Human Capital Project
Earlier this year (March/April 2007) I travelled to Cambodia to work on the “Human Capital Project” (HCP) that I am trying to put together. I first considered something like this back in May 2005 when I wrote:
“But it occured to me that there might be a market for micro-financing poor kids through school and then having them repay their debt after they get a job. One way to coordinate it might be to have the children pay a fixed portion of their income back into the scheme… and then use that money to finance more education loans. In this way the scheme can become self-financing.”
I didn’t follow through on the idea at the time, but last year two things happened that gave me an extra incentive to put this idea into practice. The first thing was that I volunteered as a lecturer at a Cambodian university aimed at poor students, which gave me some essential contacts and first-hand experience dealing with the third-world education system.
The second thing was my friend Joseph Clark publishing similar ideas in Policy Magazine (published by the Centre for Independent Studies) back in Australia. Without me knowing it, Joseph (and other friends Kate Morrison & Jason Potts) had been discussing a similar idea of “personal equity” where people provide money to students in exchange for a percentage of their future income. Provocatively, Joseph referred to his idea as “shares in people”. In January this year I had discussions with Joe, Kate & Jase and suggested pursuing this idea in Cambodia — a real experiment in putting free-market ideas into practice for development.
I had discussed the idea previously with Willem (an Australian working in Cambodia) and Keasar (a Cambodian friend) and they seemed keen to help. I met with both of them in Phnom Penh and they helped me to refine the plan. Keasar works for Maharishi Vedic University (MVU) and he agreed to do whatever he could to help set up an arrangement with the university. Willem put me in touch with Kong Pov from the University of Management & Economics (UME) and I travelled to Battambang to meet him and check out the university. Pov was very supportive of HCP and also committed to doing everything he could to help get the project running.
The basic idea is to provide a financing for a limited number of students each year to attend university at UME & MVU in exchange for 10% of their working income for 10 years (UME) or 5 years (MVU). The project would be non-profit and the repayments would be re-invested in future students. Initially this would have to be funded by donations but after 6 or 7 years the repayments should be sufficient to make the project self-sustaining and hopefully growing. If the project was successfull the idea could be extended to other universities in Cambodia and to other developing economies, and possibly could be extended to offer investers a chance to invest in student education for-profit.
At this stage it looks like I will have the cooperation of the universities, a ready supply of potential students, sufficient mechanisms for managing the system and hopefully enough donor support (touch wood). I have recently created a Human Capital Project website to give more information on the project and I am in the process of finalising Memorandums of Understanding with the universities. If things go well then HCP should be supporting it’s first student by August this year.
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This post is republished (with slight modification) from my personal blog: www.chapter5.wordpress.com
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An excellent initiative, John. The full text of Joe Clark’s article is here (pdf).
I think that’s a great idea too.
The challenge will be in execution, mostly I imagine in maintaining peoples commitment and motivation during the early embryonic years. This applies to both financiers, organisers and students. No doubt you will be screening the applicants to ensure a high probability of completion and success, however I imagine you are going to need some well defined rules regarding repayment etc for students that fail or transfer out of the system. Such a scheme is quite open to cheating by students that under declare their income or disappear into the world without repaying anything. Success will hinge on mechanisms of accountability and enforcement as well as the honor and integrity of the individuals involved. I’m sure you already know all this and I think it is commendable that you are prepared to risk your time and effort regardless. I wish you ever success in this venture and I hope it changes the world and brings you fame and fortune.
Well done John.
Is there any fields of study this is limited to?
How would the investment model work if it becomes for profit?
Thanks Andrew — I added the link to the story.
Mark — The fields of study are limited to what is offered by the university. These universities don’t offer degrees in ancient sumerian basket-weaving or 12th century Mongolian poetry. Just Business and Agriculture related subjects that will actually help the income-potential of the students.
Terje — Thankfully, in the early years there is very little to organise so it should be easily achievable by volunteers. In later years we may need to put on Cambodian staff. And I don’t think there will be any problem of student motivation. The sponsored students will likely be the only person in their family getting an education and their degree will make the difference between a life of $30/month income and upward mobility for them and their extended family. Maintaining donor interest in a few years will be the harder part.
I agree that the system is vulnerable to cheating and I expect there to be an amount of fraud, especially in the latter years of repayment (when the good vibe has worn off and they’ve forgotten their poverty). We have a number of plans for how to deal with this — but the reality is that we have to factor in some loss. After speaking with many people in Cambodia, I believe that the system will work well enough for it to be sustainable.
On the for-profit element. HCP will assess a number of students but will only have financing available for a limited number each year. One option would be to provide a list of additional students that we judge to be good investments and allow investors to finance their education and get the returns (10% of future income for fixed period). Perhaps the investor could agree to give some percent of the return back to HCP to cover expenses and to contribute to the project.
Of course, this approach would only work once we had established the viability of the project. At the moment we need supporters who do not expect to get their money back (ie donors).
Some detail questions:
The basic idea is to provide a financing for a limited number of students each year to attend university at UME & MVU in exchange for 10% of their working income for 10 years (UME) or 5 years (MVU).
Why the difference in repayment term? Do MVU graduates earn more?
What is the definition of working income? Non-cash benefits are common in Asia.
The graduate income from MVU and UME graduates depends more on where they get a job (Phnom Penh or regional) rather than which university they attended. The difference in repayment times reflects the difference in the tuition costs of the universities.
Working income is the cash income paid by their employer and cash bonuses from their employer. Obviously, HCP will do badly if a graduate gets a job as a policeman or judge or politician as most of their incomes come from bribes… but I have done my calculations based on a low estimate of cash income as indicated by Cambodians.
Great news on Cambodia progress JH.
People might also be interested to know that we are developing personal equity schemes in two other areas:
1) For investment in start-up enterprises, again on a not-for-profit basis initially, with the entrepreneur receiving up-front capital in return for a fixed-term percentage share of their future personal income. We currently have interest in applying this in Mozambique as a variation on standard micro-financing instruments, and also in NT as a mechanism for indigenous enterprise development.
2) Bi-lateral swaps: this web-based system will allow pairs of individuals to swap percentage shares of their future income under a fixed term contract; the idea is to allow you to build up a portfolio of others in whose future earnings you’ve invested, in return for a share of your own income. The site will also provide a matching service between investors and investees for a one-way personal equity investment (as some people prefer not to swap shares).
Still many details to sort out especially minimization of moral hazard and adverse selection risks… but experimentation really helps with understanding how these issues play out in practice.
What sort of money are you talking about in terms of the cost of a course and the expected ROI?
John – well done, this is a fantastic idea.
Will you set this up as a tax-deductible charity which solicits donations?
This is a bit daft as far furthering human knowledge.
The first man in space Yuri Gargarin was propelled by free state controlled education in the USSR where capital markets were effectively abolished. The great leaps in knowledge that humanity is capable of should not be killed off capitalist obsessive-compulsives. No offence just broaden your horizons into space as therapy.
A lot of the climate change people here in Bangkok at the IPCC are not making the very effective economic argument that the cost of reducing carbon/methane emissions will be less than the cost of continuing to burn fossil fuels which are very expensive to buy and use. If we stop consuming fossil fuels the cost will be less, basic point of fact. “Get on your bike” as Tory treasurer Norman Tebitt once said.
parkos intercepts the (round) ball called earth and propels it towards the goals beyond the miserly materialsts..
Parkos
You realize you risk the death sentence in certain Asian countries for substance abuse. Please be careful.
Actually Humphrys,
you have a fine idea there, basically transferring a version of the Australian HECS system as a way of financing education in a system that is strapped for cash.
I was going to do some work out at the main state university in Pnom Penh a few years ago but I was told that there was little money involved as far as facilities or wages and that there was nationalistic resistance to foreign staff and students.
The private sector in the centre of town such as the “Banana Institute attached to Norton University” (seriously) seemed to have more of an open door policy for shunting fat blokes from the North of England around muddy streets on motorbike taxis and calling it education.
JC,
thanks for your concern. Great to see I can still get a rise out of ye aroond here. First man in space argument usually shuts em up.
Ultimately, this is not a very libertarian solution in that massive state infrastructure would be required to keep track of graduates and make deductions from their earnings. In Cambodia, this simply does not exist, would take a long time to establish and if established would be riddled with all the other corruption and cash business that goes on there.
If grads were encouraged to work in donor country’s labour markets this could be a form of bonded labour.
It could only really work in terms of repayment through an honesty system which relied on the graduates themselves. It would effectively be a way to donate aid (statist welfare?) and returns should not be expected, and nor should they be.
As you rightly point out… there is no Cambodian infrastucture that we can use to help coordinate re-payment. We will be dealing directly with the graduates and with their employers.
It is a purely private system with no statist welfare.
What if they don’t pay you back?
What sanctions do you have in that case?
[...] apart some misleading BBC reporting on Perth water issues. John Humphreys discusses a very worthy human capital project he is proposing to set up in Cambodia as a new approach to meeting the higher education needs of [...]
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Graeme: “What if they don’t pay you back? What sanctions do you have in that case?”
The legal system is pretty much a joke, so we’ve had to explore other options. I explain the approach in more detail here:
http://humancapitalproject.wordpress.com/details/
“Blacklist of the school/village” as a punishment for non-payment sounds quite harsh. Ouch!! Particularly in Cambodia, where you can blow up a cow or a chicken with a bazooka at a rifle range for tourist cash (dont get ideas hjelmet), buy a kilo of smack in about 10 minutes in any town, and then visit the killing fields.
Anyway, carry on..
Keep it minimal as you propose as HECS style is not a system that has worked well in Australia or UK en masse. IE people graduating with debts into oversaturated graduate yob markets and ending up in the classrooms/brothels of IndoChina.
To be the clever country we need to educate those with brains rather than those with fat wallets but this is another issue.
Under HCP financing, if the graduate doesn’t get a job (or gets a bad job) then they don’t repay. Once their income exceeds a set minimum then they repay a percentage of their income. Consequently, only those who benefit from their education have to contribute back to HCP.
Kate.
Do you think the teritiary-education side of it is a socially benevolent thing?
I can see how you could do a lot for education in a poor society that didn’t have public education for free…. Or didn’t have it in isolated areas…
But I’m a little bit disturbed by the focus on tertiary education…
To me its about overcoming the lack of clear property-rights…. and being there to provide capital AT THAT MOMENT when the provision of capital will result in greater cash-flow.
Or alternatively being able to provide education to the kids in a small village WHILE THEY ARE STILL ABLE TO WORK FOR THEIR PARENTS….. by perhaps taking a well-worked-out home-schooling curriculum and adapting it for the village.
I like the PRINCIPLES involved. But I’m a bit disconcerted at the specifics of the tertiary education element of it.
We do not always do people a favour when we lend them money.
[...] call for sponsors Two years ago I wrote about my plans to set up a non-profit organisation in Cambodia that provided alternative financing for poor [...]
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