Education And Economic Growth Research Paper

1. Defining Growth And Education

Reasons for this maze of complexity are not hard to find. First we have to consider that when we speak of ‘economic growth’ there are many different ways in which it can be conceptualized and measured. Changes in Gross National Product (GNP), Gross Domestic Product (GDP), import export ratios, unemployment rates, and various indices of economic activity are just a few of the many ways, individually or in combination, by which economic growth can be operationally defined. The means by which rates of growth are calculated can also have a marked impact on whether ‘growth’ is discerned or not (e.g., year-to-year change, rolling averages, decade-to-decade change). Any growth also inevitably occurs within convoluted national, regional, and global contexts that includes substantial changes over time in factors such as population growth, immigration patterns, human capital, technological innovations, structural unemployment, evolving taxation and accounting policies, trade agreements and tariffs, ‘hidden’ or ‘black market’ economies, regulatory environments, and political leadership. The degree to which these changes are measured and factored into economic growth models to create ‘value-added’ or ‘adjusted’ rates varies considerably among economists and particular schools of thought within which they work.

We also need to consider that as the world economy changes over time, particular sectors of national economies may also alter significantly. Increasingly in many nations applications of knowledge and information drive economic indices of productivity rather than material goods. Changing production patterns that emphasize customization and just-in-time delivery have also significantly altered both our conceptions and means of economic growth. Large corporations within the highly interdependent global economy often have worldwide revenues that exceed the GNP of many nations, and the dispersion of corporate assets among many countries makes quantifying economic growth in any kind of reliable manner increasingly difficult.

Further complications arise when a particular model of economic growth (with its attendant assumptions and foci) is analytically and econometrically related to education. ‘Education’ is a broad concept that includes a variety of subcategories or sectors. The ‘formal’ system would include primary, secondary, college university, and certification forms of education (e.g., secondary education equivalency examinations, specialized training programs, and examinations that lead to industry-recognized certification). The formal system can be further subdivided into public and private spheres. Economists and other researchers generally have scant information about the private sector. Virtually all models of economic growth include substantial data available from the public sphere and only modest amounts from the private sector. In some nations, this means that better than one-quarter of the formal education sector is ignored as ‘missing’ and frequently forgotten data. Formal education in many nations can also be divided into academic and vocational technical in terms of its focus and once again differing results are seen when considering the impact of these different forms of education on the economy.

An ‘informal’ education sector embraces non-credit forms of education and peer-learning systems (operating without the knowledge of management) that occur on the job and within the culture generally (e.g., evening ‘courses’ offered to the local community hosted by a local secondary school but having no formal relationship to credentialing or degree-granting institutions). There also exists the arena of job-related training or education which can take the form of job-embedded education (internships, apprenticeships, union-led training, formal company programs) and industry or state-led training (e.g., vocational technical education for adults) or retraining, often conducted under the guise of either economic competitiveness or ameliorating the effects of structural unemployment. Investment in these types of informal education schemes (over $3.8 billion between 1963 and 1986 in developing nations) are particularly difficult to optimize owing to the dramatic influence of economic policies within competitive markets. Success also requires a close match between labor market conditions and the kinds of training received.

Adult basic education and general efforts to teach literacy must also be considered as important sectors of education that generally operate in isolation from the world of primary and secondary education. The economic effects wrought by adult education are difficult to measure and vary considerably among nations owing to other factors. Adult basic education, for example, is fairly large even in highly industrialized nations such as the USA and may be a much larger sector than formal education in some lightly industrialized nations. Finally, we must also recognize at the individual level that there is much informal education that occurs as a person accumulates life experiences, reads, interacts with others, and thinks. The cumulative effects of these highly personal forms of education are unknown in their effects upon economic growth.

Models of economic growth that seek to document the impact of ‘education’ usually focus on one or at most two of the above subcategories and frequently employ different data sources. Not surprisingly, they sometimes come to dramatically different and frequently contradictory conclusions that arise due to the measures for economic growth adopted, the methodology employed, the scope of the inquiry, and the data sources consulted.

2. The Continuum Of Development

Further complications arise when moving up and down the continuum of highly industrialized, information-intensive economies and minimally industrialized, information-modest economies (a growing North–South divide on the planet). Economic growth models generally focus on the capacity of a national economy and focus on measures such as global market share, employment in wage-related activities, income contributions (personal and corporate taxes) and redistribution schemes, and other factors that embody within them an implicit belief that these are the proper measures for ‘growth’ and ‘progress’ for all cultures, peoples, and nations. Movement ‘up’ the development continuum to greater industrialization and an intensification of the role of information within the economy are seen as valuable and essential for every nation. This view elevates economic considerations as defined principally by economists who live in particular types of economies into a global standard against which all nations are measured. It ignores noneconomic factors such as population growth (e.g., expansive growth is generally frowned upon by economists but may be viewed positively by noneconomists), political considerations (e.g., socialist regimes may view economic goals differently from the majority of economists who work within capitalist frameworks), sociocultural milieus (e.g., individual and group behaviors and class structures) and issues such as fertility, life expectancy, and child mortality.

Economists who have looked at some of these issues in relation to ‘developing nations’ routinely suspect that ‘traditional growth accounting estimates are likely to underestimate the true contribution of education to economic growth and social welfare in general’ (Woodhall 1994, p. 2646). Additional data sources not generally accounted for in approaches to data include the hidden economies revolving around the informal labor sector, black markets, and other exchanges of goods that are not quantified or quantifiable in many nations of the world. For example, it is estimated that only about half of the GNP in developing nations is comprised of the share of earnings from labor vs. a range of 60–70 percent in highly industrialized nations. Some economists have recommended that dualistic models be created to address adequately the many distinct differences between economies on the two extremes of the development spectrum. Others have suggested that really four distinct types of economies can now be found among the developing nations of the world: (a) newly industrialized nations in Asia, (b) relatively highly educated Latin American nations, (c) large continental economies such as India and China, and (d) marginal rural economies found in Asia, Africa, and Latin America.

A number of disparate findings have emerged when viewing the impact of education on earnings along the development continuum. Higher average levels of formal education are frequently associated with higher earnings in most highly industrialized nations, although notable exceptions are sometimes seen such as nations in Eastern Europe and Russia (Decker et al. 1997, Filmer and Pritchett 1999a, Baldi et al. 2000). Nations at the other end of the spectrum generally demonstrate negative associations with education at university level once educated labor is no longer scarce. This is probably due to the fact that the expansion of the educated labor force has far outstripped the supply of jobs requiring such high levels of formal education and this disequilibrium exacerbates civil unrest. Oversupply has led many economists to recommend that postsecondary education be scaled back in many developing nations and these resources be targeted to primary education interventions. Investments in the education of women (a key source of inequality in many nations) and in general education (as opposed to vocational education) yield returns equal to or better than their alternatives, although once again there are notable exceptions based on differences in economic policies, social structures, and the distribution of education (Lopez et al. 1998, Filmer and Pritchett 1999b).

3. Human Capital Theory

Economists classically view labor, land, and capital (human and otherwise) as the three principal inputs into production. Studies of the contribution of education to economic growth have been one line of investigation within the human capital dimension— often held in tension with inputs from the other two sectors in complex multidimensional models to tease out the residuals that can be ‘explained’ in a statistical sense by education as defined by the researcher. These ‘growth accounting’ models have generally shown a fairly modest effect of education on economic growth ranging from as low as 1 percent to highs of around 30 percent with a mean finding of around 10 percent since the 1970s. Perhaps not surprisingly, returns from primary-level education (basic literacy and numeracy) are generally found to be much higher than for other levels and the decline can be steep as one ascends the levels of formal education.

A working assumption that underlies virtually all human capital approaches going back to Nobel Prize winner Gary Becker (Becker et al. 1995) and others, is that people will invest at an individual level up to the point where they believe they are going to realize a full return on their investment. This is often driven by a belief that there are certain fundamental skills that one must acquire in order to compete or advance successfully in the labor market. (It is important to note that costs subsidized by the state or other entities rather than the individual, routinely result in most students choosing to go for a higher level of education or credential than they would elect if they had to bear the full cost themselves.) Schools serve as a powerful socializing influence both in reinforcing the value of education and in shaping the kinds of educational experiences and expectations that people hold. In many societies, schooling serves as a modernizing function whereas in others (e.g., strict Islamic societies), it may serve to restrict impulses frequently associated with modernization or open capitalist societies.

Formal education frequently acts as a filter or a screen that determines a threshold level that a job applicant must meet in order to be considered for an open position. One of the many reasons why there are such modest direct relationships between education and economic growth or even education and earning in a narrow sense is that market supply has a bearing on the level of education deemed minimally acceptable by an employer. In times of ample supply of applicants, employers often require a much higher level of education as a key screening tool. Adjusting education supply functions in the light of these changing demands in order to increase economic productivity is both conceptually and politically difficult and is generally discouraged. In part, this is because employers and policy makers recognize that education helps positively shape a variety of other aptitudes, dispositions, and motivation critical to work success (Woodhall 1994). It is important to note also that wages are affected by many other factors extrinsic to employees and employers, such as taxation, price controls, inflation, and state and local policies and regulations. For these reasons, the strong form of the screening hypothesis that argued that higher levels of education signals higher wages over one’s entire career is no longer viewed as tenable. A weaker form of the screening hypothesis that views credentials and higher levels of formal education as a filter at the initial hiring stage with accompanying early wage differentials is generally accepted. Competing theories about the operation of labor markets have produced divergent explanations for why educational attainment and levels of lifetime earnings generally hold over time in many industrialized nations. It has been amply demonstrated that ‘people with the same level of education do have different earnings depending on their race, gender, ethnicity, ability, and social background’ (Cippollone 1994, p. 1655).

Human capital theory has been substantially modified from its early days when considering the impact of education upon the economy. Understanding of human capital has expanded exponentially beyond education per se to embrace issues such as age distributions within given nations, rurality vs. urbanity, and threshold factors to economic growth in some nations such as basic health, sanitation, housing, water supply, and nutrition. The modest claims for education’s impact on economic growth advanced today are a reflection of both the complexities involved and what Theodore Shultz (1961) has called ‘adjusting to economic disequilibrium.’ The problems associated with the human capital approach have led to several competing theories about the relationship between education and economic development. One theory takes an institutional approach and argues that supply and demand in education is shaped by larger social behaviors within the society. It is these social conditions, rather than education per se, that is influential on economic growth. A second approach focuses on labor market segmentation and internal labor markets, which in turn influence both education and economic growth.

A comprehensive causative model for economic growth embracing all sectors of education has proven elusive. While the general premise of a link between education and economic growth appears sound, the complexities associated with explicating the exact nature of this premise challenge the best theories and economists.

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