The mantra of governance and policy discourse in India today is skewed towards pushing for economic growth and development. While we use both these terms quite loosely and interchangeably, it becomes pertinent to understand the distinction drawn between them from a policy perspective.

While economic growth may broadly be accounted for as an increase in the levels of productivity and production (cap)abilities of an economy, economic development is understood in terms of a quantifiable, irreversible rise in per-capita income for an economy over a period of time.

Surely, defining economic development for a given economy, society or community must go beyond this.

The search and attainment of prosperity definitely depends on the ability of an economy to grow productively, allowing per capita incomes to rise, but this ‘growth’ process is just one of the means to the end goal of achieving economic ‘development’ for all.

So, policymakers focus on enhancing access to quality education and healthcare, which are the foremost means for communities/societies to develop.

Endogenous growth Till the early 1980s, the neoclassical models in growth economics took growth rates to be exogenous — owing to influences outside the economy. The growth theories around the time could not explain the large exacerbating effects in per-capita income across developing countries.

International differences in technological capabilities were seen then as one of the main causes for the widening income differentials, which begged for an economic explanation (technology was treated as an exogenous variable in neoclassical growth theories). In 1986, the pioneer of ‘endogenous growth theory’, Paul Romer, linked growth accounting quite closely with knowledge transfer and creation, useful for the overall development of a society. Romer and his followers (including Kenneth Arrow and John Hicks) broadened the definition of capital to include human capital and/or knowledge capital.

This new approach towards a more endogenous ‘production’ of technology (driven by internal factors to an economy) argued for increasing research and development investment to innovatively transform a society’s human and knowledge capital (in addition to growth of physical capital).

'Human' vs 'knowledge' By human capital, the endogenous growth theorists referred to characteristics that would make workers more productive; this encompasses the analysis of features such as health, nutrition, education, training and experience that a worker embodies. However, investment into human capital alone may not meet all the developmental goals.

Since education and training involve the transmission of knowledge, it may seem that the concept of human capital is the same as knowledge capital in understanding the microeconomics of innovation and human capital investment. But there is a difference between these two concepts.

Knowledge capital is potentially a public good, whereas human capital is not. Sample the role of teachers. In a class, teachers impart existing knowledge to students, which increases the human capital of students but isn’t creating any new knowledge for the teachers and society.

Whereas, being outside the classroom, the teachers can give more time to research, which helps create new knowledge capital that everyone can share on a non-rival basis.

In simple terms, a society’s knowledge capital is more non-rival and non-excludable as compared to human capital which is excludable, being more personal to us, considering the fact that some of us have gained from obtaining knowledge to make us more productive, but it does not usually raise anyone else’s productivity. This makes human capital (access to education and healthcare) less of a public good than knowledge capital.

Knowledge capital investment For policymakers, it becomes important to not only prioritise on enhancing access to education with healthcare but invest long term in knowledge capital opportunities that go beyond building primary schools, universities, primary health clinics, and so on.

For this, the link between access to education and increase in human productivity needs to be better understood by policymakers. Economists, too, do not understand this relationship. For example, it is uncontroversial that higher educated workers are more productive, but it is hard to determine the cause and effect of this — whether people who are innately more productive tend to invest in more education, or whether education itself makes them more productive.

Most often, economists and ultimately policymakers assume that education makes individuals more productive. However, an educational qualification by itself may just be a screening or ranking device.

If the access and delivery of education can be contested in qualifying as a public good, it becomes pertinent to raise the issue of institutional arrangements needed for investing in knowledge capital through technological investments, in encouraging new endogenous mechanisms to promote robust, epistemic training.

The step forward A competitive market economy can lead to the production of an efficient amount of traditional, rival goods. Pure understanding of knowledge is non-rival; the use of knowledge by one person does not reduce the ability of others to use it. This is where technology endogenised to a given social setting can make a huge difference.

The non-rivalry feature of knowledge shared at a zero marginal social cost in the education sector can best be optimised through increased R&D investments by the government and also incentivised by the private sector. Online education is one such technological measure which is gaining attention, but a lot of effort is required in improving infrastructure and better designing open-curriculum syllabi, etc.

The government subsidising R&D investment or expenditure on knowledge transfer is more critical. If individuals are asked to pay for using a particular knowledge but the social cost of using it is zero, they may then resort to using knowledge at a lower than optimum level.

The application of experiential learning is another step forward, which can promote knowledge-sharing as a teaching method. As an educational practice, the case study method or an experience-based method of learning remains limited in Indian institutes offering courses in sciences and social sciences.

In times when the emphasis on education in building human capital in India seems to be quite distorted (as reflected from Budget outlays on education expenditure), it becomes vital for us to look into the future of education and its standards in a developing India.

There is a strong need for policymakers to go beyond human capital, pushing for knowledge capital development while transforming India’s comparative advantages in demography and cheaper labour cost.

The writer is executive director of the Centre on International Economic Studies at Jindal School of International Affairs

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