Your economy needs you!

November 26, 1999

Universities are busy preparing their case for more cash in the next spending round. THES reporters demonstrate how they benefit the economy A fly on the Treasury wall might recently have seen the spectacle of the "iron" chancellor, Gordon Brown, probing the financial underbelly of the education department.

More than ever, the Treasury needs to be convinced that when it spends taxpayers' money on the taxpayers' behalf it gets something in return over and above the basic public service provision.

Mr Brown wants departments such as education and employment to use hard economics to show him where money needs spending and why.

Research has found that countries with a larger stock of educated labour are better placed to catch up and adapt to leading-edge technology, even if it originated in a different country.

This is one issue Mr Brown will be exploring as he prepares for a second comprehensive spending review. Higher education has a strong case for increased investment but it is not one that lends itself to straightforward explanation.

There is a wealth of evidence showing strong correlations between increased higher education and rising social and economic returns. Can the government afford to risk the United Kingdom's position in the global market by failing to fully realise this?

It would be taking an "insane risk" if it failed to keep pace with competitor countries in levels of public spending on higher education, according to Nicholas Barr, senior lecturer in economics at the London School of Economics.

Even if Treasury officials cannot take a positive view about higher education funding, they should be careful to minimise the downside risk that they could damage the economy by falling behind countries that have been building their potential by investing in universities and colleges.

Dr Barr said: "You could say if we don't invest more in higher education we may be economically conquered by the likes of Singapore."

But he said the sector needed to respond to the "screening hypothesis", likely to be used by the Treasury, that the value added by higher education was mainly in awarding degrees that allowed people to show prospective employers that they were bright and able to respond to new opportunities.

He said: "You have to ask where the broad, flexible skills loved by policy-makers fit in. A hundred years ago things were pretty static, but now a person needs to learn new skills.

"Therefore you could say higher education aids the economy through the capacity of the nation to respond flexibly to whatever happens. Higher education gives people the capacity to absorb new information and skills."

It is clear from research in countries of the Organisation for Economic Cooperation and Development that more education leads to faster growth. But is there a plateau beyond which the total costs to society of producing more graduates outweigh the marginal benefits to the economy?

Evidence on graduate salaries tends to indicate this is not the case. Average graduate salaries continue to increase. It has to be assumed that the reason graduate salaries outpace non-graduate salaries is because, despite the huge increase in their numbers in recent years, they are of benefit to companies. If so, then they are benefiting the economy and society.

On top of this, the rate of technological innovation is increasing and so, presumably, is the pressure on companies and national economies to keep pace. The government is alive to this and "the knowledge economy" has become a late 1990s mantra.

"People are at the heart of the knowledge economy. Their knowledge, skills and creativity are essential in order to produce the high-value products and services this country needs for the next millennium," said Peter Mandelson, then trade and industry secretary, on the launch of last year's competitiveness white paper.

Money has been ploughed into initiatives to encourage universities to engage in science and technology research and to market it commercially. The signs are good for higher education.

The role of universities' high-tech spin-off companies cannot be underestimated in the race to keep pace with innovation. But again problems exist in quantifying the direct benefits to local, regional and national economies. There is little information on the number and total turnover of such firms (which include the lucrative biotechnology industries), making it difficult to gain an overview of their wider economic importance and so the importance of universities to the economy.

It is certain that universities are generating the researchers and research that enable these companies to exist. Cut back on research investment and university innovation will be curtailed.

Clusters of such companies act as magnets attracting inward investment, Silicon Valley in the United States being the supreme example. They stimulate further innovation in competitor companies. The UK economy will benefit by developing an international reputation in the global marketplace for the quantity and quality of such companies.

And, if nothing else, these companies are providing jobs and paying taxes.

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