Economic sciences/16. Macroeconomics

Zhanar A. Taizhanova

Kazakh National University, Kazakhstan

Investment in Human Capital and its Effects on Economic Growth

The fundamental question is how much society should invest, as public investment in education comes at the expense of other public and private investments. Analysis of the costs and benefits of school reform clearly shows investments that improve the quality of schools offer exceptional rewards to society. What is much less clear is how to improve the quality of education. Most studies of economic aspects of education focus on school attainment, or the “quantity” of education. This appears logical from the perspective of both analysis and policy: the quantity of schooling is easily measured and readily tracked over time. But it distorts policies and potentially leads to bad decisions.

Economic growth determines how much improvement will occur in the overall standard of living of society. Differences in growth rates that seem small can make a huge difference if maintained over a period of time. For example, GDP per capita in Kazakhstan in 2000 was about $6000. Without any growth, GDP per capita will stagnate. But if Kazakh government finds a way to grow at just 0,5% each year, incomes would increase from $6000 to $7700 by 2050 – an increase of almost a third. If it were to grow at 1% per year, it would reach almost $10000 in 2050. Small differences in growth rates have huge implications for the income and wealth of society. Indeed, the current economic position of Kazakhstan is largely the result of the republic’s strong and steady growth over the last years.

A variety of models and ideas have been developed to explain differences in growth rates across countries. They invariably include but are not limited to the importance of human capital, which is enhanced by a strong education system. Today it is difficult to ignore the message that education matters. Governments everywhere in the world have assumed a substantial role in educating their citizens. A variety of motivations lead societies to provide strong support for schooling. Education has the possibility of making both the individual receiving it and others better off. A more educated society may lead to higher rates of innovation and invention, make everybody more productive by helping firms introduce new and better production methods, and lead to more rapid introduction of new technologies.

A lot of research into growth differences across countries have emphasized school attainment differences and has found them to be highly related to economic growth. But the quantity of schooling is a very crude measure of people’s knowledge and cognitive skills. Moreover, the role school attainment plays in economic growth has become controversial. A large part of controversy resolves around a fixation on school attainment without explicit consideration of the quality of schooling.

I studied international differences in science knowledge, as evidenced by testing since 1980s. I found that school quality indeed has a remarkable impact on differences in economic growth. The analysis was very straightforward. All of the available earlier international test scores were formed into single composite measure of quality and related to differences in growth rates across countries. The basic statistical model, which included the level of income, the quantity of schooling, and population growth rates, explained a substantial portion of the variation in national growth rates. But the quality of the labor force as measured by science score also proved extremely important: one standard deviation difference on test performance was related to a 1% difference in annual per capita GDP growth rates. The impact of such a difference in growth rates is very large.

Schooling might not be the actual cause of growth but may instead reflect other attributes of the economy that are beneficial to growth. Does more schooling equal higher growth? In recent years, a number of critics have questioned whether the quantity of schooling really is a driving force behind economic growth. Some argue that even though there might be a correlation between growth and school attainment, there may not be a causal relationship – growing countries may simply use a portion of there wealth to buy more schooling. Others insist the estimated effects of education on growth are sensitive to the parameters of the underlying statistical analysis, and that is difficult to distinguish among alternative estimates. Still others point out that the estimates of the effect of schooling on growth differ significantly from what would be expected from the highly positive microeconomic relationship between individual earnings and schooling.

First, commonly available measures of school attainment are likely to be very imperfect measures of the human capital that is relevant to growth. Second, human capital is important, but it is not the only thing that governs the functioning of an economy. There is no question that basic features such as a developed system of property rights, limits on the amount of governmental intrusion through taxes and regulations, and the openness of labor and product markets have an enormous impact. Pushing more school attainment on an economy unable to use it productively is unlikely to have positive effects.

Human capital can be built up by providing more schooling, but policies that fail to consider the quality of schooling risk expanding quantity without truly expanding human capital. Likewise, development policies that fail to take into account the overall structure of an economy are likely to expand school attainment with little measurable improvement.

There are a lot of difficulties in achieving better quality of education. One of them is a quality of the teaching. Teaching ability is not closely related to training or experience. Moreover, most teacher salary system does not reward high-quality teachers. Most existing evidence indicates that quality improvements are more likely to come from selecting and retaining better teachers than from retraining existing teachers. Changes in teacher contracts, salaries, and benefits may induce more or fewer teachers to leave teaching. Explicit changes to allow more institutional decision making also have an obvious impact on turnover. Moreover, the ability to improve the teaching force will depend on the people who can be attracted to teaching.

If the teaching force is to be improved, either the hiring must select better teachers or retention policies must be skewed toward the best teachers. If better hiring is an important element of the plan, it may well take time before new kinds of people are attracted to teaching. Teaching is generally a career choice that requires a prior commitment – one that in turn depends on the career expectations of would-be teachers. And expectations take time to be affected by general policies.

Policymakers should focus on improving the overall quality of the teaching force. If one were simply to redistribute existing teachers, the overall policy goals would not be achieved. Specifically, policies of individual countries that have led to changes in measured aspects of teacher quality – such as degrees or other teacher qualifications – do not seem to have improved the quality of teachers, at least when that quality is measured by looking at student performance.

Of course, there are limits on how large the changes in the teacher force can be at any point in time. It is simply not feasible to turn over the stock of teachers completely while maintaining a coherent teaching program. Many countries don’t have active teacher retention policies. Instead, most of the decision making is left to individual teachers – once a teacher is hired, decisions about when to leave are made by that teacher rather than the school institutions. Finding a better selection mechanism that redirects who enters into teaching and other policies affecting quality takes time.

Higher quality translates into grater earnings for individuals over their lifetime. Moreover, a society with a more educated labor force can also expect faster economic growth even if the returns may not be discernible for many years. Quality of education reflects a variety of factors – schooling, health, family inputs, etc. The clearest way to improve a quality lies in strengthening schools. For those countries that stick to a path of real school quality improvement, investments in education have the potential to deliver truly large economic as well as social gains.

Literature:

1. Schultz, T. W. “The Economic Value of Education”. New York, NY: Columbia University Press, 1963.

2. Krueger, A. B. and M. Lindale. “Education for Growth: Why and for Whom?” Journal of Economic Literature, 39(4), 2001, 1101-36.

3. Nelson, R. R., and E, S. Phelps. “Investment in Humans, Technological Diffusion, and Economic Growth”. American Economic Review, 56(1/2), 69-75.