevent ‘trapped’ countries from competing successfully with highly-skilled producers in the advanced economies who rely more on knowledge- and innovation-based products and services (Kharas and Kohli 2011; World Bank 2010).
3 Japan, Hong Kong SAR, China; Taiwan, China; Singapore; and South Korea have all gone on to become high-income economies with steady and positive economic growth that has persisted over five decades. Can aspiring countries in Southeast Asia hope to experience the same success? The track-record so far is not promising. Malaysia, Indonesia, Thailand and the Philippines also experienced rapid growth in the 1980s and early 1990s, but that growth rate was insufficient to advance these economies to high-income status. Since the 1997 East Asian crisis, their growth rates have stagnated, or even contracted for a period of time (Figure 1).

This paper focuses on Malaysia and Thailand because they appear to be on the ‘cusp’ of sustained growth as the two most prosperous Southeast Asian economies (Figure 1). The latest data shows that Malaysia’s per capita income was $4987 while Thailand’s was $2604 in constant 2000 US dollars in 2010. They have surpassed the income per capital of countries like Indonesia and the Philippines with which they were once comparable. But they still lag high-income economies like Japan and South Korea and do not seem to be catching up with them.

<!-- Start of picture text --> Figure 1:<br>45000 GNI per capita, constant 2000 US$<br>40000<br>35000<br>30000 Japan<br>25000 United States<br>Korea, Rep.<br>20000<br>Malaysia<br>15000<br>Thailand<br>10000 Philippines<br>5000 Indonesia<br>0<br>Year<br><!-- End of picture text --> Source: World Development Indicators The secret to sustained growth is elusive (Easterly 2001a).<sup>2</sup> Kharas and Kohli (2011) argue that they key for middle-income countries to escape this income status is to rely on growth of a capital- and skill-intensive manufacturing sector and growth of a high-productivity service industry. Non-tradable services such as house cleaning or hair cutting have little room for productivity improvements and market expansion, but sophisticated financial, consulting, health and environmental services do contribute to productivity growth.
4 Even if there is no one pathway to sustained high-income status, as argued by the Growth Commission, human capital formation is an indispensable ingredient. Physical capital and natural resources may provide initial endowments for growth, but they are passive factors of production. Human beings, on the other hand, “are the active agents who accumulate capital, exploit natural resources, build social, economic, and political organizations, and carry forward national development” (Harbison 1973). A sound education system, while not sufficient, is a necessary condition for sustainable economic growth. What are the pathways through which this may take place? More education boosts productivity. But education needs, not only to expand, but also to be relevant, of sufficient quality and available to a broad swath of society.

_The role of education in economic growth_ Recognition of education’s key role in the growth process can be traced back to Adam Smith (1776). More recently research has focus on the “unexplained” residual in economic growth (Abramovitz 1962). Schultz (1961) introduced the concept of human capital to help explain this residual. The importance of education in the growth process re-emerged in the 1980s with the influential writings of Romer (1986, 1990, 1992) and Lucas (1988). Romer and Lucas distinguish human capital’s contribution to economic growth by introducing two concepts. First, beyond the quantity of human capital, output also depends upon the average level of human capital. Second, human capital is endogenous, rather than exogenous, in the system in the sense that it is produced by using resources. The implication of these conceptual insights is that “knowledge” becomes a public good that spills over into the economy as an additional source of growth. For countries this means that they do not converge to a common steady state path; they can grow at different rates – as can per capita incomes. Another, equally important implication of this model is that, by virtue of the average stock of human capital being available to all, there might be social underinvestment in human capital formation.

These ideas have profound implications for study of education as a driver of sustained growth. It is not just the quantity of education delivered in a country; it is the relevance and quality of education that provide skills which enhance abilities to learn and allow those with more schooling to adopt technology faster. Under such circumstances the returns to capital will grow.

If these ideas are correct, focusing only on the returns to an additional year of schooling may not be the best guide to social investment decisions (Pritchett 2001). A standard criticism of economic estimates of the returns to education for individuals or for national growth is that they refer to the quantity of schooling, saying nothing about the quality. Several studies have shown the importance of school quality in determining earnings (Behrman and Birdsall 1983; Bedi 1997; Card and Krueger 1996). At the macro level, Barro and his coauthors (Barro 1997; Barro and Lee 1993, 1996) have shown the positive association between test scores and economic growth. But it was not until Hanushek and Woessmann (2008) put together the panels of international test scores that the effect of education quality on growth became evident. They find that there is strong evidence that the cognitive skills of the population – rather than mere school attainment – are powerfully related to individual earnings, to the distribution of income, and to economic growth.
5

# _The importance of relevant education_

It is not only more years of education, or even high quality education, that matters – it is also the type and amount of skills imparted by such education. Aside from basic cognitive skills such as literacy and numeracy, two other skill types are important: generic skills such as team working and communication, and occupation-specific skills. Most occupations require a blend of different skill types, with a specific ability level within each.

What types of skills might middle-income countries require to maintain growth momentum? Such economies will have to move from activities such as relatively labor-intensive low valueadded manufacturing and assembly jobs to more productive and higher value-added activities. Thus, they should experience a growing demand for young people who have moved beyond basic education and gained the technical skills that are normally associated with sound upper secondary and higher education systems.

Such systems stress science, technology, engineering and mathematics (STEM) education. STEM occupations are among the highest paying, fastest growing, and most influential in driving economic growth and innovation. Individuals employed in STEM fields enjoy low unemployment, prosperity and career flexibility (National Governors Association 2011). Falling behind in this is the result of: lack of rigorous K–12 math and science standards; lack of qualified instructors; lack of preparation for postsecondary STEM study; failure to motivate student interest in math and science; failure of the postsecondary system to meet STEM job demands.

# _Access to education matters_

Creating a robust middle class is crucial for long-term growth. A viable middle-class population generates dynamic domestic consumption and demand for better governance (Donnorummo 2000). They also tend to demand better health and education services and desire lower fertility (Banerjee and Duflo 2008).

A robust middle class characterizes almost all high-income economies; they receive a high share of total income, are better educated, have better health; and such economies have better infrastructure, less political instability, better economic policies, more social modernization and are more likely to be democratic (Easterly 2001c). Such a group can also help protect economies from the vagaries of global downturns. East Asian economies that have relied chiefly on exports to sustain growth may not always be able to do so if traditional markets in developed countries such as those in Europe and North America undergo prolonged economic stress. These economies must also rely on the consumption of their own citizens – and the surest way is by generating domestic demand from a middle class (Kharas and Kohli 2011).

Education has an important role to play in developing the middle class as an economy grows. Technological progress tends to widen inequality (those with more skills benefit more) unless there is an offsetting increase in skills through education, not only for such high-end occupations as management and engineering but also for such middle level jobs as technicians and operators (Acemoglu and Autor 2012).
6 In sum, useful indicators of an education system that contributed to sustained growth include coordination of the level and quality of education with the economy’s stage in the industrialization and modernization process; paying attention to the types of subjects that students are learning and the quality of their education – both at entry and at upper levels; paying attention to skills gaps as reflected by labor market demand for skills; and finally, ensuring equal access by different income and population groups.

In the next section we use these indicators to benchmark the systems in Malaysia and Thailand against that of South Korea.

# **The Cases of Malaysia and Thailand: Where Do They Stand?**

Malaysia and Thailand have accomplished much in the past 30 years in moving from lower- to upper-middle-income status. But there are also some worrying economic signs that their trajectories are not following the steady rise seen in the East Asian Tigers like South Korea. In light of the preceding analysis we now examine whether the systems in these two countries are producing the ‘right’ skills using the indicators that we have defined.

We rely on such indicators as enrollment rates and years of schooling to measure the quantity of education and international assessments to measure quality. These assessments include the Programme for International Assessment (PISA); Trends in International Mathematics and Science Study (TIMSS); and the cognitive skills and the quality of education perceived by employers from surveys by the World Economic Forum.

# _Access to education_

Malaysia and Thailand have a relatively good track record on access to basic education—both countries have achieved universal primary school since the 1980s. But school enrollment rates at secondary and tertiary levels remain below what might be expected. In 2009, Malaysia and Thailand’s gross secondary enrollment rates were 68 and 76 percent, respectively, compared to the average of 83 percent for upper middle-income countries and 101 percent for high-income OECD countries. Tertiary gross enrollment rates for the two countries (36 and 45 percent) remained below the high-income OECD average (72 percent) and considerably below Korea (100 percent) (UNESCO Institute of Statistics). While the correlation between education and growth does not imply causality, the historical comparison of Barro-Lee years of schooling is indicative. It shows that Koreans in the 1960s and 1970s, when GDP per capita was about the same as Malaysia and Thailand, had about 1.5 more years of schooling (see Figure 2). This gap widened overtime as Korea continued to expand its education system at the secondary and tertiary level (see Figure 3).
7

**Figure 2:  Trends in Years of Schooling**

<!-- Start of picture text --> United States<br>Japan<br>Thailand<br>Korea, Rep.<br>Singapore<br>Malaysia<br>1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010<br>Year<br>Source: Barro-Lee (2010)<br>6<br>5<br>4<br>3<br>Average years of schooling, ages 15+<br>2<br><!-- End of picture text --> We also find that the distribution of access is fairly even across socio-economic groups in Malaysia and less so in Thailand. Although in 2002 there was a 17 percent point gap in secondary school participation rates between the poorest (76 percent participation rate) and richest (93 percent participation rate) children in Thailand, this gap had narrowed -- from 24 percentage points in 1994. Such progress could be attributed to more equitable distribution of public education expenditures across household income (Benveniste 2008). However, despite achievement in promoting equal access to education, challenges remain in closing the differences in learning outcomes between urban, particularly Bangkok, and rural areas in Thailand. This disparity is largely due to differences in the quality of the education systems and unequal resources for different school types (World Bank 2012a).
8 <!-- Start of picture text --> Figure 3: Access to Education over Time<br>Korea<br>1970 1975 1980 1985 1990 1995 2000 2005 2010<br>Year<br>Primary Secondary<br>Tertiary<br>Source: UIS<br>Malaysia<br>1970 1975 1980 1985 1990 1995 2000 2005 2010<br>Year<br>Primary Secondary<br>Tertiary<br>Source: UIS<br>Thailand<br>1970 1975 1980 1985 1990 1995 2000 2005 2010<br>Year<br>Primary Secondary<br>Tertiary<br>Source: UIS<br>100<br>50<br>Gross Enrollment Rate (%)<br>0<br>100<br>80<br>60<br>40<br>20<br>Gross Enrollment Rate (%)<br>0<br>100<br>80<br>60<br>40<br>20<br>Gross Enrollment Rate (%)<br>0<br><!-- End of picture text -->
9

# _Quality of education_

The quality of education in Malaysia and Thailand is not up to the standard of the highest Asian performers in world rankings. This may lead to competitive challenges if the labor force is not being endowed with the appropriate technical and creative talent.

Both PISA and TIMSS international assessments show that compared to Indonesia and the Philippines, Malaysia and Thailand perform better in both math and reading. But secondary school students are still learning much less than their peers in wealthier countries like Hong Kong SAR, China; Macao; Japan; Korea; and Singapore (Figure 4). A Malaysian or Thai student on average scores between1.2-1.5 standard deviations below a Korean student in mathematics (TIMSS 2007). This underperformance can be a serious issue as nearly half of 15-year-old Thai students fail to achieve the level of functional literacy in PISA assessments. In other words, most of them are unable to locate information which may need to be inferred or perform other tests (World Bank 2012a).

**Figure 4: Learning Outcomes in East Asia over Time**

<!-- Start of picture text --> Mean Reading Score (PISA) Mean Math Score (TIMSS)<br>Korea, Rep.<br>Singapore<br>Korea, Rep.<br>Hong Kong SAR, China Hong Kong SAR, China<br>Singapore Japan<br>Japan<br>Macao SAR, China<br>Malaysia<br>Thailand Thailand<br>Indonesia<br>Indonesia<br>Philippines<br>2000 2003 2006 2009 1995 1999 2003 2007<br>Year Year<br>550 600<br>550<br>500<br>500<br>450<br>450<br>400<br>400<br>350 350<br><!-- End of picture text --> Source: OECD Programme for International Assessment (PISA) and Trends in International Mathematics and Science Study (TIMSS) The time trend in academic performance indicates that Malaysia and Thailand have not caught up with others in the region; indeed they may have fallen even further behind. Mean scores in both mathematics and reading from PISA and TIMSS declined between 1999 and 2007. Thailand improved slightly in 2009 but not enough to return to the level of 1999. The World Bank’s (2012c) analysis shows that the decline in Thai students’ performance is mostly explained by the deterioration of the quality of the education system rather than by changes in students’ backgrounds.

Non-cognitive skills as well as cognitive skills determine an individual’s success (Heckman, Stixrud and Urzua 2006). As mentioned earlier, internationally comparable data on noncognitive skills do not yet exist. As a substitute, we present information collected by the World
10 Economic Forum Survey on employers, who were asked to rate a country’s quality of education using a scale of 1 to 7 (see Figure 5). In both mathematics and science education as well as in management schools, educational quality in Thailand is well below regional counterpart institutions. The quality of education in Malaysia was perceived as comparable to Korea and Hong Kong SAR, China. There are drawbacks to these indicators, however, as they lack a standard for measurement, rely heavily on subjective judgments and are a small sample. Employer surveys provide some insights into how the supply of skills have been matched to the demand, but more reliable measurements are needed to provide an accurate understanding of the basic skills that an individual needs for success.

**Figure 5: Quality of Education as Perceived by Employers**

<!-- Start of picture text --> Quality of the Math & Science Education, 1-7 (best) Quality of Management Schools, 1-7 (best)<br>7 7<br>6 6<br>5 5<br>4<br>4<br>3<br>3<br>2005 2006 2007 2008 2009 2010 2011<br>2005 2006 2007 2008 2009 2010 2011<br>Korea, Rep. Malaysia Thailand Malaysia Thailand Hong Kong<br>Singapore Korea<br>Singapore Hong Kong<br><!-- End of picture text --> <!-- Start of picture text --> Source: World Economic Forum<br><!-- End of picture text -->

# _The economic benefits of human capital_

The economic benefits of human capital can be estimated from education produced in schools or elsewhere (the home, for example). There are both private – accruing to the individual in the form of better jobs, higher wages, for example – and social – meaning they affect not only the recipient of education but others as well – benefits. Better educated mothers have lower fertility rates while parental education raises children’s schooling level and scholastic achievement. Parental education also improves child health. More schooling in general improves one’s health and life expectancy. There are also a number of social benefits, such as technological change and diffusion, social cohesion and reduced criminal activity (Psacharopoulos and Patrinos 2008).

The market benefits of human capital can be captured in rate-of-return calculations estimated from wages reported by workers in nationally representative surveys. Thus, they are based on the wages more and less educated people command in the labor market. Such estimates also provide proxy indicators of shortages of quality education. Low-income countries tend to yield higher rates of return to schooling reflecting skilled labor shortages. The average rates of return to each additional year of secondary schooling are 20, 18 and 12 percent for low-income,
11 middle-income and high-income countries. At the tertiary level, the average rate of return in low-income countries is double that of a high-income country (Psacharopoulos and Patrinos 2004).

Compared to Korea and Singapore, the rates of return to each year of additional schooling in Thailand are more than double and closer to quadruple, reflecting the scarcity of skilled workers. Returns to education are not as high in Malaysia—closer to those in the United States and the United Kingdom, but still exceeding other high-income countries in East Asia, suggesting a similar story (Figure 6).

But the returns to schooling, despite tremendous growth in the numbers of students and graduates over time, have not declined in Thailand. They have increased. In 1970, the rate of return to secondary schooling was 11 percent (Blaug 1976). Between 1985 and 1995, the average private rate of return to a year of education was 10-11 percent (Hawley 2004). In 2002 it was as high as 15 percent. By 2009 it had declined, but only to 13.5 percent (Garcia and Patrinos 2012). In Malaysia, though the information is sparse and methodologies differ, Hoerr (1977) estimated for 1968 a rate of return to primary schooling of 13 percent, 18 percent for upper secondary, and higher education of 16 percent. And even though Gallup (1997) estimated an overall rate of return of just 7.6 percent for 1979, Chapman and Harding (1985) found an average return to education of 9.4 percent in 1977. But in 2002 and 2004, the average rate of return was between 10.0 and 10.5 percent (Ismail 2007). In Korea, by contrast, the return to schooling was above 15 percent in the early to mid-1980s; it has since steadily declined to about 7 percent (Choi and Jeong 2003). These trends imply that these countries may be lagging in the classic Tinbergen-type “race” between skill-intensive technological change and the ability of learning systems to produce those skills (Acemoglu and Autor 2012).

<!-- Start of picture text --> Figure 6: Private Returns to Schooling<br>16 15.2<br>12.6<br>12<br>10.4<br>10<br>9<br>7.3<br>8<br>4.1<br>4<br>0<br>Singapore Korea 2002 UK 2002 US 1995 Malaysia Philippines Thailand<br>1998 2004 2000 2002<br>Source: Psacharopoulos and Patrinos 2004<br><!-- End of picture text -->
12

# **Education and the Options for Improving Growth Prospects**

The previous section showed that Malaysia and Thailand have a mixed record of success in preparing their labor forces for sustained higher growth rates. They have achieved inclusive access but clearly need to improve the relevance and quality of their education systems.

It is tempting to turn to South Korea and attempt to duplicate what was done to enhance the quality and relevance of its education system. Countries in East Asia, though, are at different stages of development, and it is not clear whether the education policies used by the relatively wealthy and high performing countries are necessarily suitable for those that have lower institutional capacity and higher rates of poverty and inequality. Since the 1960s, Korea’s GDP increased 40 times, something that Lee (2008) largely attributes to the country’s education system. In what follows we point out that, while useful lessons can be drawn, rather than trying to duplicate South Korean policies, thoughtful adaptation is advisable.<sup>3</sup> We suggest six options to address the salient issues we identify above – of sequencing the quantity of education, addressing quality and relevance concerns and assuring broader access for left-out groups.

# _Set budget priorities_

Given budget constraints, governments must set priorities. South Korea carefully sequenced the expansion of its public schooling system. Primary school enrollment expanded first, until approximately 90 percent of eligible children were enrolled by the early 1960s. Then, secondary enrollment became the focus and was expanded throughout the 1960s and 1970s. But it was not until middle and upper secondary schooling became nearly universal, higher than 80 percent, that the focus turned to tertiary education. Between 1990 and 2005, the tertiary enrollment rate increased from 23 to 62 percent. Low and middle-income countries, however, are not following this same sequence. Thailand had a net secondary enrollment rate of 72 percent in 2010; whereas when Korea had the same GDP per capita, its net secondary enrollment rate was 57 percent (UNESCO Institute of Statistics). In fact, almost all low and middle-income countries have secondary enrollment rates that exceed those reached by Korea at the same stage of development, suggesting that these countries are taking a different approach to that of Korea.

There are similar trends at the tertiary level. The share of public spending on tertiary education as a percent of GDP had grown from 0.3 percent in 1970 to 0.67 percent in 2009. Some low and middle-income country governments are spending about the same as Korea did at the same stage of development while other countries, notably Malaysia, are spending much more. Malaysia’s public expenditure on tertiary education is 1.4 percent of GDP, which is nearly three times more than South Korea’s expenditures at the same stage of development (World Bank 2010b).

What is apparent is that Malaysia and Thailand both began to expand secondary and even tertiary systems even before their primary systems achieved high levels of quality, at least relative to Korea. Perhaps they had no choice. After all, low and middle-income East Asian countries are much more integrated into the global economy than South Korea was at the same stage of development. Thailand and Malaysia have manufactured exports equal to around 50 percent of GDP. As a result, Malaysia has a level of manufactured outputs as a percent of GDP that is 1.8 times what South Korea had at the same stage of development, and Thailand has 2.5 times
13 (World Development Indicators). But it is apparent from PISA and other results that more attention needs to be paid to improving quality at these lower levels.

# _Reward teachers appropriately_

Researchers in South Korea attribute its strong performance in international exams that test education quality such as PISA and TIMSS to being able to attract the “best” into teaching (Kim et al. 2009). In Korea, the competition to be a teacher is intense – in 2006, only 15 percent of those who received teaching certificates after completing programs at secondary teacher education institutes were employed by public and private schools. Korean teachers have also received higher remuneration than their counterparts in other countries. In 1965, teachers with 15 years of experience were paid 3.9 times the average per capita income, and in 1985 the ratio peaked at 4.2. Indeed South Korea’s spending on teachers as a percentage of GDP per capita is higher than all other East Asian countries at comparable times in their history (Macdonald and Park 2012).

But raising salaries alone will not be sufficient to improve quality. Without adequate accountability, education systems may simply wind up with higher paid but still poor-performing teachers. Also important would be to ensure that the teachers are accountable and produce results for the higher pay. In Korea the accountability of schools to parents is a defining feature (Macdonald and Park 2012). Since 1999, the school council system was introduced to every school to supervise budget implementation. At the same time, information flow is ample, with standardized tests the norm (OECD 2011). We return to this theme below.

Malaysia and Thailand have “established” systems of attracting the best into teaching and motivating teachers to perform. This assessment is based on recent ranking – a three on a scale of four – which implied that they had good practices with some limitations (World Bank 2012b). However, shortage of qualified teachers remains a large problem in Thailand. The teacher shortage index is high (0.65) compared to the average OECD countries and the high-income East Asian economies (0.51 for Japan, -.31 for Taiwan, China, and -0.2 for Hong Kong SAR, China). This may hinder students’ academic achievement—a unit increase in the teacher shortage index is correlated with an 18.2 point decrease in Thai students’ average science test scores (World Bank 2012a).

# _Avoid inflexible tracking of students_

Tracking students into terminal degree, or “dead-end,” programs has shown to be both inequitable and detrimental to students’ cognitive ability. Korea adopted a 6-3-3-4 single track education system to ensure that high school graduates are still qualified to apply to universities. Tracking to vocational programs does exist in Korea; however, the difference between Korea and other countries is that vocational programs, while not orientated towards university admission, do not disqualify a student from entering. In Malaysia, 86 percent of upper secondary students are selected into vocational tracks that disqualify them from entering all tertiary programs (World Bank 2012b). The key difference is that Korea has never at any stage of development produced secondary graduates that are not able to enter academic tertiary programs, let alone technical or vocational tertiary programs.
14

# _Provide autonomy with accountability_

If an education system is to respond to rapidly changing needs of a growing economy, its institutions – whether schools, universities or vocational training centers – must have the autonomy to make important decisions. South Korea’s system, especially at the higher levels, is remarkable because it is driven and held to account by a private sector that responds to market forces. The smaller and elite public sector also has direct links to private sector employers. But equally important, institutions have the autonomy to make changes in their curriculum and other policies that allow them to respond (Salmi and Kosaraju 2012). These institutions are then held accountable for results.

Malaysia’s policy _intent_ on school autonomy and accountability reflects good practice, with some limitations (World Bank 2012b). School principals have the authority to manage the school budget. However, authority over salaries is centralized. School principals can raise additional funds from the private sector and from non-governmental institutions. In terms of personnel autonomy, this is still relatively weak; teachers must be appointed by the Ministry of Education and deployed by the Ministry’s office of human resources under a union or civil service agreement. Parental participation, thought to enhance quality, is well functioning. Overall school accountability, in terms of policy intent, is advanced. But implementation remains a work in progress.

Thailand is implementing education reforms with a clear objective of improving the quality of education so that it is comparable with high-income countries, but the policy for school accountability could be more effectively managed. Budgetary autonomy is well established (management of non-salary funds functions well), but non-salary transfers are slightly regressive. School autonomy in personnel management, however, is almost non-existent. Teacher management is highly centralized and schools cannot select teachers or manage incentives for effective teaching. Parent participation in school finance is well established but school boards have no legal authority over personnel choices. Overall school accountability is well established, since it is good at the administrative level but with gaps in teacher accountability (World Bank 2012a).

# _Invest in early childhood development_

Economists such as Heckman (2006) have demonstrated the benefits of investing in children at early ages. Labor market outcomes improve as more able people acquire skills and more skilled people become more able (Heckman 2004; Carneiro and Heckman 2003). The main mechanism through which early education affects labor force productivity is through its effect on cognitive and non-cognitive skills – such as persistence or dependability (Heckman and Masterov 2007). Early childhood interventions are more effective than remedies that attempt to compensate later in life. Enriched prekindergarten programs, with home visitation, have a strong track record of promoting achievement for disadvantaged children, improving labor market outcomes and reducing crime (Heckman 2004). Quality early education is a key part of the solution to this problem. Gross enrollment rates at the pre-primary level are much higher in Korea than in
15 Malaysia and Thailand. Moreover, more than three-quarters of pre-primary enrollments are in the private sector in Korea, compared with 46 and 20 percent in Malaysia and Thailand.

# _Finance higher education appropriately_

The sequential nature of education suggests that the education system should accord priority to improving literacy and numeracy skills and ensuring a quality basic education. But at the same time, increasing global competition also requires emerging markets to have skilled and innovative workforces. A good tertiary education is important to develop professionals and leaders with high-level technical skills and with the potential to produce new knowledge.

In the absence of government intervention, investment in tertiary education will be less than what is socially optimal for reasons explained by Chapman (2006). Educational investments are inherently risky because of the uncertainty of the expected returns of investment (Barr 2001; Palacios 2004). Leaving financing for higher education to be financed through market institutions such as banks is risky in view of the difficulties of pricing loans to individuals with high risk and no collateral. Risk-averse individuals, especially those with lower social and economic backgrounds, would hesitate to borrow for higher education. Government intervention is therefore desirable to increase access to higher education.

The challenge is to define effective interventions to achieve the optimal quantity and quality of university education. The historical “free” provision of higher education by public subsidy has been proven suboptimal and regressive. Empirical evidence has shown that such a subsidy scheme is likely to cause quality deterioration (Chapman and Greenaway 2006) and reinforces inequalities in having access to university education (Patrinos 1992; Chapman 1997; Greenaway and Haynes 2000; Blondal et al. 2002).

How can governments help with financing? One way that has been tried is for governments to guarantee repayment in the event of default. This option is flawed because of moral hazard, adverse selection problems and inequality as well as the high costs of public subsidies. Banks have less incentive to ensure repayments; low-income individuals will be excluded from loans that require up-front repayment burdens (Chapman 2006); and their default risks tend to be relatively higher because of the fixed repayment schedules that are insensitive to future income profiles (Dynarski 1994).

Income-contingent loans (ICL), if properly designed, on the other hand can offer both default insurance and consumption smoothing to borrowers (Chapman 2006). In Australia, ICL reduced administrative costs significantly and provided a considerable source of revenue. The higher education enrollment rate also increased after the introduction of ICL, although it is difficult to attribute the increase fully to ICL as the government also increased spending on higher education. The major drawback to such a scheme, as Chapman points out, is that its successful implementation depends on the existence of an effective and functional administrative and policy framework.
16

# **Conclusion**

We have focused on the role of human capital formation in sustaining per capita income growth in Malaysia and Thailand, two countries where growth momentum has slowed in recent years. We have argued that a good education system is fundamental to equip workers with the right skills because an educated population earns more, and education provides people with the cushion and the life skills to avoid falling back into poverty.

Malaysia and Thailand have successfully provided schooling access to children and young adults, particularly at primary levels, but the quality of education remains an issue. Malaysia and Thailand produce achievement levels well below international and OECD averages. Malaysian and Thai students on average score 1.2 to 1.5 standard deviations below Korean students in mathematics. Such underperformance is a serious issue where almost half of 15-year-old Thai students fail to achieve the level of functional literacy in PISA assessments. Quality has also deteriorated over time with mean math and reading scores from PISA and TIMSS declining between 1999 and 2007. Thailand has improved slightly in 2009 but not enough to return to 1999 levels.

Malaysia and Thailand have different economic structures than did Korea at a similar stage of its development. The former two economies are more deeply integrated to the world economy; manufactured exports as a percentage of GDP are twice Korea’s at the same level of per capita GDP. Raising quality in their education systems requires systemic reforms of the education system within each country’s economic and political context; duplication of Korean’s policies is unlikely to work. Modern education systems in Malaysia and Thailand should aim to provide universally-available quality education using the following policies: first, prioritize budgets to deliver quality and universally-available basic education before expanding higher levels of schooling; second, provide appropriate incentives and rewards to teachers; third, permit school autonomy and ensure accountability for results; fourth, invest in early childhood development; and fifth, consider implementing income-contingent loan financing schemes to expand higher education.

Each country has already taken some steps in these directions. Thailand’s National Education Plan (2002-2016), for example, was created to promote a balance between educational development toward economic competitiveness and cultural self-reliance. The government has committed to ensure minimum quality standards for basic education for all and established a fast track for high-achieving students. The Office for National Education Standards and Quality Assessment, established under the NEA, is strengthening its capacity to monitor school quality assessments, to raise community awareness on school quality and management, and to propose actions for non-performing schools. In addition, the Office of Basic Education Commission seeks to offer greater school autonomy, while empowering and motivating schools to set their own measures to improve the educational performance of students. Malaysia has also recently taken some initiatives to address the quality of education including the release of the National Education Blueprint and the Education National Key Result Areas. The future challenges are to implement them well and adjust them in accordance with evolving needs.