The Economic Implication of Increasing Life Expectancy and Late Bequest (Revised)

Capital is the key!
Image source: http://www.amycrossnance.com/bequests-in-wills/

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Note (04.12.2014)

Please note that this article best reflects the state in which most less developed and least developed nations are in. Developed nations have their own side of the story, but they are doing better in terms of resources allocation, especially from capital owners (retirees who would have otherwise left their wealth idle) to those who demand capital (willing to borrow to invest). So in terms of capital circulation, developed nations have done a much better job thanks to their well-functioning and more robust financial structure (active financial intermediaries). Of course, wealth is not just in the form of money such as land, houses, precious metals, etc. So, maybe, developed nations are also affected by increasing life expectancy and late employment of bequest, but the effect might be smaller or simply negligible. I can't say for sure at this point. We need a solid statistical proof. I will look more into the topic.
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29.11.2014

I, personally, find this topic to be quite intriguing in a sense that it really points out a simple fact that there are negatives and positives to every decision made, to every turn of event, to every path taken towards the future. Gloomy it may sound, but what should be inferred from such a statement is the need for us to weigh carefully the pros and cons of any decisions to be made in the future regarding policy making and constructing political, economic, and social frameworks.

So, let's get right into the discussion.

What is bequest? Bequest is simply inherited wealth. In this article, we want to theoretically analyse the potential outcomes of life expectancy in terms of wealth. In other words, how can the increasing life expectancy of a population impact the employment of bequest or wealth, or inherited wealth to be precise, necessary for the growth of an economy?

Before we begin, we have to understand what wealth means. Basically, Wealth, in economics, is capital, and capital is a major driving force of an economy because capital can be anything from money to machine used as inputs in the production of goods and services. We can safely assume that wealth is used to start a business, to be loaned to new businesses/entrepreneurs of innovative ideas either directly or indirectly via savings (with banks as intermediaries), or simply to be consumed/spent to purchase products and services the economy has to offer; consequently, higher tax revenue for the government to allow for improved public services as well as lower interest rate because with larger amount of inherited wealth circulated, a portion of the aggregate capital can be obtained via an interest-free transfer from predecessors to their successors, and this ease the burden of borrowing (having to pay high interest rate) for entrepreneurs who possess less capital.

These three routes will lead to economic growth, be it small or large growth rate, because by injecting wealth into the economic circulation, we are also redistributing wealth either directly or indirectly to the people of the workforce who is depending on the economy to live and thrive.

However, note that capital is not something that is self-employed. We, humans, are the ones who put the wealth, the capital to uses. And this is when the population comes into play.

This implies that no matter the amount of wealth/capital, if it is not utilized by us, if it sits idle in our basement, it will never be supplied to enrich our economy. Think about food. Why are there people starving even when there are abundant food, enough to feed the whole globe? In fact, based on an article written over one and a half decades ago by Danielle Knight (see reference), it was found that, even back then, we were capable of providing at least 4.3 pounds (roughly 2kg) of food per person a day; yet, there were those who died miserably of hunger. Tragic it is, but the obvious issue (before we even jumped into detailed reasoning process) here is that people died, even with sufficient aggregate amount of food, because there was a portion of food that was wasted or not accessible to the starving population.

Wealth, in the form of capital, follows the same causes and effects. Wealth that is not invested/loaned/consumed/donated is no different from food that is placed 500 meters above your head, with you dying of having nothing to eat and given only a 2-meter ladder.

And how is that related to the increasing life expectancy?

You see, people normally are born with a certain amount of wealth generated by their predecessors. They then grow up, join the workforce, and accumulate their own wealth over time. Here is the catch. People mostly spend their wealth when they are at young and middle ages, while at the same time, they save for old ages. When they retire, when they get older and older, they produce much less for the economy, spend less, pay less tax, while sitting on a pile of untapped wealth. The longer they are able to live beyond the age of 60-65 (retiring ages), the longer the wealth will be unemployed.

Diving deeper into this issue, I have realized that one reason is that, besides a tiny percentage of those old tigers and dragons of the business world, the average old people just do not have the spark, the incentive to invest and spend. This is a problem that is most relevant to us, now. Why?

Because when we look at the historical trend, the baby boomers (born after World War II from 1945-1960s) are now retiring. They are the ones who benefited the most from the recovering and booming global economy after the dark era of war. This gave them significant advantages over us of the generation Y and Z, the younger generations, in terms of wealth generation capabilities. Once they retire, they are also sitting on a huge stock of wealth. Another way to translate this is that as more of the baby boomers are retiring, on top of having less tax generated from the workforce and more government spending on the retired/former workforce, there will also be less capital trafficking on the economic highway of our time due to the large amount of wealth left idle by the retirees. What is more is, now, they are retired in the time of significantly increased life span, better healthcare and life sustaining means than ever before, and that also means that the capital, that could otherwise be employed, will not be put into effective uses for a much longer period of time.

So, if wealth is not passed down to their descendants, it will deprive the younger generation of the greater investment potential through the employment of a larger amount of capital to kick start their economic activities. As the life expectancy increases, wealth might be passed down from a 100 year-old father to a 70 year-old son or a 40+ year-old grand-daughter. This slows down the potential growth rate as the inheritors of wealth might have been able to make a much better used of the bequest (which would have produced positive outcomes for them and spillovers for the others) had it been bestowed to them much sooner.

What does this tell us? This tells us that our growth right now are highly dependent on technological growth to make up the slack. The increasing rate of technological advancement allows us to create much more advanced machines that can remarkably raise the output-per-capital ratio (because higher output-per-capital ratio also means that a unit of labour can produce more outputs with a unit of capital). So as the workforce is shrinking due to the retirement and the declining fertility rate, technology is our savior. In addition, we also have more efficient and effective workforce due to the better education standard, the more efficacious institutional and organization structure, and the more resources unlocked.

But how long can it last? At the current rate of technological growth, we can't say for sure. However, is it enough? That is probably a better question. Why? Because we cannot ignore the exogenous/external adverse forces such as global warming, natural disaster, disease outbreak, etc. These can drastically reduce the world outputs even with the current technology and efficiency we enjoy so much.

This article is, as of now, simply introduces us to the less visible problem we are facing. Therefore, it is of our best interest to start looking into the idle resources/wealth/capital, to find a way to fairly and equitably employ them. We need to construct sensible knowledge and understanding, rules and regulations, social and economic structures, and suitable policies revolving around this issue.

How can we do that? One way is to construct a financial system that is able to relocate idle resources (such as pension fund). The rest, I will leave it to you, or maybe, we can discuss it together in the next article.

I hope you find this piece of economic knowledge interesting and useful.
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Reference:
http://www.psrast.org/nowohu.htm

Redefining Education in Developing World: An Organic Way of Teaching (Part 2)

**Note: This is a continuation from the previous article. However, rather than relying on economics, I think for such an article, it is far better to incorporate personal observation and philosophy into it to make it feel a bit more alive, but at the same time, a bit unpragmatic here and there (if you think of it based on how developing countries function as of present days).

II. The Challenges

Since the developing world lacks in so many aspects, the adoption of western-style education without adapting it to the social, cultural and economic contexts of the local can lead to a major problem, the mismatch between reality surrounding the recipients of education and the theories or the information taught. In each developing country, how big the gap is can be determined by looking into the richness of knowledge provided in comparison to the lacking or the availability of tools or materials to demonstrate and solidify the knowledge or theories taught to students. 

This recurring trend is a motivation killer. I, myself, have experienced it. This is worsened by the fact that most educators are not able to explain and demonstrate the practicality, the purpose of the subjects being taught. There is little or no activity to increase students' understanding of particular scientific theories, and thus, they are not able to conceptualize the ideas being conveyed to them. Learning then becomes a chore as students see no purposes of learning beyond certain levels. Students are unable to perceive the milestones that they can reach each time a certain level of education is achieved. The academic world then becomes boring. Many students have become no better than parrots who only memorize the subjects being taught in short-term, to only fight to survive the exams, but cannot figure out the underlying concept, the intuitions, the rationale of what they have been studying on and on for so many years. Tedious and lack of appeal, the conventional and outdated western-style education has transformed students to be just like sailors who can't navigate their way through the ocean.

If possible, I would like us all to travel back in time and ask the high-school version of ourselves (Heck, even our current selves) what they think about, say, calculus and its practical purpose? Why study physics if you only want to be a car salesman? We need to answer these sorts of questions to fully feel the motivation and see the incentive in further pursuit of such fields of study, which, without doubt, are critical in building a capable workforce that is able to assist the industrialization process of a country.

It seems a structural reform is needed, but this would require a tremendous amount of resources. Furthermore, developing countries are already facing many challenges, all at the same time: income, health, security, natural disaster, political instability - just to name a few. Resource constraint has then become a big hurdle as countries possess very limited resources even with external aids. This means that allocating too much resource into one sector, like education, will suck away resources from the others, and most of the time, many sectors equally demand strong attentions and actions. Setting priority is, thus, a very challenging task for a small group of high-ranking people at the decision-making level. For instance, putting too much resource into the education sector might retard the growth of health and agricultural sector on which most developing nations are highly dependent. Of course, education sector might complement health sector, but that really depends on the ability of the government to effectively allocate resource into the right place and at the right time, to where it is most needed so we can avoid unnecessary waste of valuable inputs. Since that is the case most of the time, one simple question pops up when making decision regarding relocating resources towards education: "Is it worth the money and effort?"


III. Recommendations

Re-think Education
Image source: http://www.thesamhitaacademy.com/activities.html

The road to education is to invest in it and expect a change, a high return and a sustainable one. A great investment if you ask me. While resource constraint remains, developing nations need to set a clear budget plan for education and further mobilize funds from various international communities and organizations to meet the goal. Private and public sectors partnership also plays a significant role in allowing for quality and affordable education. For instance, banks can offer schools in its vicinity some sorts of educational services like allowing students to visit and learn about its operation or sending its staff to teach students, even a little bit, about banking, how it works and how it benefits students and their society. Government can, for example, provide free public transportation to students. If scholarship is too much of a burden on their pockets, the government can provide long-term-low-interest loan to aid students financially until they are able to join the workforce and earn to repay their debts. This is, in a sense, an investment that will also yield financial return on top of more capable citizens.

And how can we reshape education? 

Effective, impactful, and sustainable ways of educating people is through positive reinforcement, motivation and encouragement. In a nutshell, that means acknowledging and treating students as human, and not machine. Educational structure will need to be reformed slightly or drastically depending on the re-assessment of the current practice and re-adjust it accordingly to be aligned with the strengths and weaknesses of each country.

What does that mean? It means that a country, like Burma, will have to evaluate the current understanding of an average person in its country, see if they are strong in business sense and weak in judgmental capacity, or if they are strong in technological know-how but weak in punctuality and work ethics. Of course, each individual is unique, but it is not wrong to generalize if we do a rigorous study on one particular society because a group of people tend to have certain traits peculiar to them, which normally emerges due to the natural surrounding environment. 

The government should also look more into the current and projected demands of skills in the current and future market. Knowledge gained from such observation can be used to reshape the educational curriculum of that particular country to first include subjects teaching skills that are most needed (practical) in everyday life; second, include subjects that build a strong foundation of cognitive thinking and spiritual understanding which are both indispensable in promoting quality individual and social life and society; and third, advanced knowledge that fosters cutting edge development and innovation to further promote not just technological, economic and social improvements, but development in general.

Moreover, the world of education should take a simple economic concept into account, which is incentive. Incentive will bring motivation and purpose. For instance, incentive to be educators. Countries should be more willing to run on deficit and re-allocate more resources to education sector, to provide enough incentive and prestige for higher quality educators, not the smartest one in what they are doing, but the smartest one in explaining what they are doing and why they are so enthusiastic about it. These sorts of people are crucial in development, in ensuring a promising future, because a country's workforce is its people, and well-educated people will not just push return per unit of investment even higher, but also contribute to a strong foundation of social stability, order and peace, and last but not least, morality. Note that, this will be much more likely to come true with strong educators, visionaries that are bold enough, reckless enough, to defy the conventional viewpoints for the greater good of the whole society.

But formal education is not the only route, I dare say. Why? Because not everyone is good at studying in a classroom setting. There are people who can learn better and quicker in actual practice; there are people who are better at doing than thinking, and vice versa. Everyone is good at something, something that can help them sustain their own lives and ensure long-term satisfaction. Forcing them to study (by overvaluing formal education) is no different from forcing them towards one direction, stripping away their personal goal and value. They should study because they think it helps them achieving a better life for themselves and those around them. They should be explained about the true nature of education, that it is not a chore, but something they should enjoy to their fullest. 

Another reason why I strongly encourage countries to spend more and even borrow to spend on education is because spending and borrowing will only erode in value if they are used on something that yields no or low return. Since education will create a strong workforce in the long run, I believe that there will be strong and positive explicit and implicit returns, and the momentum will keep going when such a workforce has been created. Why? Because the next generation of those well-educated people will mostly be shaped in the same way by their predecessors. For this simple reason, developing nations should earmark their expenses for things revolving around education such as schools, training center for teachers, higher salary for teachers, better physical and soft infrastructure to shorten the distance between students and educators, and so forth. This sounds like too much spending all over again, but let me repeat: it is not the same. The purpose of spending, even though we are spending on the exact same thing, can make a huge difference in terms of outcomes, and I think I have talked about this enough from my previous articles and this article that there is no longer the need to reiterate.

I envision a course begins with an introduction to the practicality and purposes of it, as opposed to the rudiments of that particular subject. Students should be allowed the freedom to explore, to learn from practical points of view first before getting into the harder theoretical or abstract forms of ideas. How can we make this happen?
Non-formal education is the answer. It should be factored in and aligned with formal education. I would like to one day see a school where non-formal education is embraced. Students can have a full day during their normal weekdays to explore their interests. Work on a business idea, create amazing piece of artwork, compose beautiful music, listen to interesting history of the world of their choices, explore space in awe, read for pleasure, learn how to repair their own bikes, learn how to sew, learn how to saw, learn how to see the world the ways they want to the world to see them, learn about self-regulation, learn how to build strong sense of moral value, and my goodness, there are a lot more. This will only happen if we all are in consensus to forget just for even a day what we used to think, what we used to do, and re-think a better way to learn, to work and to live.

Creating such incentive and close the gap, non-formal (let's say "extra") education for students is of vital importance. Inclusive and organic approaches should be taken to actualize this form of education.

Of course, that does not mean that compulsory education is no longer needed, BUT it should be practiced in conjunction with various other forms of education such as cooking, music, computer, physical education, and many others. In other words, students should not only be tested on their ability to solve problems on paper, but also their ability to apply what they have learnt in the real world practice, to survive and be self-reliant, to be fit, to play healthy (music and sports, and heck, even moderate gaming), etc. 

This is not to say that quantity should be preferred over quality, but smart students should NOT just be book smart. A book is a compilation of one or a group of human thinkers, a record of some historical events, and by assuming we are all different and none of living and non-living beings, events, philosophy can be without flaw, being book smart is never enough, and I guess everyone can see that from their own experience.  

I want to see a world where everyone is able to, rather than memorize philosophy and events, analyse, select, adapt and synthesize the various elements of life they learn to suit their own taste and personal value, while at the same time, keeping in mind that a line should be draw, a boundary should be set to respect the values other people hold. This is to say play your game but don't ruin the others'. I want to see a world where people are able to contribute not just in terms of raw labour and brain power, but also qualities as human beings.

The sad truth is that this is a utopia that is probably not ever going to exist, but let's go as close to it as we can. 

Re-think education. Re-imagine the world.