EDUCATION and ECONOMIC

Thursday, 2 October 2014

EDUCATION and ECONOMIC GROWTH


1 Introduction

Should countries or regions (generically, "states") invest more in education to

promote economic growth? Policy makers often assert that if their state spends

more on educating its population, incomes will grow sufficiently to more than

recover the investment. Economists and others have proposed many channels

through which education may affect growth--not merely the private returns to

individuals' greater human capital but also a variety of externalities. For

highly developed countries, the most frequently discussed externality is

education investments' fostering technological innovation, thereby making

capital and labor more productive, generating income growth.

Despite the enormous interest in the relationship between education and

growth, the evidence is fragile at best. This is for several reasons. First, a

state's education investments are non-random. States that are richer, faster

growing, or have better institutions probably find it easier to increase their

education spending. Thus, there is a distinct possibility that correlations

between education investments and growth are due to reverse causality (Bils

and Klenow, 2000). Second, owing to the poor availability of direct on

education investments, researchers are often forced to use crude proxies, such

as average years of educational attainment in a state. Average years of

education is an outcome that people chose, given their state's investments in

education. It depends on returns to education and is, thus, far more prone to

endogeneity than is the investment policy. Furthermore, because the average

year of education counts an extra year of primary school just the same as a

year in a doctoral (Ph.D.) program, average years of education cannot inform

us much about the mechanisms that link education investments to growth. It

is implausible that making one additional child attend first grade generates

technological innovation, and it is equally implausible that adding another

physics Ph.D. affects basic social institutions, fertility, or agricultural

adaptation (all mechanisms that might link education

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