Education’s Role in Catalyzing Economic Development and Growth

Education’s Role in Catalyzing Economic Development and Growth
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Despite the productivity slowdown in countries such as the United States, education remains one of the most powerful instruments for reducing poverty and inequality and for laying the basis for sustained economic growth. Recent evidence points to the need to make sure that the increasingly schooled population is also effective in terms of competencies and abilities, especially the ability to use high tech. For instance, it is not sufficient to simply increase school access and years of schooling attainment if that schooling is not also of high quality. That is, schools should ensure the attainment of cognitive skills and other competencies needed in society and the labor market. Studies show that students with high academic achievement earn more and that countries able to increase education quality tend to grow more. The higher the level of education of the population, the lesser will be the number of poor persons because education imparts knowledge and skills which is correlated with higher earnings:

  • A 1% increase in the adult literacy skill raises productivity by 2.5% in OECD countries
  • A 1 standard deviation increase in international cognitive test scores is associated with a 1 percentage point higher growth rate

Economists have long recognized and measured the lifetime benefits of education from improved learning opportunities. The importance of lifelong learning has been reaffirmed most recently in an important piece in this week’s Economist. A growing body of evidence suggests that education can reduce crime, improve health, lower mortality, and increase political participation. Low quality education leads to much lower rates of growth. A lack of investment in high level skills is also seen as a contributor to the productivity slowdown in the United States. But countries need to accumulate human capital. There could be a threshold in terms of education before a country can reap growth benefits. This threshold might be early literacy. Better schooling investments raise national income growth rates.

In nearly all countries, though to varying degrees, educational progress has lagged for groups that are disadvantaged. This may be due to low income, gender, disability or ethnic and/or linguistic affiliation. Leaving poor people, girls and minority groups at the fringes of the education system will eventually impede a country’s ability to maintain educational progress and achieve socioeconomic development. In most developing countries, education systems are not providing workers with the skills necessary to compete in today’s job markets. The growing mismatch between the demand and supply of skills holds back economic growth and undermines opportunity.

Are there specific education actions that could catalyze economic development?

1. Increase the productivity of schooling

It is shown that countries able to increase education quality tend to grow more. We know that from cross-county analyses using test score and other data for many countries. As the example of Vietnam shows, a value-added education system can increase cognitive achievement significantly and rapidly. In other words, gaps prior to school entry are modest at best but grow rapidly in the first couple of grades. A school year is much more productive in Vietnam. The differences have less to do with inputs – spending per student, pupil-teacher ratios, qualified teachers, total hours, etc. – but more to do with accountability. Test score differences are not immutable.

2. Don’t get stuck in the middle

The challenge of sustaining economic growth over the long term is one that only a few countries have been able to surmount. Slowing momentum in countries like Malaysia and Thailand has led analysts and policy makers to consider what it would take to lift them out of middle-income status, where other countries have arguably become stuck. Human capital formation plays an important role in the quest to sustain economic growth in these two countries. A good education system is fundamental to equip workers with marketable skills. Malaysia and Thailand have successfully expanded access to schooling, but the quality of education remains an issue. Modern education systems should aim to provide universally-available quality education using the following policies:

  • prioritize budgets to deliver quality and universally-available basic education before expanding higher levels of schooling
  • provide appropriate incentives and rewards to teachers
  • permit school autonomy and ensure accountability for results
  • invest in early childhood development
  • consider implementing income-contingent loan financing schemes to expand higher education

3. Invest in low income and fragile environments

Fragile and conflict-affected states stand to benefit greatly from education investments. Returns are high in fragile states – and education contributes to growth because these countries are going through tremendous change. In conflict-affected countries – undergoing or emerging from conflict, where peace-keeping forces may still be needed or where deaths from conflict may still be high – such as Afghanistan, Liberia and Sri Lanka, the premium to investing in primary schooling is high. In fact education has returns precisely when there is a shock to the system, or when there is disequilibria.

4. Education protects during crises

There are returns to schooling because schooling can improve productivity in the market and in the household based on the notion that schooling enhances information acquisition. By improving access to information sources such as newspapers or instruction manuals, and by improving the ability to decipher new information, whether from external sources or from own experience, education results in learning, and learning contributes to income growth. Evidence from studies based on micro estimates of agricultural and household technologies from both developed and low income countries suggests that positive schooling returns exist where productive learning opportunities can be exploited. New evidence suggests that schooling improves abilities to learn. But reaping returns from such investments requires that the scope for productive learning can be expanded via either technical innovation or changes in market and political regimes. In other words, there needs to be a growth engine in order for investments in education to generate growth, for the individual or for the country.

How else can education contribute to economic growth?

Follow Harry Anthony Patrinos on Twitter at @hpatrinos.

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