Relationship Between Education And Economic Growth

There are two very basic reasons for expecting to find some relation between education and economic growth. First of all at the most general level it is instinctively reasonable that living standards have raised so much over the last years because of education. Growth of the nature enjoyed in Europe was not observed in the illiterate societies that have gradually merged into the world economy over the last two decades. There is usually a correlation between the scientific advance and the way in which education has aided the development of knowledge as seen by the casual observer. People that usually find it difficult to function in advanced societies is those with only very limited education. To benefit from the scientific advances as well as to contribute to it, education and knowledge are needed. Secondly, being at a more precise level, a broad range of econometric studies point out that the incomes individuals can grasp depends on their level of education. “if people with education earn more than those without, shouldn’t the same be true of countries? If not the rate of change of output per hour worked at least the level of output per hour worked in a country, out to depend on the educational attainment of the population” Philip, Martin, Education and Economic Growth (2003) National Institute of Economic and Social Research. It is reasonable to invest in human capital, as opposing to invest in fixed capital, if spending on education delivers return of some kind, in pretty much the same way as spending on fixed capital. Philip et al.

Philip, Martin, (2003) pointed out that the type of schooling is crucial. In the past, education in Europe was controlled by the Church and emphasized on oral instruction in religion and few manual skills. Illiteracy remained common despite the level of school attendance. The mixture of protestant Christianity and education that was responsible for the economic success in Europe at the time when there was almost no economic development elsewhere. There are severe date limitation to be able to relate between education and economic performance. However GDP per capita in recent years indicate that high level of GDP per capita is associated with high level of primary and higher level of school enrolment. The determination of economic growth has to have some connection with the microeconomic. Since education conveys economic benefits to individuals, the effects of education should be seen on groupings of individuals which comprise nations. Philip et al.(2003) looked at individual earnings as function of years of education and also other determinants such as age and experience. They found out that for the average male not working on farms, an additional year of education raised the earnings of individual by about 7%. When allowance was made for this, the return to a year’s schooling increased to 10.1%. The quadratic effect in schooling and a cross-product term between education and experience suggested a more complicated pattern of returns but pointed to the early stages of education being more voluble. The percentages of 7% and 10% obviously overstate the return of society from investing in additional education for an individual. It neglects the cost of providing the education and the opportunity cost of earnings that is forgone for pursuing higher education. The benefits of additional education are apparently different from one another. People can be stop pursuing their education at the point of which the expected return of the additional schooling balances or exceed the additional cost of schooling. In other words the average return per year of education up to the point of which the marginal return to education, equals the marginal benefit recognized by the individuals.

Philip et la. (2003) provided an international survey of rates of return to the education that include seventy eight countries. They illustrate returns to primary education ranging from 42% p.a in Botswana to only 3.3% p.a in the former Yugoslavia and 2% p.a. in Yemen. The largest return for secondary education was 47.6% p.a. in Zimbabwe, falling to only 2.3% in the former Yugoslavia. The range for tertiary education was somewhat narrower, between -4.3% p.a in Zimbabwe and 24% p.a. in Yemen. It is not clear that much can be learned from these individual data, but aggregates, either by region or by income level can average out some of the variability in the individual returns. Thus quoting the following returns by income level

Income Band Social Rate of Return (% p.a.)

Income is measured in 1985 US$ Mean Income Primary Secondary Higher

Low Income (< $610) $299 23.4 15.2 10.6

Lower middle income ($610-$2449) $1402 18.2 13.4 11.4

Upper Middle Income ($2500-$7619) $4184 14.3 10.6 9.5

High Income (> $7619) $13100 n.a. 10.3 8.2

World $2020 20.0 13.5 10.7

Table 1: Rates of Return to Education

These show that social returns decrease with the amount of education received by individuals and also that they decrease with the income of the country concerned (and thus, it may be assumed with the abundance of educated labor) Philip, Martin, Education and Economic Growth (2003) National Institute of Economic and Social Research

the effects of education on economic growth can be viewed by a simple frame work such as growth accounting framework. It can be utilized as an indicator of the implications of the economic growth. If a country increases the average number of years of schooling of its workforce by one, and assuming that educated and uneducated workers are perfect substitute for each other. Ultimately it does not matter whether everyone’s education has increased by the same amount. Or whether some people have increased their education even more and others less than one year then the effective labor supply is increased by the same amount. The increase in effective labor multiplied by the share of labor, in the overall product; result in an increase in the output. It is likely that countries with high level of education will also have high capital per worker,

A number of studies have been comparing output per worker, or to be precise output per capita due to data limitations. There are ways in which the change in the total factor productivity can be rendered endogenous. They tend to involve a departure from the production function with its types of labor with different degrees of education. Previously it is assumed that human capital is related positively with the level of education attainment. However shown otherwise, human capital of an individual can increase even without any increase in the level of educational attainment. Even though the human capital may perish over time, the accumulated knowledge can add up. Thus even when the educational attainment has stopped increasing, the human capital can still continue to increase and continue to contribute to economic growth. A high level of education leads to rapid growth rate, as Philip et al. stated whether high growth rate can be expected only if the stock of educated capital is expanded.

The impact of education on economic growth rate is 1.2%p.a. or even more for countries with low income per capita that tend to catch up with those with high incomes. The catch up rate relay positively on the period of education years, reflecting the absorption of technology much easier with high level of education. Philip et al. found a significant positive relation between education and economic growth only for the countries with the lowest level of education. Lower level of education contributes significantly to economic growth even more than at higher level of education, whereas higher level of education tends to suppress the rate of growth. In countries where a worker spends less than 7.5 years in education, the marginal effect of education on economic growth will be positively related. Exceeding this margin will have a negative effect on growth. The fact should remain that educated workers are paid more than uneducated workers. With the sensible assumption that worker’s marginal product is measured by their wage rate, which is the most effective model of measuring.

Economic Returns to Investment in Education

Economic growth per capita in the Middle East and North African (MENA) region has been fairly low, due to high population growth rates and the dependence on oil exports while the oil prices remained low. It is not expected to see a link between the MENA region between investment in human capital and economic growth. The positive relationship between education and economic growth is that individuals are willing to take more years of schooling to be able to earn more and get better jobs. Accordingly, nations are willing to raise the average level of schooling, because they believe that by doing that it will improve productivity, raise the quality of jobs and increase the economic growth. A major argument that link education to economic growth is based on the increase capacity of the labor force to produce due to more years of schooling. Educated worker are easier to train and it is easier for them to learn complex tasks than uneducated works. A lake of educated workers might limit growth but it is unclear if more educated workers will increase growth. It is as well unclear what type and level of education that contributes to economic growth. Education does contribute to growth as see, countries with higher levels of economic growth have labor force with higher level of formal schooling. Beyond such macroeconomic approach to the relation between education and economic growth, the new growth theories stating that developing nations have a better chance to catch up with advanced economics when the stock of labor with the required skills to develop or adopt new technologies. Education in the labor force increase productivity in two ways; education adds skill, increasing the capacity to produce more; and it increases the capacity to innovate to increase the productivity.

The common remark that state earnings is associated with education, the more educated the person the higher the earnings, yet another indication that education contribute to growth. This connection reflects a microeconomic approach to the relation between education and economic growth. Higher earnings means higher productivity thus, an increase in educated labor in the economy is related to the increase to the economic output and higher growth rates. There are compelling reasons to think that education brings about economical attributes that contribute to economic growth. The problem is that the empirical evidence demonstrating the education-economic relationship shows mixed results, and often rejects the hypothesis that investment in human capital promotes economic growth. Ahmed, The Road Not Traveled (2008) Education reforms in the MENA

The macroeconomic growth analyses shows that economic growth rate was positively related to the level of human capital for a given wealth level, whereas the growth rate was negatively related to the initial level of GDP per capita for a given level of human capital. The difference in the growth level among countries can be explained by the initial level of human capital. Does a higher level of investment in education affect the growth? the answer to the this is mainly “no” Ahmed (2008)

According to Ahmed (2008) people find it difficult to accept the idea an increase in the level of education and the years of schooling do not necessarily effect the economic growth positively, as researchers try to settle the contradiction between the expected and the observed findings. One of their justifications is related to the quality of education the workers ability to innovate and adopt new technology. The second justification is related to the heterogeneity of the education and growth relationship from country to another. The third explanation is linked to the education distribution within dynamic population. The last explanation has to do with the allocation of workers among different economic activities. From this point of view, opportunities for growth are bound to a lesser degree by educational investment than they are engaging educated workers in jobs that capitalize on their skills. The relationship between education and economic growth is not universal. This idea is supported by observed studies. Lau, Jamison and Louat (1991) found that the impact of schooling on growth vary in different regions. It has a positive effect on Southeast Asian countries, insignificant in Latin American countries and negative in the MENA region. They also found that coefficient of human capital in the growth equation is almost five times higher in developing countries than in developed countries. Therefore it is incorrect to assume that education has the same effects on growth in all countries.

Ahmed (2008) suggests that quality of education or human capital and the ability of workers to innovate are aspects in explaining the weak relationship between education and economic growth. The stock of human capital is usually measured by years of schooling, however by using this method does not specify the quality of education. Realizing this limitation, quality indicators based on international tests score is used. Even though not many countries participate in these tests, but with those that participated a positive correlation between education and economic growth were found. Several studies have shown that low education quality is a reason why there is a weak relation between education and economic growth. Ahmed also found out that Arab countries concentrate more on definitions repletion and knowledge of facts and concepts. Hence, they are not staggered that the increase of the average level of education in the labor force did not generate more productivity or rapid economic growth.

Recently the MENA region has shown some progress in the quality of education. Male and female rates increased significantly during the past few years. The score of the MENA countries students on international tests are matching up with those of other region, this shows an increase in the level of schooling and education. Despite all that, the question remains; why do not these improvements and progress have a positive impact on economic growth? The answer lays in the relative rather then the absolute measures education quality. As mentioned before, MENA countries focus more on humanities field of study rather than since and critical thinking. Shifting to the ability of individuals to innovate and adopt new technology as factor in increasing the productivity and in increasing the economic output, is not an easy task. Unfortunately, the ability of the MENA countries to innovate and adopt new technologies is not that high. In the 1990s, American or European patents registration by Arab scientists was almost zero percent of world total. if a considerable and positive education and growth relation is mostly the product of the development, the lack of innovation and the low level of foreign direct investment (FDI) in the MENA region are not good signs for a positive impact of investment in education on the present and future economic growth

The weak relation between education and economic growth can also be due to the distribution of education, which usually neglected. The level of productivity will ultimately be low as an affect of education if a small proportion of the population has a high level of schooling while the majorly is illiterate lastly, the allocation of the human capital can result in the weak relation between education and economic growth. The lack of opportunity in an active and dynamic for the worker to get a job will restrict the worker’s productivity and the chance to innovate and develop new technologies that fuel the economic growth. The misplace of the skilled workers and the lack of diversification leads the economic structure not to fully utilize its skilled and highly educated labor which eventually result in the misleading marginal relation between education and economic growth

Disaggregated education data and growth; MENA

The table above shows a brief detail of the education and growth connection in the MENA region, with chosen indicators of education and per capita annual GDP growth rates for the MENA countries, not including Iraq due to lack of information. Obviously, the countries in the MENA region vary in terms of formation of the economic foundation and the historical background of their economic development. In other words, it is not homogenous in terms of determinants that may have an effect on the economic growth and performance. Accordingly, difference in the economic growth should not be attributed exclusively to the disparity between quality and level of education among the countries. However knowing this limitation, the date supports the view that proposes the connection between growth and education. Zeynep Deniz, A,Suut Dogruel (2008)

The figures in the table shows the expenditure per student at primary and secondary level as the percentage of GDP per capita and annual growth of GDP per capita. The student expenditure can be seen as an indicator to the quality of education and the relationship between education and growth in the MENA region. Keeping in mind those specific countries with relatively high per student expenditure could be affected by oil wealth in countries such as Saudi Arabia and Kuwait.

Zeynap also explained that the total public spending on education as the percentage of GDP can be used as an additional indicator of the quality of education. Not to include Yemen and Kuwait, the performance of growth can be clarified by public spending on education. The effects on economic growth can be shown by these quality indicators. Other indicators that can be used is the student-teacher ratio as an indicator of quality education. It is believed that the increase in the number of student per teacher can restrict the economic growth, whereas the decrease in the number of student per teacher stimulates the economic growth. However the ratio for student-teacher for the primary education does not entirely support the idea that less the number of student per teacher stimulates for economic.

It is know that enrollment is regarded as a weak indicator for education in economic growth. However looking at the connection between economic growth and enrollment at primary and secondary schooling in the MENA countries excluding Sudan, the connection between economic growth and school enrollment is almost the same as the result acquired by using other quality indicators. The information gained from the limited data provides a relatively clear relationship. Moreover the results presented are subject to the economic circumstances existing during the period. For instance, turkey suffered s ever economic turmoil which dramatically decreased the average growth rate during 1999-2004. Nonetheless, the data are sufficient enough to support the role of education on growth in MENA countries.. Zeynep Deniz, A,Suut Dogruel (2008)

Education-Growth in Egypt

Around the world, education promotes economic growth and ensures sustainable growth and poverty reduction. From the developing countries, Egypt seems to be in a good position to gain from impartial education-led growth, with its continuous investment in public education. However the Egyptian economy has not realized any quantifiable economic return to its continuous public investment in education. Furthermore, the allocation of the public spending on education is not efficient enough consequently the poor and middle class people to fall behind in education.

Nancy Birdsall, Lesley O’Connell (1999) explain the reasons behind the anomalously low return education investment in Egypt. During the past decade, Egypt leaped with a tremendous advancement and education expansion. Gross enrollment rates for both males and females gradually increased at every level of schooling, showing a promising performance in basic education. Currently, 80% of school aged students are enrolled in primary school and 68% enrolled in secondary school. Adult literacy increased from 26% to over 51% in the few past decades. The rapid expansion of access to education has been attained at the expense of the quality of education. The overcrowded class rooms and law salaries pull down the moral and motivation of the teacher and the students as well to deliver and receive a quality education. Despite the 4.6% of GNP investment on education as opposed to 3.9 for average developing countries, results have been disappointing.

Egypt’s constitutional effort to provide free education for everyone resulted to the unequal distribution of education. The education provided has been in such a bad quality that it makes little if any economic benefit. Egypt’s human capital distribution among working-age people is not better off than that of East Asian and Latin American countries and on par with the MENA. Thus, the potential of education to to contribute to economic growth has been minimal; it may even be reinforcing the transmission of poverty and low education achievement across the country. Nancy et al. expected that unequal distribution of education in a generation can be passed on easily to the next generation, without suitable allocation of resources to make sure that the children of uneducated parents are able to catch up in school. Egypt has shown a harder effort to provide an efficient and effective higher education by spending high investments. The countries’ share of public spending on higher education amount to more than 30% as compared to 15% on overage in the East Asia. The quality of the higher education provided makes up for the unequal distribution of education in school, yet the challenge remains to improve the overall distribution of education.

Egypt has a considerably good record of education access expansion even though the education distribution is still fairly ineffective and unequal which lead to poor economic results. Egypt’s economic performance has insignificant relation between GDP growth and human capital attainment, which is measured by years of schooling. Moreover, the privet returns of schooling for worker vary with each level of education compared to other developing countries that shows a more stable pattern. Privet returns to higher education as, measured as an increase in wage with additional schooling, are 62.1 per cent. Those workers that did not pass through primary school receive low returns to the years of schooling they attained the average years of schooling for the average adult worker is 5 years, those with primary schooling or less cluster the size of the Egyptian labor force.

It is known the education adds up to the accumulation of human capital, that makes workers more productive, innovative and adapt to new technologies. It is also known that education brings economic growth, yet this does not apply entirely to Egypt. Two reasons explain the law return of education on economic growth. One lies on the supply side. As mentioned, the quality of education provided in Egypt is low, this reflects to the low returns in the form of privet income which bring the low return that contribute to economic growth the other reason lies on the demand side. Most of the time, the problem of education is viewed as a problem in the education system, while disruptions in the economic system that affect education are neglected. in fact the difference among countries in the demand for skills have been ignored in many regression analyses of the factors of economic growth that test education’s input and outcome in a expected rates of growth for countries like Egypt. The mismatch of skills with jobs limits the productivity and eventually the economic growth. Nancy Birdsall, Lesley O’Connell (1999

Growth effects of education in the OECD countries

Twenty countries originally signed the convention on the Organization for Economic Co-operation and Development on 14 December 1960. Since then a further ten countries have become members of the organization. Education is a key to economic growth and to people’s ability to earn a living. Education is important for societies, too, as they respond to increasing cultural and ethnic diversity, inequality and the needs of disadvantaged people. OECD’s education Directorate works to help countries promote learning opportunities for all. Therefore education is a major area of spending for OECD countries, but they face tough questions when it comes to allocating resources; how can the role of education in fuelling economic growth be reconciled with other education goals. OECD helps societies answer these questions. The goal is to create education and training system that contribute to social stability and economic strength, and to provide everybody with the chance to make the most of their innate abilities in life. Organization for Economic Co-operation and Development, 2009. Directorate for Education [online].

According to growth effects of education and social capital in the OECD countries, Jonathan Temple (2001) expenditure on educational institution accounts for 6 per cent of the GDP of the OECD member countries, or approximately $1550 billion a year. This figure understates the true opportunity cost of educational investments, since it does not take into consideration the earnings forgone. Jonathan also found that sustainable growth is only possible if human capital can grow without bound in the long run. This makes it difficult to interpret the conception of human capital usually used to measure educational attainment. Another argument rises is that even at the university education level, there might be some major courses in which the knowledge acquired currently has a greater effect on productivity than before ( information technology and medicine) but there are other, less vocational qualifications of which they make this argument less compelling. At schooling level, with their focus on basic skills such as literacy and numeracy, the idea that increases in the quality of schooling drive sustained growth seems even harder to support. On a note, individuals can raise the stock of human capital, or knowledge, simply by allocating some of their own time to its growth.

In an attempt to determine the productivity benefits of education using the disparity in educational realization and growth Jonathan tied together the different pieces of evidence from labor’s productivity, growth accounting, cross country regressions, externalities to human capital and the wider benefits of education. There is a strong correlation between ability and years of schooling, and suggests that earnings may be correlated with schooling even if it has no effect on productivity. Given the wage payment earned by those with more years of schooling, employers would probably have strong enticements to perform their own tests of ability. This view was supported by the evidence that measured the performance in school and universities are correlated strongly with the outcomes of the tests conducted. The second argument Jonathan presented in his paper is that if education does not affect productivity, a person would expect to see educational wage differentials to decrease, as the employer acquire direct knowledge of their workers. Education’s role could be to provide the worker for the task of working with more advanced technologies and the knowledge and skills, for providing a higher quality of service, or for learning by doing in the course of employment. Comprehending the mechanisms could be important, and will have inferences for the interpretation of earnings functions. For instance, more educated persons may have better access to those jobs that require some degree of knowledge and skills than those with less basic knowledge and skills. If such mechanisms like this exist at work, there would again be fewer reasons to believe that the observed relation between schooling and earnings represents solely a direct productivity effect.

Jonathan also found that increases in educational attainment seem to have accounted for perhaps a third of the productivity residual in the US, a member of the OECD after the war period. In the 1950s and 1960s, it would correspond to an effect on the annual growth rate of aggregate output of about 0.5% points. In the 1970s productivity slowdown effect of educational enhancement will have been lower, perhaps raising the growth rate by 0.2 % or 0.3% points. Other OECD members such as France, Japan, Germany, Netherlands and UK show a relative figures that changes in the quality of the labor force and productivity naturally added between 0.1% and 0.5% points to annul economic growth between 1950 and 1984. Taking into account the composition of male/female, in countries where the ratio of women in labor force has noticeably raised, such as the UK and the US, the contribution of education to economic growth will be fairly higher. The growth of human capital naturally accounts for a tenth to a fifth of growth in total output per worker.

Another OECD country which shown a dramatic effect on the economical growth rate is Korea, where it has seen a dramatic increase in educational attainment of the labor force as well, between 1966 and 1990, that increase the annual growth rate by 1% point. Basically a percentage point increase in growth due to a change in the quality of labor does not necessarily mean that in the absence of the change the growth rate would have been lower in exactly the same percentage points. However researches measuring the extent of educational attainment differences explaining the variation in GDP per capita among the OECD member countries, started to emerge. The idea is that the stock of human capital can affect the growth in several ways, mainly by influencing a country’s ability to adopt technology, and change in educational attainment explaining the output growth.

It is also noted that a person’s education contributes to their productivity, in the manner seen by labor economists, a correlation between the change in output per worker and the change in the average educational attainment. Moreover, the effect can be detected, whether the level of education can determine the economic growth. There is a significant effect of education on OECD growth, where growth is related to the change in average years of schooling, as one would expect if microeconomic estimated of the return of schooling are picking up a genuine productivity effect. Furthermore, the level of education plays a role in the technological catch-up. It is seen that growth is higher where countries have higher level of average schooling. growth effects of education and social capital in the OECD countries, Jonathan Temple (2001)