What role does education play in country’s economic development?

Essays | Sona Verdiyeva | 5-01-2017, 12:10

What role does education play in country’s economic development?There is a wide range of literature written on the relationship between education and economic growth. It is often asserted among scholarly circles that investment on education brings higher returns to individuals’ human capital and subsequent increase in their productivity. As much as the productivity of the labor force increases; that is, the output per worker per hour produced increases, so the level of outputs produced per hour in a country should logically increase. And education is deemed to bring technological innovations to countries, which further make the labor force and production process more efficient and productive. All these above-mentioned statements could sound logical, connected and factual but there is no ground-breaking research that has established a clear cause-effect relationship between education and economic development so far. This research paper would discuss what kind of a role, limited it may be, education could play in country’s economic development.
Before getting into the argumentation part, it is necessary to bring clarifications to the very general question of this research. Although the world is moving toward more globalization and the countries in it are getting more interdependent through financial and trade relationship, all the countries, be it developed or non-developed, have their distinct political economic regimes. Thus, it would be statistically biased or erred to put all these diverse countries into one box and analyze their economic growth vis-à-vis educational investment variable. Because in different countries, the same amount of money invested on education would generate, if it could, different economic growth results. Besides, the investment on education should also be made clear regarding the level of education that the investment is going to be oriented, whether it is an investment on the primary, secondary or higher education. And lastly, as the boundaries of the question are a little bit deterministic; that is, given that it asks the question of ‘what role does education play in country’s economic development?’ it in a sense implies the alleged role that education plays in countries’ economic development and asks the responder to list them. Thus, the question would be better posed if be asked as ‘does education play any role in country’s economic development? If yes, how?

To start, one needs to define what is meant by economic development or economic growth. The general understood definition of the economic growth is that economic growth is the increase in the average productivity of the economy in a country in a given time period, it is measured by country’s GDP. GDP being the ‘monetary value of all the finished goods and services produced within a country’s borders in a specific time period (Investopedia)’ and being the function of consumer spending+government spending+investment+net exports-imports.  And as noted in the introductory sentences, there are more written on this subject that one could hardly squeeze all of them into a rather narrow work like this one. However, there is the central pattern among these works that one could discuss and analyze in greater details. One of the most seminal works written on this topic is that of Gary S. Becker with his book called "Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education”.  In this book, Becker establishes the theory of Human capital. Human Capital theory basically asserts that investments in education-related fields are ‘rational responses to a calculus of expected costs and benefits’ (G. Becker, Chapter 2, p.15-17). That is, people are more likely to be willing to bear the costs of the school, university or college years, if they are expecting better earnings in the workforce that far compensate the educational costs later. And based on the empirical data drawn between 1950s-1980s in the USA, Becker became able to show the positive correlation between high school or college graduates and their earnings and there existed almost 40-60% difference between the earnings of high school or college graduates and the earnings of high school drop-outs or unschooled ones.

Subsequently, B. Gary sees the cause of economic growth in the productivity brought by education that is deemed to be also the main reason behind higher earnings of those schooled. And he supports this idea with diminishing marginal utility concept. That if the ‘income growth is caused by the growth of land and physical capital per worker, diminishing returns from additional capital and land eventually eliminate further growth (G. Becker, Chapter 2, p. 23).’ Besides, he attributes the economic achievements of ‘Asian Tigers’ to well-educated labor force and huge investments on the training/education of the labor force. Education is seen by Gary as a way to not only technological innovation, but also adaptation to ‘changing technologies’.

All these analyses by ‘Human Capital theory’ hold some truth in it; however, the explanatory power of this theory is in some respects unsatisfactory and contradictory, and in other respects, is unable to explain certain forces behind the economic growth.

First of all, the empirical results of this research paper were based on the 1950s-1980s America, which was already and is one of the most economically developed countries in the world. Thus, being richer with centuries of industrialization process, the positive link between educational investments economic growth in America could better be attributed to the economic growth. That is, one could reverse the direction of causality from education to economic growth. As fast as the economy grows, the educational investments expand as well. As fast as the economy grows, the investment on technological innovation increases as well.

Secondly, although Gary tries to disrepute the competitive explanations for the cause of economic growth by using diminishing marginal returns concept, he does not notice that the same concept in fact shoots his own explanation in the foot. Diminishing marginal returns establishes that ‘if one input in the production of a commodity is increased while all other inputs are held fixed, a point will eventually be reached at which additions of the input yield progressively smaller, or diminishing, increases in output (Britannica)’. The same concept can be applied to a case, wherein the increase in productivity brought by educational investments, if the level of all other inputs is kept unchanged, would bring over time diminishing increases to the production process. The case of highly-developed countries where additional investments in education would bring less/ even negative productivity to the production process through overeducated labor force and oversupplied work places than in developing countries where a small increase in additional investments in education would be beneficial for the production in terms of brought efficiency could explain this.

Additionally, what makes Gary’s theory incomplete is his exclusion of intermediating variables for explanation. In positivist tradition, the parts of a theory are its cause-effect law, a hypothesis (in case of a difficulty to establish a grounded causal relationship like in natural sciences), and intermediating and conditional variables for explanation. However, Gary satisfies only himself by establishing a ‘cause-effect’ relationship between education and economic growth without having any mention of intermediating and conditional variables that ‘cause’ the education to have any effect on economic growth. He is too obsessed in the power of productivity as a driver behind economic growth that he oversights how the economies work. As even every lazy student of economics knows, the (open) market economy is the work of supply and demand.  If there is an additional supply of educated labor without any demand from the market to accommodate them in higher earning jobs, it is difficult to see how education would cause economic growth in this case. This point would be made even clearer by quoting a line from his book to which Gary tries to bring a counter argument:

"…the expansion in education as countries get richer no more implies that education causes growth than does a larger number of dishwashers in richer countries implies that dishwashers are an engine of growth.”

Here, what this line tries to deliver is to signal Gary that he has forgotten to include such an important variable as conditional variable which in the case of the USA is the richer opener economy. That is, one could not generalize the existence of such a causal relationship in less developed, poor economies.  Besides, the importance of this sentence is greater than one could assume. As mentioned above, the supply and demand are the drivers of market economy, so the expansion in education could increase the productivity as much as the economy could demand, not much not less.

The famous Keynesian thought is that the demand creates the supply and the ‘Principle of Acceleration’ states that the investment to increase the output should be carried if there is an increase in demand for that particular product, not vice versa. The same principle is applicable in the case of educational investments. If there is no demand from the economy to highly-educated human capital, additional investment in the education would cause not growth, but rather migration of brilliant brains to technology-frontier countries. In a famous paper published by Harvard University, Aghion P., Boustan L., et al, finds that

"…exogenous shocks to research-type education have positive growth effects only in states fairly close to the technological frontier. In part, this is because research-type investment shocks induce the beneficiaries of such education to migrate to close-to-the-frontier states." (Aghion P., et al, p. 38-39)

Expressing this in a simple way, the investments in research-type education in Azerbaijan, a country that is far-from-the-technology-frontiers, would only stimulate migration of the beneficiaries of this investment to the technology-frontier countries. Unless Azerbaijan does not imitate, let alone innovate, the technological practices of the technology-frontier countries. Linking this to Gary’s theory of the human capital, unless the government is closer-to-the-technology-frontiers, the additional investments in education would not bring the predicted productivity to the economy. Not to mention the fact that technological imitation or innovation should also involve a well-analysis of the economy and the gaps in the world economy so the country could develop upon technological innovation/imitation its comparative advantage.

As a final note, education has a great importance in the economic development and technological advances, although to establish a causal relationship between education and economic growth is difficult. The other positive externalities of the education in terms of its effect on mental and its contributions to the improvement of the physical health, its contributions to know how the nature, economy, universe works are all undeniable and are as important as the water for a survival of a human life. As Gary himself asserts ‘it is much easier to quantify the monetary side’ of the education’s impact. Yet at the end, quantification also proves difficult.



1. "Human Capital: A theoretical and empirical analysis with Special Reference to Education”, Gary S. Becker, The University of Chicago Press, January 1994, Chapter 2, p. 15-28

2. "The Causal Impact of Education on Economic Growth: Evidence from U.S.”, P. Aghion, L. Boustan, C. Hoxby, J. Vandenbussche, Harvard University Press, March 2009, p. 1-73

3. "Education and Economic Growth”, Philip Stevens and Martin Weale, National Institute of Economic and Social Resarch, August 2003, p. 1-29

4. "Lectures in Labor Economics”, D. Acemoghlu, Chapter1st-The Basic Theory of Human Capital, p.3-31

5. "Education and Economic Growth”, University of Florida, E.T. York, Part 1, p. 31-40.

6. ‘Economic Growth’, retrieved from Investopedia.com

7. ‘Diminishing Marginal Returns’, retrieved from Britannica.com


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Sona Verdiyeva

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