Sunday, November 7, 2010

Will education and knowledge transfer really be an issue when Emerging nations enter the next phase in their growth cycle?


Country Rankings at the Chess Youth World Championships, 
Porto Carras (Greece) Oct 20-30, 2010

Emerging and Frontier Markets are growing much faster than mature economies at the moment. To a certain extent this is of course logical. When you come from a lower level a specific percentage growth is easier to achieve. But the experience of the BRIC countries Brazil, Russia, India and China and some of the more successful smaller Emerging markets made it clear that there is more to it. The world is changing and Emerging Markets did translate themselves into a third power bloc. Growth in Asia and commodity-induced wealth gains in the Middle East transformed these economies. Latin America is developing as well and Africa is finally what it should have been much earlier: a mixture of economies with commodities and cheap labor. 

True, governance, corruption, lack of regulatory and legal frameworks are often an issue. But the latest figures from the International Finance Corporation show that doing business in Emerging Markets is not as high a risk anymore as it used to be. In a globalized world these nations have come to understand that an inflow of international capital as Foreign Direct Investments (FDI) is in their advantage. FDI is more sticky, stable and loyal than alternatives (portfolio investments or bank loans).

But history has also shown that nations that went through a period of growth - even if it lasted for 5-10 years or longer - did in the end never completely catch up with the major, leading countries because they lacked the human or physical capital to go from a first growth phase into a second. In a lot of analyses education and knowledge transfer were mentioned as weak spots of countries that basically made their fortunes through export of cheaper products due to the availability of cheap labor. Countries who controlled the markets for higher value-added products did in the end always prevail.

But to what extent will knowledge be the problem this time around? The world is a global place, more than ever. When we look at the international job market we see that the Middle East is attracting enormous pools of Western talent already. And Singapore and Hong Kong are doing the same in Asia. But what about the level of education in those countries itself? It is well known that top universities in India, Israel, China etc are now capable of delivering strong academic talent.

A couple of weeks ago we wrote a piece about the Big Mac index. That index was for many years used as a proxy for inflation and purchasing power analysis on a global scale. And we were wondering: is it possible to find a proxy indicator that helps us when we want to get some kind of impression of the educational position in various countries in the world? From 20-30 October the Youth World Championships Chess were held in Porto Carras in Greece. And since this was not just one championship but a total of 12 tournaments (6 for boys in the age classes Under 8, Under 10, Under 12, Under 14, Under 16 and Under 18 and 6 for girls in the same age classes) we felt that this was a nice sample to test 'knowledge' and 'educational opportunities'.

It has been proven elsewhere that there is a linkage between Chess Talent and Educational Opportunities, especially in more quantitative areas when looking at the highest levels but also - when looking at kids for whom chess is still more fun than a profession, we can see it in a similar fashion as scholastic aptitude tests. The nice aspect of this test framework is of course that - in an international setting like the World Youth Championships - kids have to play each other thereby providing us with a nice comparative experiment.

So, what we did is the following:
1) We created a ranking for the top-10 in every age category. The number 1 player received 12 points, number 2 10, number 3 8 and the numbers 4-10 from 7 to 1 point.
2) We allocated the points received by the players to the country they were representing.
3) We summarized the points over the various groups, first to see if there were striking differences between the Boys and Girls group and second overall (Boys and Girls together).

The attached table (see above) shows a few things:

1) Emerging Market nations dominate. Only one(!) developed nation made it into the top-10 and that is the USA. Indeed, the country with the best track record in higher education as well. Just take a look at rankings of the best universities in the world.
2) India is the overall winner. With Russia and China on the 3rd and 4th spot just behind nr 2 the USA. So 3 of the 4 BRIC nations in the top. And actually: when looking at the student populations and faculties at Harvard, Berkeley, Stanford, Chicago etc we are not that surprised that these nations were doing well. But the dominance of Emerging Nations remains shocking.
3) The difference between the Girls and Boys lists is remarkable. The USA list is totally dominated by scores of Boys. Actually when looking at the Boys, the USA is still the number one. India is the strongest country in the Girls lists. Remarkable: India, China and Russia post scores that are equally distributed between Boys' scores and Girls' scores. No gender inequalities there.

All in all: to the extent that this education proxy is good, it shows that we do not have to worry about the second phase in the growth pattern of these nations. They do have the money to buy the necessary educational resources and skills that they did not develop in their countries and in combination with good basic and higher education they will be challengers in more sophisticated product markets with higher value-added products as well. 

And for those of you who believe that this might be a one-time coincident: when looking at different years, we see that the strong position of Emerging countries is actually not a one time event.

But of course, maybe it is a 'chess thing': the World Chess Federation is a Federation in which Emerging Markets countries were for many years strong. But we cannot use this as proof of a big bias in our analysis. Just check the faculties of top universities in the West. How many top professors were of Russian, Jewish or Indian descent? The big difference will be that a growing percentage of these people will now stay in their own country with intelligent and talented people now being available in local talent pools. And with the local economies providing growing opportunities for these people, the percentage leaving the country will go down. On the contrary: growing numbers of Western firms and research institutes will now be attracted by their talents and (still!) relatively low costs. It is like the story about Mohammad and the mountain. When the mountain is not coming to Mohammad, Mohammad has to go to the mountain and that is what growing numbers of Western firms will be doing. Re-allocate research and development facilities and different types of production facilities to the leading Emerging Markets.

So Western nations who try to hope for a catch-up or recovery phase because of a dominance in the area of knowledge and education: you better be quick because this Chess proxy - applied to youngsters in the age groups from 8 to 18 - indicates that during the next 10 years some of the Emerging markets will also start to show successes in industries where we do not expect them. Actually: isn't the Indian experience in IT a nice illustration of the validity of our proxy analysis? Or what about Western European markets now being bombarded by similar IT offerings from Eastern European firms? And what about Israeli high tech venture capital firms?

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