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Article Excerpt
Abstract
This paper examines the role of human capital on economic growth by using a large panel of data including 93 countries. Given the cross-sectional character in most of the relevant studies, there is a possibility that when the long-run dynamics are considered, education might not be a significant determinant of growth. Following a dynamic panel data approach, the analysis indicates that education has, indeed, a significant and positive long-run effect on economic growth. Moreover, the size of this effect is stronger as the level of education (primary, secondary, and tertiary) increases. This has a straightforward policy implication that governments taking actions towards an expansion of their higher education may well expect larger gains in terms of higher economic growth in their countries. (JEL E1, F43, C33)
Introduction
The early neoclassical theory of economic growth had placed much emphasis on exogenous demographic factors that affect the growth rate of nations. Factors such as the growth rate of population, the structure of the labor force, and the rate of technological change were assumed to determine the long-run equilibrium growth rate. Indeed, in neoclassical theory, capital accumulation increases an economy's growth in the medium term, but the steady state growth is constrained by the rate of growth of the labor force. Moreover, technical progress, which is assumed to be exogenous, is the main driving force of the model. However, a large part of the measured growth in output was left unexplained in the neoclassical model, the so-called Solow's residual (see Snowdon and Vane [1997] and Romer [1996]).
In the mid 1980s, however, the endogenous growth theory, motivated by the work of Paul Romer and Robert Lucas, has identified a number of factors that determine the growth rate of an economy. Hence, factors such as increasing returns to scale, innovation, openness to trade, international research and development (R&D), and human capital formation are considered key factors in explaining the growth process (see Lucas [1988] and Turnovsky [1999] for a review). In this paper, the analysis on the role of human capital is restricted to the economic growth of a country and the resulting policy implications that governments should follow are examined. Indeed, since investment in human capital is taking place through training and education, there is a strong rationale in favor of government intervention. More specifically, government policies intended to affect publicly-provided education and training will, in effect, determine the process of growth of the whole economy, (see Lucas [1988], Shaw [1992], Romer [1994], Barro and Sala-i-Martin [1995], Aghion and Howitt [1998], Kaganovich and Zilcha [1999] and Capolupo [2000]).
The last two decades have witnessed voluminous empirical studies worldwide that try to quantitatively investigate the relation between education and economic growth. The general result of these studies indicates that there is a positive correlation between economic growth and education. However, many of the existing studies on the relationship between education and economic growth have been carried out by employing cross-sectional data and techniques, mostly from the advanced countries that had solved their most crucial problems of development by the first quarter of the 20th century. In the empirical analysis, panel data is employed using dynamic panel data techniques for a diverse set of 93 countries (1) over a period of 28 years, with different levels of economic development and different trends in terms of GDP growth. Furthermore, the contemporary panel data estimation techniques take into account country (fixed) specific effects and allows each country to follow its own short-run dynamics.
The findings not only suggest the existence of a robust positive relationship between education and economic growth, but also that higher levels of education have a stronger effect on economic growth. The policy implication of this result is that governments will be inclined to adopt measures that will expand higher education in their countries in order to increase potential gains in term of a higher economic growth. This finding has a straightforward policy implication that governments taking actions towards an expansion of their higher education may well expect larger gains in terms of higher economic growth in their countries. Moreover, this finding may also contribute towards an explanation of the observed expansion of higher education in several countries. (2)
The paper is organized as follows. In the second section, the study augments a standard textbook Solow model by following Mankiw et al. [1992]. This model allows for the determination of the contribution of education to the long-run output per capita. The following section presents the empirical methodology appropriate for dynamic panel data as suggested in a series of papers by Pesaran, Shin, and Smith [1995, 1999]. The fourth section presents the estimation results, followed by a conclusion of the paper.
A Growth Model with Human...
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