Quality of Education and Economic Growth

The conventional method of estimating the effect of education on economic growth is to estimate cross-country growth regressions using the annual growth of gross domestic product as a dependent variable and average number of years of schooling in a population and other macroeconomic factors as explanatory variables. Since students in different countries with the same number of years in school have different learning outcomes, cross-country studies that use quantity of schooling instead of quality of educational attainment and/or individual skills fail to capture the impact of human capital on economic growth. This study attempts to fill this gap using recently developed quality-adjusted educational attainment data from 53 countries over a 40-year period (1970–2010) and examines the significance of educational skills on economic growth. Several macroeconomic factors (e.g., government expenditure, growth of fixed capital, average longevity of the population, and trade as a percentage of gross domestic product) were used as control variables. The primary data source for the macroeconomic variables was the World Bank World Development Indicators. Cross country data on quality-adjusted educational attainment data came from three diverse sources: Lee and Lee, Barro and Lee, and Altinok and Diebolt. The empirical study used the dynamic generalized method of moments model that addresses the potential problem of endogeneity and causality, common issues in growth regressions. The study found that when human capital is measured by skill and learning, it is strongly associated with economic growth. Since educational institutions are the major source for developing cognitive skills, policies to improve educational attainment through investment in education would promote economic growth.