Investing in Skills for Economic Development

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What Works in Education to Get Economies Moving and to Sustain Growth? (Part 2)

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. We examined the importance of adult functional literacy skills for individuals within a country. The inclusion of the direct measure of basic skills accounts for almost a quarter of the rate of return to schooling, equivalent to two additional years of schooling. That is, quality matters a lot for determining earnings. Furthermore, a one standard deviation increase in the test score increases earnings by 20 percent. For those who are less skilled (cognitive ability), more years of schooling contributes little to earnings; rather, skills are the key to higher earnings. Rates of return to schooling are much higher for investing in primary school quality – or quantity – than for investing in middle schools. This has implications for educational policy in developing countries.

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, such as:

· 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

<p><em><strong>Highest and Lowest Returns to Schooling by Economy</strong></em></p>

Highest and Lowest Returns to Schooling by Economy

There are returns to schooling because schooling can improve productivity in the market and in the household. Education 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 for investments in education to generate growth, for the individual or for the country.

This is the second in a series of blogs on how education can help re-ignite and sustain economic growth and development. See the first one here.

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