(This essay was published in South China Morning Post on 25 March 2015.)

During his 2013 State of the Union address, US President Barack Obama referred to University of Chicago Professor James Heckman’s finding of a 7‐10% return on investment per annum for certain early childhood education programs. These rates of return are higher than those for equity in the stock market between 1945 and 2008.

 

James Heckman is among the ten most influential economists in the world. He won a Nobel Prize in Economic Sciences in 2000. His work has revolutionized our thinking about the emergence of an underclass in the US and Europe and shows why current policies to reduce inequality and poverty in many parts of the world, including Hong Kong, are ineffective.

 

Everyone knows education boosts productivity and enlarges opportunities, so it is natural that proposals for reducing inequality emphasize effective education for all.

 

But according to Heckman, “existing solutions ignore a powerful body of research in the economics of human development that tells us which skills matter for producing successful lives. They ignore the role of families in producing the relevant skills. They also ignore or play down the critical gap in skills between advantaged and disadvantaged children that emerges long before they enter school.”

 

His path breaking research shows that the rate of return to a unit dollar invested in human capital is greatest in the prenatal period, followed by 0-5 years of age. The following oft-cited graph captures this relationship:

 

 

Heckman synthesized two unrelated streams of literature – the human capital approach to health economics and the economics of cognitive and non-cognitive (character-building) skill formation – to help us understand the origins of human inequality.

 

He found that ability gaps between individuals and across socioeconomic groups open up at early ages, for both cognitive and non-cognitive skills, as do gaps in health status. These gaps are highly correlated with family background factors such as parental education and maternal ability.

 

Most importantly, small initial skills gaps that appear in early childhood will accelerate into increasingly larger gaps over time if they are not remedied. Intervention at early ages is therefore warranted before it is too late.

 

If a young disadvantaged child can be helped to acquire the most relevant skills when their learning capacity is most effective, then their skill gaps could be narrowed more effectively and also most cost effectively.

 

Some critics say early childhood education is expensive. Heckman agrees, but he argues that the focus should be on the large return on the investment. Quality early childhood programs for disadvantaged children more than pay for themselves in better education, health and economic outcomes. “Success nominally attributed to the beneficial effects of education, especially graduating from college, is in truth largely a result of factors determined long before children even enter school.”

 

High-quality early childhood programs are great economic and social equalizers — they supplement the family lives of disadvantaged children by teaching consistent parenting and giving children the mentoring, encouragement and support available to functioning middle-class families.

 

Smaller class sizes, adult literacy programs and many job-training programs, on the other hand, are not nearly as effective or cost efficient.

 

To check the growth in the underclass, Heckman has called on policymakers to adhere “to a few essential principles: focus on disadvantaged families, start at birth, integrate health, develop cognitive and character skills, and encourage local innovation in quality programs from birth to age five.”

 

Economic growth and equality are often considered conflicting policy goals. Heckman shows there need be no trade-off between equity and efficiency. Early investment in disadvantaged children will help reduce inequality, in both the short and the long run, and promote prosperity.

 

Professor Heckman will deliver a public lecture on “Investing in Early Childhood” at the University of Hong Kong on 30 March.

 

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