28/12/2011: Brain-drain & IRL's knowledge economy

When Government policy-supported brain-drain is compounded by heavily subsidised 3rd level education system, Ireland risks turning into a third world-styled resources supplier to our more dynamic trading partners:

http://www.irishtimes.com/newspaper/ireland/2011/1228/1224309553505.html

HT to @dalkeyhead

That's the 'Knowledge Economy' in the absence of real jobs creation: taxpayers pay for knowledge, private holders of knowledge emigrate to earn private returns, taxpayers pay for more 'Knowledge Economy' boffins and pamphlets... but do not worry - 20 years from now, the IDA will have plenty of new ex-Irish execs in UK, US, Australia, Canada, etc to beg for FDI.

08/12/2011: An even greater threat

Here's an even greater threat to Ireland's 'economic model' - the one based on attempting to attract into this country a new generation of FDI - FDI that is increasingly based on human capital-intensive activities.

BBC report here covers increasing mobility of skills across the borders (link). And I co-authored recently a report on this (here).

But Ireland, folks, is not a serious contender for this capital due to the confluence of the following trends here and abroad:

1. Our taxes on top earnings - earnings associated with higher human capital, once we remove the egregiously high salaries at the top of the public sector bureaucracies and in sheltered private/semi-state sectors;
2. Our quality of public services that can be meaningfully utilized by people with higher human capital is not up to scratch - in health, education, transport, urban amenities, cultural amenities and Government services;
3. Our quality of promotional opportunities within the country is restricted, especially for foreign talent due to archaic promotion practices and cronyism; and
4. Our quality of public discourse, when it comes to higher earners is toxic - in part justified by absurdities of our top public sector brass who enjoy earnings well in excess of their talents, and in part justified by our absurd 'bankers' whose performance in the past is also unmatched to their earnings.

So we are witnessing an outflow of key talent from Ireland. In recent months a large number of high quality academic researchers have packed up and left (or currently leaving) this country. In a number of sectors - including the 'flagship' ICT services sector - we are seeing jobs moving after key workers (not key executives, as our Government mistakenly thinks, judging by the special measures in the Budget 2012, but key skills-holders). In a number of sectors, we are failing to develop critical mass of skills and activities due to lack of talent - one example would be funds management in IFSC, the area where policymakers have been trying to build activity for some 5 years now.

Now, we might think that these issues should be priority number 734 or so on the list, given the gravity of our crisis, but they are not. Long term competitiveness no longer rests on simplified harmonized indicators for brawn labour, but on yet-to-be-compiled indicators of our human capital pool. And here, mass-produced degrees with plausible-sounding names of poorly ranked institutions on them won't do the job. Ireland is facing two roads ahead: one road leads to a low wage, low income autarky of skills, another to a high wage, high income open skills economy. So far, our policy wheels are pointed firmly in the direction of the former.

05/11/2011: Patents and 'sticky' ROI on academic investment

In the previous post I covered some interesting data on hotspot universities (high impact academic institutions) around the world based on OECD data for 2009. Here is the data on high impact patents (EPO top 1 percent) through 2005 against data for the same through 2000.

About the only interesting trend in the above data, other than the one that reinforces the trends highlighted in the previous post is that there is tremendous 'stickiness' or resilience or historical dependence in the data. In other words, there is a 0.994% positive correlation between past performance in terms of highly cited patents and the later performance.

The above trend is of interest because it suggests that overall, league tables changes are difficult to achieve over the shorter period of time and also that ROI in academic research is itself relatively 'sticky', stretched over time.

The good news is that for the two periods, Irish patents applications have increased from 5 in 1996-2000 to 14 in 2001-2005 - a rise of 180%. The bad news, the average for 36 most advanced economies is 226% improvement over the same period of time.

Economics 19/7/10: Urban growth, education & knowledge intensive services - part 2

In the previous post (here) on the issues of growth, education and knowledge intensive sectors, I showed that

• There is a strong positive resilience in income per capita levels across urban economies, with almost 94% of variation in income per capita in 2007 being associated with the variation in income per capita found in 1999. This strong persistency in GDP levels over time implies there is only a weak (but positive) relationship between the past and the future growth rates.
• Data also shows that there is a weak positive relationship between long term growth in education and long term growth in income per capita. Growth in education between 1999 and 2007 was able to explain just 0.54% of the overall variation in growth in income per capita across various regions.
• However, over time, the relationship between the levels of education of the workforce and the levels income per capita is becoming stronger both in terms of education impact and the overall explanatory power as to the direct positive correlation between education and income. By 2007 over 14.5% of variation in income per capita across major urban regions was explained by variations in education, up from 7.3% in 1999. If in 1999 1% increase in the proportion of population with 3rd level education was associated with a USD336.53 increase in income per capita (PPP-adjusted), by 2007 this effect rose to USD730.92.
• Lagged period education levels were shown to be a better determinant of income per capita than contemporaneous levels of education, which suggests that causality flows from education to growth, rather than the other way around.
  

Chart 7 below explores the relationship between the levels of education in the labour force and two core higher value added sectors of economy: high tech manufacturing (HTM) and knowledge intensive services (KIS).

Chart 7
Consider the blue and the red lines. More educated workforce, it seems, is negatively correlated with high tech manufacturing role in the economy. And this correlation is becoming more negative over time (with lags). In other words, an urban centre that started with highly educated workforce in 1999 is more likely to see declining share of its economic activity accruing to HTM in 2007.

This can be related to the changes in manufacturing that took place over the last two decades, with manufacturing in general becoming increasingly more capital intensive. It is also likely to be due to the fact that with greater outsourcing of core activities and greater offshoring of manufacturing, much of higher value added activities related to high tech manufacturing, such as design and development, and marketing of new products, is now classed separately as services, and geographically removed from manufacturing activities, despite being physically embodied in the value of manufactured goods.

The opposite is true of the relationship between education levels of the workforce and knowledge intensive services role in the economy, although the positive correlation here is not becoming stronger over time (orange and green lines).

Knowledge economics – at least as proxied by education levels – is about the positive role of education in services, but it is not about the links between high-tech manufacturing and education. The dumber is your workforce (in extremely simplistic terms), the higher will be the importance of HTM to your economy… or so it appears…

Chart 8
A look at contemporaneous data reported in the chart above also confirms the previous chart 7 conclusions.

What is even more interesting here are the slopes of the two relationships.

First, the negative correlation between the degree of workforce education and high-tech manufacturing (HTM) had become more negative, from -0.1032 in 1999 to -0.1633 in 2007, while the overall relationship has strengthened (R2 = 0.0836 back in 1999 to R2=0.2341 in 2007).

This relationship is very robust and shows relatively less dispersion in the data than the relationship between education and knowledge intensive sectors.

Second, the slope of the positive relationship between the degree of workforce education and knowledge intensive sectors (KIS) has become weaker over time (from 0.5961, R2 = 0.3104 to 0.3877, R2 = 0.1396).

This result is surprising. Are we hitting diminishing returns to education in terms of increasing importance of KIS in the economy? Or are we simply at the flatter end of asymptotic KIS growth curve with much of knowledge economy already in place so that new education yields lower marginal returns? Alternatively, this might suggest that education is an imperfect instrument for skills and talent and that today, skills and talent gained outside formal classrooms matter more than before.

Finally, it is also worth noting that KIS results are significantly impacted by three observations which tend to drag the slope of the relationship down somewhat. The three, however, do not appear to represent statistically significant outliers.

Another striking relationship is shown in chart 9 below. Greater importance of high-tech manufacturing in the economy is associated with lower GDP per capita, and this negative relationship is strengthening over time, both in the explanatory power and in the size of overall negative effect. This again illustrates, most likely, the growth in capital-intensity of high tech manufacturing and disembodiment of the services-related components of high-tech manufacturing (such as R&D etc).

Chart 9
Lags in data confirm the above conclusion.

Chart 10
Chart 10 shows that identical conclusions to those presented in Chart 9 are warranted when we look at the lagged structure of economy with respect to high-tech manufacturing role in overall economic activity, so that regions that started (back in 1999) with greater share of HTM in overall economy tended to have lower GDP per capita 9 years later.

Lastly, unlike High-Tech Manufacturing, Knowledge Intensive Services are strongly positively correlated with GDP per capita, as shown in chart 11 below. This relationship is true for contemporaneous correlations and for the lagged one. And it is increasing in strength (slopes) over time, as well as in statistical significance. Furthermore, between 1999 and 2007 there has been an acceleration in the strengthening of the relationship. Finally, it is worth noting that lagged role of KIS in economy is almost as strong as 2007 contemporaneous relationship, suggesting that there is significant persistence in the positive effect that KIS have on overall income per capita.

Chart 11.


So let me summarize the main results:

1. There is a weak positive relationship between long term growth in education and long term growth in income per capita between 1999 and 2007 across various regions.
2. Over time, the relationship between the levels of education of the workforce and the levels income per capita is becoming stronger both in terms of education impact and the overall explanatory power as to the direct positive correlation between education and income
3. Lagged levels of education are a better determinant of income per capita than contemporaneous levels of education, which suggests that causality flows from education to growth, rather than the other way around.
4. More educated workforce is negatively correlated with the importance of high tech manufacturing in the economy. This correlation is becoming more negative over time (with lags).
5. The relationship between education levels of the workforce and the importance of the knowledge intensive services role in the economy is positive. This positive correlation is not increasing over time.
6. Overall, knowledge economy – as far as it is captured by third level education – is positively linked to services, and negatively linked to high-tech manufacturing.
7. The negative correlation between the degree of workforce education and the extent of the high-tech manufacturing (HTM) in overall economy had become even more negative between 1999 and 2007.
8. The positive relationship between the degree of workforce education and knowledge intensive sectors (KIS) has become weaker over 1999-2007 period.
9. Greater importance of high-tech manufacturing in the economy is associated with lower GDP per capita, and this negative relationship is strengthening over time, both in the explanatory power and in the size of overall negative effect.
10. Regions that started (back in 1999) with greater share of HTM in overall economy tended to have lower GDP per capita 9 years later.
11. Knowledge Intensive Services are strongly positively correlated with GDP per capita. This relationship is true for contemporaneous correlations and for the lagged one.
12. The positive correlation between income and KIS is increasing in strength (slopes) over time, as well as in statistical significance.

Note: you won’t be able to read this anywhere else – the two blog posts on urban economies, knowledge, education and the roles of high tech manufacturing and knowledge intensive services is an exclusive, just for the readers of this blog…

Economics 19/7/10: Urban growth, education & knowledge intensive services - part 1

As promised few days ago, here are the first couple results from an interesting data set from the OECD on regional economies.

Let me first explain what I have done to data in order to derive this (and the next post) analysis:

• Out of 350 regions defined by the OECD, I have selected 50 regions that are directly aligned and dominated by capital cities and major industrial and commerce centers.
• Countries covered are: Austria, Belgium, Canada, Czech Republic, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Korea, the Netherlands, Norway, Slovak Republic, Spain, Sweden, UK and US.
• I tested for, and controlled for influential outliers (in particular Bratislava and Washington DC) where their presence distorted the overall results of estimations.
• Time horizon covered by data is years 1999-2000 and 2006-2007.
• Where the data was available for both 1999 and 2000, 1999 data was used. Where the data was available only for 2000, this data was used with 1999 label. Where the data was available for both 2006 and 2007, data for 2007 was used. Where the data was available only for 2006, it was used with 2007 label.
• There were only 7 occurrences where pairs of 1999 and 2000, and 20006 and 2007 data were not available.
• In addition to the OECD original data, I computed 1999-2007 growth rates.
  

The first chart below precisely plots what I call here Greater Dublin and South region (which, in the case of OECD includes Cork). OECD defines two regions for Ireland: Southern region and Border, Midlands and West region. Obviously, these are proxies for our more detailed traditional regional classification – perhaps, they are a hint that a country with 4.5 million inhabitants shouldn’t really have a Byzantine system of local authorities and Napoleonic system of regions that we have. Either way, the chart provides some very striking comparisons.

Chart 1
The size of each bubble corresponds to income per capita. This is not what I am after here. Instead, focus on change between blue dots – regional positions in terms of 1999 levels of education and the share of knowledge intensive services in overall economic activity, and green dots – the same data for 2007.

First, observe that while Dublin & South were clearly no better educated than the rest of the country in 1999, their share of higher value added knowledge intensive services (KIS) was much greater back then.

Second, notice that neither part of the country was anywhere near being in the leaders group in terms of either education or in terms of knowledge intensive services back in 1999 when compared to their peers worldwide. I always said that the claimed Irish advantage in terms of educated labour force back in the 1990s was nothing more than an urban myth. We were, frankly speaking below average in terms of education back then.

Third, note how dramatic was the increase between 1999 and 2007 in the levels of education in Dublin and South, especially compared to Border, Midlands & West. Within just 8 years or so, we moved Dublin & South out of the followers or laggards pack and into the lower end of the leaders group of better educated regional economies.

Fourth, notice that BMW region was rapidly catching up with Dublin in terms of its share of KIS in the economy, closing some of the earlier gap between 1999 and 2007, although still remaining out side the leaders group of regions.

This is interesting for a number of reasons, but chiefly, it is interesting since BMW levels of education did not rise as dramatically. There are couple of things going on here, which might explain this strange result. On the one hand, low early starting position in terms of higher value added KIS in BMW region might have resulted in a more significant growth during the financial services boom years. On the other hand, there might be a diminishing return to growth in education in the labour force present in Dublin & South region, especially as lower value added construction boomed during these years. Finally, one might conjecture that with a gradual decline in manufacturing in the country, BMW region saw increased inflows of less educated, but somewhat more experienced workers into KIS activities.

These are speculative reasons, but some are supported by the evidence presented and discussed below.


Chart 2
Chart above shows that there is a strong positive resilience in income per capita levels across urban economies. This implies that future income levels are strongly correlated with past income levels. Almost 94% of variation in income per capita in 2007 is associated with the variation in income per capita found in 1999.

This means that we have to be careful directly interpreting data showing, for example, that in a specific country, such as the US, a number of cities with highly evolved economic environment to support economic growth might be underperforming in terms of actual achieved growth their less advanced counterparts. In fact, across the 350 regions defined by the OECD, there is no statistically meaningful direct relationship between urban economies growth and levels of GDP per capita, neither in 1999, nor in 2007. Rich states in 1999 might have either lower or higher income growth through 2007 and vice versa.

Chart 3 below shows that strong persistency in GDP levels over time implies there is only a weak (but positive) relationship between the past and the future growth rates.

Chart 3

Chart 4
Chart above shows that there is also a weak positive relationship between long term growth in education and long term growth in income per capita. A 1% growth in the proportion of population with 3rd level education between 1999 and 2007 accounted for 0.13% increase in the growth rate of income per capita. Growth in education between 1999 and 2007 was able to explain just 0.54% of the overall growth in income per capita over the same period. Although this contrasts the relationship between levels of education and levels of income per capita as shown in the chart below:

Chart 5
Over time, per above chart, the relationship between the levels of education of the workforce and the levels income per capita is becoming stronger both in terms of education impact and the overall explanatory power as to the direct positive correlation between education and income. In 1999, 7.3% of variation in income per capita across major urban regions was explained by variations in education. By 2007 this has increased to over 14.5%. If in 1999 1% increase in the proportion of population with 3rd level education was associated with a USD336.53 increase in income per capita (PPP-adjusted), by 2007 this effect rose to USD730.92.

Lagged period education levels are better determinants of income per capita than contemporaneous levels of education, which suggests that causality flows from education to growth, rather than the other way around. This is illustrated in the chart below. Notice also that this is true both in terms of explanatory power (R2) and the overall impact of education (slope coefficient). At the same time, compared to 2007 data (previous chart), this relationship (lagged 1999 education to 2007 income per capita) is weaker in the overall effect of education on income, suggesting that in recent years, there has been a significant shift in the importance of education in determining income per capita.

Chart 6

I will explore some of the possible explanations for these results in the next log post on the matter, so stay tuned…

Economics 24/01/2010: Knowldge Economy and Irish academia

Charles Larkin and Brian Lucey are having a go at the issues clogging up Irish third level policies in Sunday Business Post today.

Here are few takes and my views on them:

“Hardly a week goes by without a government spokesperson discussing an aspect of the "Smart Economy". In the public and perhaps government mind this is equated with technology. We suggest that a truly "Smart Economy" is not based on technology -- the really smart economy is about flexibility, especially mental flexibility. Developing this should be the primary focus of the higher education sector. We suggest that there exist a set of interlinked issues that make the sector as it stands unable to do this.”

Yes – Knowledge Economy is not about quantity of labs / patents / ICT applications etc. It is about our abilities to create new applications and tools, but more importantly – ability to deploy these in profit earning undertakings (I mean, of course, a broader notion of profit that can, should the individual owners of technology and/or skills elect to do so, include pursuit of non-monetary returns).

“Irish higher education suffers from a severe conflict of mission. It is expected to deliver on innovation, education, social enrichment, economic growth, public health, improved lifestyles and put a chicken in every pot. Though research suggests that all of these and more arise from higher education, the effect varies across individuals and disciplines. The context is further complicated by the regional imperative.”

Also spot on – the conflict between objectives of the universities that are political (and this now also includes science policies) and that are academic is best highlighted by the fact that Irish universities are no longer the hot beds of subversive thoughts. Instead, they are staffed and run by bureaucrats with singular mode of thinking – coalescence, assimilation and homogenization of staff to achieve pleasant singularity of view that can then be monetized via Irish and European grants.

Not a single Irish university today would have seen Keynes offering a job to Hayek. Only senior faculty are allowed, and even then – unwillingly – to express dissenting views. Any junior faculty member peeping their head above the grey mass will be thrown out as soon as their contract comes for a renewal. ‘Does not match strategic direction’ on a rejection letter for a job means that the candidate is simply not ‘slottable’ into the Borg collective of some department.

Can anyone expect any sort of creative excellence out of this?

“Academic freedom is perhaps the simplest and yet most profound step. In essence this would involve the granting of "university" (i.e. degree granting) status to all third and fourth level institutions (inclusive of exceptional legal entities, for example the research-orientated facilities, such as the Royal Irish Academy and the Dublin Institute for Advanced Studies). The announcement by Minister O'Keeffe that he is to abolish the NUI is a first, faltering step towards this... Care needs to be taken that we do not replicate the failures of the UK and Australia in similar reforms. Within the IOT sector new programmes go through a very rigorous evaluation. The issue is that existing programmes need root and branch reform to ensure that they are at the same quality and intellectual standard. With freedom comes responsibility, and the most important responsibility will be to offer educational programmes aligned with the fostering of flexible minds.”

I fully agree – which probably means the authors are now at a risk of being branded ‘extreme’ in their views – freedom must be given to universities and all third level institutions, and they must be self-accountable for their actions. If one chooses to pursue EU and Irish academic handouts through so-called ‘collaborative’ piggy-back-riding on other EU researchers grants, so be it. They will sink in the long run, having reduced themselves to the backwater of unoriginality in thinking and output. If other universities chose to take a bolder position and once again become centres for debate, discussion, challenge and search (breaking away from their current tradition of serving as yes-men to the social regime of singular ideological hue) – they will thrive in the long term as their creativity will allow them to command a premium. The same premium the relative start ups of Stanford, UofChicago, University of California campuses, and so on – having arrived to the university game in the US well after the Ivy League institutions – now command over the majority of previously mighty, now completely mediocre Ivy League institutions.

Last night, RTE was showing the documentary about the Bog Bodies discoveries. In the entire lengthy feature, there was not a single point at which the documentary managed to show any disagreements between numerous Irish and international researchers. Instead, it was a saccharine, sonorous and harmonious blandness of: ‘Yes, I agree with my colleague on this point’ and ‘We all agree with our colleagues on all points’. I am certain that there were probably different views discussed by scientists amongst themselves. But the telling feature of the documentary was just how important consensus is to science’s image in the public. And this is frightening. Not a single major breakthrough discovery in science was delivered by consensual group-think of collaborative researchers.

Back to Brian and Charles’ essay:

“Freedom should be extended to faculty wages. At present, within narrow bands, the best are paid the same as the worst, the most active the same as the least. …Evidence from the US indicates that salary freedom can assist in incentivising staff, but this can arise at the cost of over-reliance on casual and adjunct lecturers at the undergraduate level. …we need to ensure that in the newly freed institutions a motto of "every scholar a teacher, every teacher a scholar" is taken just as seriously.”

I am not sure about the ‘over-reliance on casual and adjunct lecturers’. In my view, and a disclosure is due here – I am adjunct myself, adjunct lecturers are usually self-selected individuals with passion for teaching and with different sets of skills from other researchers and academics. If selected on merit, they can add serious diversity of thought and experiences to the universities. They are also key to linking universities to the real world. What is really sad about Irish universities is that casual lecturers are often selected for a single shot teaching, filling in for absent full time faculty. There is neither coherence, nor open-mindedness as to how adjuncts are selected, appointed and contractually hired.

“Freedom must also of course mean freedom to fail. If a university were unable to deliver on the required educational outcomes then it ultimately would be required to fold or to be subsumed by another more successful university and mechanisms need to be put in place to deal with the fall-out if this happens.”

This really needs no qualification. Superb! I lamented on many occasions the lack of consolidation and closure in the process by which universities that thrive can gain market shares.

“We suggested earlier that a truly smart economy involves the production of flexible thinkers. Such an education must be more than purely discipline-focused at the third level. …We can broadly consider three domains of intellectual activity in universities- humanities, letters and the social sciences (arts), life sciences and natural sciences. Mapping degrees to one of these we suggest that a true university education would involve an annual minimum of 15 per cent engagement with each domain.”

Very well put. Again, on many occasions I raised this concern that we are not producing flexible, creative thinkers, but are focused on producing standardized degree-holders. Like a commodity product, these degree holders are then released into the real world where they go on to form a mass of uncreative, unchallenged and unproductive middle managers and functionaries. The future of Ireland Inc rests with people who can deploy creative and innovative thinking in management (not necessarily in the labs alone, but at all stages of production, marketing, delivery, sales etc). This is what I would call a real ‘knowledge-based’ economy. It is good to see that at least two of my colleagues are now publicly in agreement.

“To adequately provide these postgraduate courses all academic staff in the university would be required to be active researchers, which would be achieved by a rolling tenure system. This would involve the granting of tenure for a prospective 5-7 year period, with biannual reviews.”

Spot on!

“Research activity and research quality are only loosely related but quality requires activity as a prerequisite. To ensure quality of teaching we suggest that again there be biannual reviews of teaching based on best modern practice. This would involve some element of student feedback but would also involve reflective portfolios and classroom observation. To oversee this quality issue we suggest a single evaluation unit within the above suggested ministry.”

Sadly, although I agree with the idea of a review, I am not yet ready to place my trust in Ministry bureaucrats to deliver on such an objective. Fas experience shows that our public officials cannot be entrusted to do this job in an impartial, efficient and effective manner. I would rather suggest use of class numbers, relative to faculty averages, as a partial metric for academic wages. Taken, of course, over a period of time and within comparable disciplines. Students tend to vote with their feet.

“A third element relates to funding. …Separating undergraduate from postgraduate education we suggest allows greater clarity to emerge. Persons seeking to take masters or doctoral qualifications in an area do so for one of two reasons -- a desire to seek entry to an area or profession (investment) or from a personal interest (consumption). There is no obvious reason why the government should fund the latter over other consumptions. In any case the operation of the tax/PRSI system should, in most circumstances, offer a return to society partly via the increased taxable earnings that the better qualified persons achieve, thus capturing the public good element of an increase in, for example, dentists, or telecommunication engineers, or doctors of literature.”

I actually disagree. PRSI and income tax place a surplus taxation burden on individual investment. If a person invests their own funds in education, they should be able to deduct the cost of this investment before they pay tax on capital gains. Secondly, if the society at large already benefits from the social good nature of higher education, then a person having invested in it for private benefit must be reimbursed for society benefit accruing not to themselves, but to others. After all, if my money paid for my PhD and I get a return of x% per annum, while the society gets y% per annum and a tax return on my PhD – is this not a case of double taxation?

This means that, while I fully agree that the state should not provide funding – except that based on merit and inability to pay considerations – for post-graduate studies, I disagree that PRSI/income tax should be viewed as fully functional means for capturing individual gains.

Economics 23/01/2010: Knowledge economy infrastructure

Some interesting data from a study "Broadband Infrastructure and Economic Growth" by Nina Czernich, Oliver Falck, Tobias Kretschmer and Ludger Woessmann, CESIfo Working Paper 2861 published in December last year that provides good comparatives for Ireland relative to the peers in terms of what I would call rudimentary 'Knowledge Economy' infrastructure -

• the relationship between physical capital and knowledge-related capital (broadband penetration and education); and
• the relationship between GDP per capita and the above

all taken over a long period of time (1996-2008).

First, broadly, the findings of the study itself: "We estimate the effect of broadband infrastructure, which enables high-speed internet, on economic growth in the panel of OECD countries in 1996-2007. Our instrumental-variable model ... [shows] voice-telephony and cable-TV networks predict maximum broadband penetration. We find that a 10 percentage-point increase in broadband penetration raises annual per-capita growth by 0.9-1.5 percentage points. ...We verify that our instruments predict broadband penetration but not diffusion of contemporaneous technologies like mobile telephony and computers."

Interesting - a 10% increase in broadband penetration ups the growth rate by 0.9-1.5%. In other words, to get a 10% increase in GDP per capita out of a 10% rise in broadband penetration requires 6.4-10.7 years. Not a bad return. The problem here is that, of course, the starting levels from which this effect is measured are low, so the law of diminishing marginal returns has to kick in somewhere.

I took their data and run through some of it in a very crude way to see if I can glimpse other interesting aspects. Here are the results.
Maximal (for the period GDP per capita, PPP-adjusted) with 2 standard-deviation 'candles' around it. Notice two broadly defined groups of countries: Overperformers (including Ireland) and Underperformers. Now, I know - I shouldn't be using GDP here, but I am not about to make a statement about the actual 'wealth' or 'riches' of Ireland, so GDP will do.

Next, take a look at scatter plot relating GDP per capita to two measures of communications sector performance: broadband penetration for 2008 (the end score, if you want) and starting point measure (voice telephony penetration back in 1996).
It looks like GDP per capita in the end is much more responsive to increases in broadband penetration than to the starting position. In other words, economies with low legacy stock of communications seem to be catching up through broadband penetration improvements. Is this suggesting that a country can leapfrog weak communications sector legacy by jumping straight into broadband age? Well, sort of. The problem here is that we do not separate out the twin effects of growth in broadband penetration (much higher for countries doing leapfrogging) and simultaneous growth in voice telephony penetration (also likely to be much higher for countries doing leapfrogging).

A very revealing chart next:
Let us take physical capital as a share of GDP and compare its effects on overall GDP per capita, against the same effect being induced by education. What is unambiguous is that countries with higher physical capital base share of GDP tend to have lower GDP per capita. How come? Because they are physical capital-intensive, i.e their production is stuck in the late industrial age. Countries with higher education are more labour-intensive and especially skilled-labour intensive, and thus have higher GDP per capita.

Note Ireland. It is relatively poor in physical capital per GDP and yet relatively rich in GDP per capita. Why? Because we do have a modern economy - an economy where value is added through human capital side (of course this happens much more on the side of MNCs, where transfer pricing is used to import, artificially, human capital-intensive value-added, but it also happens in services economy, in our IFSC, etc). And yet, our education measure is far from being impressive.

The gap between our unimpressive levels of education and the levels of education consistent with the 'average' OECD pattern of relationship between education and GDP per capita, to me, clearly shows the importance of transfer pricing in our GDP figures. This gap is captured here by, in effect, showing that our capital and human capital stocks cannot support our GDP fully!

Here is more detailed view of our physical capital stock relative to our education (human capital stock).
Ouch. We are an outlier precisely in the direction suggested by the gap identified above. Note that moving to a 'Sweet Spot' of highly productive economies with significant rates of utilization of human capital requires both - more physical capital formation and even more education. Also note just how inefficient is the stock of education in the upper 'bubble' group of countries that includes all Nordics, Japan and France. These countries are simply not being able to derive the same returns to education in terms of GDP per capita as the 'Sweet Spot' nations.

So here is a question no one is asking - is there such a thing too much of education? Is there an inverted U-curve for the relationship between education and income, whereby too smart for its onw good society leads to suboptimal levels of growth? After all, since the 1990s we are seeing an emerging trend in the developed world whereby the new generations of slackers are increasingly composed of highly educated people...

This is not an argument out of the blue - take example of a potentially 'too livable city' concepts discussed in a brilliant article here. Can the same happen to the 'too-knowledgeable-economy'?

Ok, couple more charts on the same point. Broadband penetration is positively correlated with capital formation... Hmmm. This might reflect the fact that higher stock of capital imply better infrastructure through which broadband can be delivered. The relationship is not very strong, though.

And there is an even weaker, and negative, relationship between education and physical capital. This negative coefficient of correlation does suggest, though, that we are in the early stages of the process whereby physical capital takes second seat to human capital in characterising modern economy. If so - good news for 'Knowledge' economists out there - machines do not possess knowledge. People do. But it is also bad news to all social engineers out there who still think technocratic management of economy/society is possible. Knowledge requires heterogeneity and creativity. And these are antitheses of planning and policy-driven controls and incentives.

Far from being dead, the age of Friedmans' Freedom to Choose is only dawning!

And the final point: education and broadband infrastructure are much more strongly (almost 4:1) positively correlated with each other than they are with physical capital.
This, of course, can be interpreted as a warning to the folks interested in restricting the freedom of people to communicate. If China, and other countries that impose controls on internet, want to have a 'Knowledge'-intensive, modern economy, they will have to deliver real (i.e. free of political ideologies and biases) education and meaningful (i.e. free of political 'bottlenecks') knowledge infrastructure (in this case, broadband).

If they don't, the risk is they will end up being physical capital giants - countries where the world does its 'dirty work' of mass manufacturing widgets...

Economics 20/01/2010: Knowledge Economy and Dublin Water woes

It is beyond any doubt that Ireland has had its share of bizarre unlucky events and disasters:

1. Man-made crises: economic recession, banking collapse, fiscal meltdown, construction/property bust and policy/regulatory legitimacy, a schism between the public sector and the ordinary folks trying to make a living (yes, it is back - industrial strife is now clogging our transport and threatening our healthcare system);
   
2. Natural: swine flu, measles pandemic (remember that one?), floods, a snow storm, a freeze, most current - vomiting bug is apparently back;
3. Natural/man-made: water shortages (with parts of the country still covered in floods).

There have been severe costs imposed on people and the economy at large. And there are lessons to be learned and, hopefully this time around - few people responsible for (1) and (3) to be punished.

But one lesson has not been discussed to date. Recall a year ago, the Government came out with a grand plan for creating a 'knowledge' economy in Ireland. This plan is still alive (as plans go), although, of course, nothing has been done to deliver on its promises. Now, the EU is about to come out in February with a comprehensive platform for building a brighter better Union through 2020. I've seen the document. It too aims for 'Knowledge Economy' thingy.

So now to the lesson of our crises: 'Knowledge Economy' needs functional, efficient and excellent services. Public and private. Functional, efficient and excellent services is what our public sector simply cannot deliver.

That was, of course a two part proposition.

Let us take the first part: 'Knowledge Economy requires functional, efficient and excellent services". I hope this is pretty much apparent:

• PhDs and high quality entrepreneurs who will fuel the 'Knowledge Economy' will require good housing (as opposed to substandard shoe-box apartments we built for cheaper laborers during the Celtic Tiger boom), good on-time and on-schedule transport systems (as opposed to completely random travel times at Dublin Bus), cheap and quality air connections to the rest of the world (as opposed to what passes for airport out on the North side of the city), high quality healthcare (as opposed to waiting lists for tests and procedures measurable in light years instead of days), affordable and superior in quality education for their children (as opposed to schools where teachers do not engage in any post-university life-long training and where doors are shut after 3 pm - when the rest of us, mortals - have to be at work) and so on. They will require parks that are safe and pleasant, the sea front that is free of industrial rubble and incinerators. And air that is clean.
  
• PhDs and high quality entrepreneurs who will find these services wanting in Ireland will require either a much higher rate of pay, making their output, no matter how much 'Knowledge'-infused it might be, uncompetitive in the world markets. Alternatively, they will simply move on to build 'Knowledge Economy' somewhere else - in Paris or Singapore or Hong Kong, where such services (also known as inputs into the 'quality of life') are better and more efficiently supplied.

Agree? Ok, second part of proposition needs to be proven. Does it? Really? Anyone still believes that our public sector delivers excellent services? Or that the shambolic quality of these services has nothing to do with knowledge economics?

Instead of proof - an example. We all can agree that our nation's top university is and must be at the centre of the 'Knowledge Economy' activity. It must be its heart. Well, the speed of the body is related directly to the speed of the heart beating. Here is a snapshot:

From today's email to faculty and students (this is a second such notice this week):

"Dear all,

As we are all aware following the severe cold weather...

Within College we use a large amount of water and must during this period make an additional effort to reduce our water consumption. ...The following water saving tips should be considered by all [I omit the measures proposed that actually should be a normal practice for all times, not just at the time emergency]:

· In laboratories reduce water consumption for vacuum pumps and water cooled condensers

· Ensure all water supplies are turned off when experimental work is complete

· Only run dish washer, glass washers and autoclaves when full

· Consider can any experimental work consuming water be stopped during the current water crisis"

Of course, conserving water is a good practice - it is a scarce resource and should not be wasted. But if three days of snow and -3 degrees temperature can stop experimental work and lead to reduced operational capacity of our best University, are we really getting the public services that can support 'Knowledge Economy'?

I personally don't think so. So why on earth have our policymakers - wise enough to set numeric targets for PhDs well into the first half of the century and capable of producing tomes after tomes of white papers on 'Knowledge' economics - have so utterly failed to even mention the need for proper electricity supply (yes, TCD routinely warns staff that the University is teetering on the top edge of its supply capacity and that ESB supply might be disrupted) and decent water supply?

Before science and technology policy proposals, shouldn't we be first served with a decent emergency response system that can make sure flooding is contained when it happens, roads are gritted when the icy conditions advance and water/power/communications/gas/energy are delivered when adverse weather hits? It might be not 'Knowledge'-intensive and not too glamorous of a task, but it would serve a much greater purpose.

Economics 16/01/2010: PhDs employment

One of the comments to my earlier post today got me thinking about a simple question: what are the prospects for employment in Ireland for all those PhDs we are preparing to stamp out in the next few years?

In truth, of course, the answer to this question is: I don't know. But some data mining and a quick back of the envelope analysis can shed some light on the issue.

Per CSO's Business Expenditure on Research and Development 2007/2008 document, we have: "...estimates indicate that research and development expenditure should have increased to almost €1.7bn in Ireland in 2008. Enterprises indicated that they expected to spend €905m on labour costs, €510m on other current costs, €205m on instruments and equipment (excluding software) and €65m on land and building costs." This gives us the overall ratio of labour costs to total spending at roughly 55%.

"There were 13,950 persons engaged in research and development activities in Ireland in 2007. In total there were 8,250 researchers of which 1,200 were engaged as PhD qualified researchers, 2,950 technicians and 2,750 support staff."

So average labour cost per one R&D staff member: €64,875 per annum. Labour costs are usually comprised of roughly 60% salary/wage and 40% non-wage costs (taxes, insurance etc). This means average wage per person engaged in R&D activities in Ireland was around €38,900 per annum. Not a hell of a lot, by any measure. Just about 76% of the average earnings in our illustriously educated public sector.

"There were 10,950 Full Time Equivalent (FTE) research staff in Ireland in 2007. Almost 1,050 of these FTEs were PhD qualified researchers while there were more than 6,200 other researcher FTEs." Another useful fact to show the ratios of PhDs to non-PhDs required in the private economy.

"There were more than 1,200 enterprises engaged in research and development activities in Ireland in 2007. More than two thirds of all enterprises spent less than €500,000 on research and development activities, a fifth spent more than €500,000 and less than €2m while 14% spent €2m or more." Figure 1.5 provided specific allocations by enterprise spend which I used in following calculations.

Now,  suppose Irish enterprises double their expenditure on R&D while preserving distribution of relative spending as is. Suppose furthermore, they increase by 20% the proportion of R&D spending that goes to support employment (as opposed to capital). The total demand for PhDs in Ireland will be – wait for it – 2360.

HEA stats show that total enrolment – not the stock of existent PhD graduates – in PhD programmes in Ireland was 5,637. And that is not enough, according to the DofE plans, which require at least a 25% increase on enrolment levels achieved so far to reach the target of doubling the number of PhDs from 2004-2005 levels. Oh, yes, folks: if businesses double their spending and increase their intensity of use of PhDs in doing this research by 20%, the resulting increase in PhD positions over currently occupied will be just 18% of the total pool of enrolled PhD students in the country.

Suppose our State heroically steps in to hire 50% of all freshly minted PhDs. That brings potential PhD-level employment - after the doubling of R&D spending by our enterprises - to, say 40%. Suppose graduation rate from PhD programmes is 60% (it is actually getting higher by the minute as lower quality institutions hoover up state funding for PhDs). This still leaves some 380-400 PhDs floating around looking for jobs.

And this is before we add on those countless Irish PhD students studying in the UK, US, Australia, across the EU. And before we add those PhDs coming into Ireland from Europe. And before we take on roughly 10% annual enrollment growth rate that HEA has been delivering on.

No matter how you skin the numbers, they simply do no add up.

Economics 08/10/2009: THE Rankings - World class to poor class

Times Higher Education 2009 world league table of Universities was published last week, confirm what all of us already know:

• There is one world AAA class University in the country: Trinity College, that has risen from a respectable 49th place a year ago to 43th place in 2009 (peer review score=88 or relatively under performing for the peer group of top 50 universities, employer review score=96 good performance, staff/student score=72 average performance, citations/staff score=49 poor performance, international staff score=98 great performance, international students score=83 average performance, and overall score=80.1).
  
• There is one world AA class university in the country: UCD, that has risen from 108th place in 2008 to 89th place this year (peer review score=72 - much poorer than TCD despite a major and sustained drive by UCD to improve research, employer review score=94 slightly lower than TCD but excellent performance overall, staff/student score=67 - a clear sign of funding shortfalls, citations/staff score=37 - very poor mark, suggesting little of influential research being performed, international staff score=95 very solid score, international students score=90 - an excellent score, but one wonders if it is a function of the various artificial exchange programmes sponsored by the EU, and overall score=69.7 - good score and good progress)

Not a single Irish University made it into Global 50 in the areas of:

• Engineering & Information Technology;
• Life Sciences & Biomedicine;
• Natural Sciences;
• Social Sciences; or
  
• Arts & Humanities.
  

What can we learn from the above scores for TCD:

1. Knowledge economy in TCD is happening through teaching and much less through research - our research scores still have ways to go to match our overall score.
2. Knowledge economy is driven, at least in top universities, by international nature of the faculties, not by indigenous talent - as expected for a small open economy. So recent tightening in Green Cards and spouses employment for non-EU workers is a travesty that can cost us dearly in the areas of research.
3. Despite having fewer resources (staff/student ratios being one sign of this), TCD and UCD pair is still managing to outshine our 'Gateways of Excellence' across the country - those heavily subsidised 'junior' Unis and ITs.
4. There is absolutely no evidence that focusing on sciences or biomedicine, or life sciences or any of the rest of 'hard' science disciplines is yielding any real excellence in either TCD or UCD as neither institution has made it into top 50 rankings by a single discipline.

More on the results later... stay tuned

Economics 20/07/2009: Education Plan

For those who missed my Sunday Times article last, here is the unedited version. For more on education premium in Ireland see my Long Run Economics blog here.


Remember the wave of protests hitting the streets over the withdrawal of the automatic entitlement to the senior citizens’ health cards – a benefit worth some €2,500 per annum for a well-to-do family of two? As the Government studies this month’s report on the options for the reintroduction of third-level fees, the prospect of taking out some €5,700-7,300 from the already stretched middle classes has to be an equivalent of a nightmare in our Ministers’ heads. Unlike the elderly, these are the same families hit hard by Minister Lenihan’s tax war on Ireland Inc.

Politics aside, this level of radical pain therapy would be warranted were it to deliver improved quality of education. Alas, the plan is so fundamentally flawed that one must wonder if serious economic impact assessment of its proposals was even attempted.

The Department of Education report suggests, as a clearly preferred option, setting fixed fees of €5,715 for arts and humanities students and €7,272 for nursing and engineering. While these differentials somewhat reflect the variation in capital between the two broad categories of programmes, these are hardly sufficient to establish proper pricing of education. Neither do they recognise the differences in the costs of non-capital inputs, such as faculty salaries.

In other words, the idea of fixed, uniform pricing independent of quality or institution’s ability to attract top internationally competitive students and faculty is about as daft as charging a single price for all cars. Do this, and within years you’ll get an overpriced mediocre labour force.

Two features of the Irish market for education amplify this negative effect of fixed pricing.

The first feature is extreme over-proliferation of third level institutions. In normal circumstances, when price reflects quality differences between competitors, the markets regulate the new entries and the survival of the incumbent colleges, institutes and universities. But absent pricing mechanism and with politically motivated education expenditure allocations you get a competition driven by the race to increase numbers of degrees awarded. A race to excellence is replaced by a race to graduation and grades inflation. Do we, as a nation, want certified mediocrity for the indigenous labour force? If not, we should allow our universities to charge a market rate for their services.

The second feature relates to the market for education. For all our talk about the knowledge economy Irish wages are driven primarily by tenure. Per latest CSO data, released last week, even at the peak of the boom in 2007, Irish workers collected low earnings premia per each additional year of investment in education compared to tenure. Chart illustrates. After-tax real annual earnings gains from moving from post-leaving cert level of education to a 3rd level non-degree education are lower than those from staying in the workforce. This is true for all types of potential students, with exception of mature female students. A picture is better for those planning to invest in a full 3rd level degree or higher, but even here the premium earned falls below the price to be charged under the proposed reform. That was before the latest decimation of jobs, wage rates and bonuses associated with the current recession.

In other words, given the labour market-enshrined system of tenure-driven rewards, education does not really pay in Ireland. Staying in the job does. This is likely to explain why on average more educated EU15 foreign nationals (excluding UK and Ireland) have earned some 9.6% less in hourly wages in 2007 than their Irish counterparts. For males, the same number was a whooping 14%. Per CSO data, not a single sector in Ireland yields an education premium in excess of the upper marginal tax rate other than our knowledge-thirsty public sector. And even there, only females earn such a premium.

This makes it even more crucial for the reform of education financing to be focused on long term objective of creating a functional market pricing of human capital – skills, schooling and aptitude. On a deeper level, such a reform should be linked with a rapid shift away from the system that rewards tenure and taxes heavily educational attainment and resultant skills. In other words, we need more after-tax wage inequality based on skills and educational attainment differentials before we can charge a real price of education. But at the level of education reform itself, we need a system of fees that differentiates between degrees of varying quality, incentivises student effort and merit.

The main mistake of the proposed fees system is that it sets singular pricing for all degrees independent of quality or the variations in the demand for specific degrees in the market place.

For example, if the country is experiencing a reduced supply of engineering and hard science personnel, as FAS and Forfas have asserted on so many occasions, surely we should witness a combination of lower fees (due to smaller demand for admissions from the potential students) and higher wages emerging. Under the latest Department of Education proposal, we will get exactly the opposite.

Similarly, if our two world-class institutions, TCD and UCD, were to offer their degrees at the exact same price as those offered by less internationally recognisable schools, this society will be underpaying for their services and overpaying for lower quality universities and schools. This is hardly a system that can be expected to yield economically and socially efficient outcomes.

Bizarrely, our education mandarins claimed in the report that allowing institutions to vary the price of admission can lead to some charging “excessively high fee rates, perhaps resting more on reputation than service”. This is economically illiterate and smacks of an outright manipulation of the market.

The second grave mistake is not to create a fully diversified and functional system of state-supported lending for tuition fees coverage and merit-based grants. Such a system, for obvious reasons, should be accessible only to the children of Irish citizens and long-term (8-10 years plus) residents. It should be coupled with a University-driven system of own merit grants open to all candidates to attract star applicants from abroad.

It should also work seamlessly with the means-tested system of supports. The much-lauded Australian option (or Option 3a in the report terminology) will simply not work for a small open economy like Ireland that is a temporary migration attractor within a much larger EU. Judging by the fact that the Department of Education expects the cost of running the scheme to be roughly equivalent to only 3-4% of the set up cost, I doubt they counted on the potential education tourism and skills drain to be of any significant magnitude.

And yet, our own Government expects some 150,000 Irish people to leave this country in the current recession alone. How many of these new emigrants will carry with them above average levels of education attainment is an open question. However, were we to have the proposed fees system in place today, the Government migration solution to the crisis could be washing away some €800-1,200mln in educational investment out of the country.

The last error of judgement by the Department of Education is to address the issue of fees separately from the overall financing of academia. Even assuming that our mandarins’ numbers stand up to scrutiny, there is no added certainty as to the future income for the academic institutions in this country. How much of the current funding will the fees replace? How will the fees revenue be distributed across various institutions? Who will be responsible for financing of uncompetitive institutions? All of these and other questions remain unasked. Which suggests that the fees reform will be nothing more than a plaster on a gapping wound that is our system of education.

Box-out: This month’s ECB Bulletin on the Euro area economy included an interesting model for estimating the sovereign bond spreads as a function of public debt to GDP ratio, public deficits, the volumes of bond financing required in the future, past yields and the measure of international financial markets’ willingness to accept investment risk. The original ECB estimation was based on the yields history for 10 Euro area countries, including Ireland. Recalibrated forward to reflect the expected changes in our fiscal position in years to come, this model predicts Irish bonds spreads over the German bund to increase by roughly 40-50% through 2013 assuming NAMA bonds are held off the public balance sheet and have no impact on the market demand for our bonds. Under less favourable conditions, with NAMA bonds entering public balance sheet and demand for Irish bonds falling to the level where the ECB becomes the sole purchaser of bond, market yields spreads can rise by some 200%. Drastic, but feasible.

Economics 03/07/2009: Ireland's Research Sectors - a net positive

CSO released their latest data on R&D spend in Ireland for 2007/2008.
Chart above shows overall R&D expenditure by type of firm in 2007 and 2008. In both 2007 and 2008 larger firms dominated overall R&D expnditure in Ireland, but there was a marginal increase in the share acruing to small firms as well. There has been only marginal growth in terms of overall spend between 2007 and 2008. Still a net positive, when compared to the rest of economic activity.
Total capital spending on R&D declined for larger firms, but rose for smaller firms. Ditto for foreign owned enterprises as opposed to domestic enterprises. Across the board, foreign owned companies vastly dominate R&D spending space in Ireland, though domestic enterprises are closing the gap. Again, a net positive. Capital spending overall declined, as expected, given the fall in the value of land and buildings.
Current expenditure on R&D (inclusive of labour costs) rose for all categories of firms. The smallest percentage increase was for foreign owned enterprises and manufacturing. Again, net positive, albeit marginal. And in the long run, this might be signalling rising pressure on R&D competitiveness. No analysis is provided in terms of off-set in R&D Capital spending savings agains Current spending inflation.Labour costs rose at a significant margin for all players, except for manufacturing enterprises. Net negative for the 'knowledge' economy. Apparently - doubling PhDs output does little to reduce their cost.Own funds are dominant as a source for R&D financing, with small firms, expectedly, leading larger firms in the importance of public funding. In general, public funding is extremely marginal. Again, this is good news. This is true in relative - percentage - terms (above) and in absolute terms (below).
Table below shows the sectoral breakdown of total R&D spending:
Predictably, MNCs-led sectors account for over 70% of the total spend. This is ok in the short run, but must be reduced in the long run if we are to lower the risk of significant withdrawal of one or two leading MNCs from the market.