The Effect of Education on Economics Growth - Literature review Example

IMPACT OF EDUCATION ON THE ECONOMY of Month, Year Impact of Education on the Economy It is said that education is the main driver of economic growth. Investment in education also means that the standards of living are improved because of the increased economic ability. Most of the growth models that are used emphasize on the importance of education and suggest that it (education) has a huge impact on the macroeconomic performance. The available analysis on the rate of growth of the real per capital GDP points to the fact that the investment in education (both public and higher education). Education is also a prerequisite of human capital. Education is seen to play a key role in the economic growth of a country. It is also of benefit to both the individual and the society. Education benefits the individual in that it presents him with more opportunities when it comes to employment. The individual is therefore able to enjoy a higher income than he would have if he did not have an education. Barro (2003 p1) most of the studies that have been done on the impact of education on the economy agree that the investment in education has a great impact on the economic development of a country. The studies also agree that the investment at all levels of education leads to greater economic growth and has benefits for both the individual and the society or the country. The studies have also been focused on the effect that the investment on education and the government policies have had on the economy. Woessman (2002 and 2003) proposes that most of the questions on the impact of education are based from the dimension of human capital needs. For the different countries in the world, both the developing and the developed countries, to achieve economic competitiveness they must invest in their education. Education should therefore be viewed as an investment to the economy. According to Conrad (2011, p278) education plays the essential part in a country’s economy. This is because it (education) supplies the human capital in the country. The investment that the government makes at the different levels of education is therefore dependent on the amount of investment that a government makes at the different levels of education(primary, secondary and tertiary). The human capital that is available at different countries has an impact on the economy of the country. It can be said that the government spending on the different education levels is an indicator of the human capital that will be formed in the country and which will then lead to economic growth and development. Education-education has many definitions. For the purpose of this paper, education is defined as the process through which human beings learn and through which knowledge is passed on and the mental faculties are trained. Education is a process that is continuous and through which one’s mental capabilities grow and develop. Most of the formal education systems have three levels of education, which are the primary level, the secondary level and the tertiary level which includes the institutions of higher learning. Basic education has to do with the individual attaining literacy and basic arithmetic competence. Formal education system is the organized school system in a given country. This system has a set academic year, a standard curricular that is regulated and upon completion, there is recognized certification. The levels of formal education are the primary school, secondary schools and the tertiary institutions. Human capital refers to the productive investment that is made in human person it is a combination of abilities, skills, abilities and health that are as a result of expenditures that have been made on medical care and training for job performance. This is different from physical capital which refers to the tangible investments which includes buildings and machinery. Economic growth refers to the process through which the economy’s productive capacity increases over a period of time. The effect is a rise in the level of national income and output. Labor productivity is the level of output that exists per every unit of labor input. Labor productivity is usually measured in terms of the output per worker per year. Development is the process through which the quality of human life is improved. Development usually involves three aspects which include enlarging the range of choices that people have to choose from and creating conditions that are conducive for the people’s self-esteem to grow. It also involves the raisin of people’s levels of living. Theories on the impact of education on the economy Blundel, R.et al. (1999 1-23) assert that while looking at the impact that higher education has on economic development, there are three theories that ca be used. These theories include the economic dependence, the human capital and the modernization theory. By using these theories, one can establish the connection between education and the economy and establish the impact that education has on the economy. The human capital theory asserts that education has the effect of increasing productivity among those who receive it. This happens by increasing or improving the cognitive abilities of those who receive it, which in turn improves their efficiency. The investment in education therefore leads to growth of human capital. The human capital can therefore be viewed as the amount of available human capability, which is economically productive. Human capital can be created through making an investment in the education of the population. Such an investment requires spending on educational programs and activities. According to Vladimir & Andrade, (2008), the investment that a government makes to education determines the amount of capital stock that will be available. Human capital be said to be the most important element when it comes to the process of generation of growth in the economy. Blundel, R.et al. (1999, p1-23) proposes that by providing education to a population, a productive investment is made to the human capital. Research has shown that instead of investing in education for basic literacy, the investment in education should be made to human capital. Increased investment in education therefore leads to an increase in the human capital, which will increase the economic growth of the country. The modernization theory on the other hand says that education is a tool to transform the values, beliefs, and behavior of an individual. When one is exposed to a system of education, one is exposed to the values and ideas that are taught in that that educational system. The values that are taught in the educational institutions include efficacy in both self and social efficacy. A person’s relation to the social structure is changed upon exposure to the education making the person more modernized in their way of conducting themselves. When a larger portion of the population is educated then the society will benefit from a modernized way of thinking which will translate to economic benefits for the country. The dependence theory on the other hand argues the presence of foreign capital for investment and the presence of multinationals combined with the dependence on imports has a constraining effect on the economic development of a country. There are however certain features that may increase economic growth in some regions of the developing world. These features include the regime centralization, the fiscal strength, and the integration in external politics. Perna (2003, 451-472) says that Higher education is often neglected in many economies. Higher education is however a determinant of the income that one is likely to generate. It can also be seen to be as a result of the income, as income plays an important role in determining whether one will pursue higher education. Higher education also has the potential of creating an increased tax revenue and increased investment. Most of the countries that have invested in higher education such as India have been able to improve their economic positioning in the world. Carrying out a comparison between the economies of the developed countries and those of the developing countries reveals the impact higher education has on the economy. In the developing countries, there is a relatively low enrollment rate of students to the institutions of higher learning. This can be seen by the enrollment rate to institutions of higher learning in Africa which stands at 5%. There is also a low output in the area of academic research in the developing countries. This implies that there is need for the developing countries to invest in higher education if they aspire to be successful in the setting of the world economy. According to Soares (2006 p 367-389), the public benefits of higher education include increased revenue for the governments through an increase in tax collection. The increase in the number of people who have achieved higher education would also mean that there is an increase in consumption, which in turn leads to benefits for the consumers. Studies have indicated that an increase in the number of people who have pursued higher education raises the annual growth in the economy. It is therefore evident that there is an interaction between the human capital and the initial GDP. The increase can be seen in both the developed and the developing countries. This can be seen by the fact that a 1% increase in the number of people who had completed their higher education in Taiwan led to a 0.35% increase in the industrial output of the country. Higher education has also been found to have had a major impact in the economic growth of countries such as Japan, Sweden, France, and the United Kingdom. Blundel, R.et al. (1999 1-23) asserts that there are also some indirect impacts of higher education on the economies. An example is the graduate teachers from the institutions of higher learning enhance the quality of education that is provided in the elementary levels of education. This increases the potential in the students to be economically productive. It has been proven that the enrollment rates in the institutions of higher learning are directly related to the growth in labor productivity. Those who have gone through higher learning also have a higher productivity rate when compared with those who have not attended higher education. They are therefore also likely to earn more than those who are not graduates. Sluis, Praag and Vijverberg (2005, p 226) assert that another impact of higher education is that it produces graduates who are more likely to venture into entrepreneurial activities. Studies have revealed that graduates are more likely to engage in startup activities and get involved in the starting up of new firms than those without higher education qualifications. The graduates also engage in activities geared towards research and development, which lead to an increase in the economic growth and a growth in productivity. Vladimir and Andrade (2008) also assert that the basic education that is provided or that is available has a great impact on the economy of the country. There is however an assertion that there are some instances in which the government spending on the provision of education has a negative impact which is the prevention of the accumulation of human capital through the process of the acquisition of higher education. This may occur in cases where the government has allocated most of it’s resources on the provision of basic public education. It is therefore important to note that there exists a relationship between the level of government spending on basic education and on higher education and the economic growth of the country. Barro (2003, p 23) asserts that when it comes to the impact of education on the economy, the quality of education is more important than its quantity. This means that the student’s score on the international exams, which are the indicators of the quality of schooling, are more important than the years when it comes to having an impact on the economic growth. According to Bloom, Hartley, and Rosovsky ( 2006), governments in both the developed nations such as the United States and in developing nations should recognize the benefits that investing in education has on the economy. They (the governments) should then invest in all levels of education including primary and secondary. The benefits of such an investment have been backed by quantitative evidence. Matoon (2005) asserts that despite the numerous merits of investment in education, the higher education sector in many areas such the Midwest in the United States has been faced by challenges in recent times. These challenges include the financial challenge where the financial support from the states has been decreasing. This decrease has been attributed to the increase in the cost of provision of other services such as the rising cost of healthcare. The rise in the cost of elementary education has also contributed to the reduced funding to the institutions of higher learning. Bibliograpphy Barro, R.J 2001, Education and economic growth. Retrieved from November 18, 2011 from http://www.oecd.org/dataoecd/5/49/1825455.pdf Bloom, D, Hartley, M, & Rosovsky, H 2006, Beyond the Private Gain: The Public Benefits of Higher Education, International Handbook of Higher Education, 18 (1), 293-308. Blundell, R., Dearden, L., Meghir, C & Sianesi, B 1999, Human capital investment: The returns from education and training to the individual, the firm and the economy. Fiscal Studies, 20 (1), 1-23. Conrad, D 2011, "The Level-Specific Effects of Education on Economic Growth: Evidence from Four Caribbean Countries", The Journal of Developing Areas, 45 (1), 279-290. Mattoon, R 2005, "The state of higher education in the Midwest", Chicago Fed Letter, 218, 1-4. Perna, L 2003, The Private Benefits of Higher Education: An Examination of the Earnings Premium, Research in higher education, 44 (4), 451-472. Sluis, J. Praag, M. & Vijverberg, W 2005, Entrepreneurship Selection and Performance: A Meta- Analysis of the Impact of Education in Developing Economies, World Bank Economic Review, 19(2), 225-261. Soares, J 2006, "A dynamic general equilibrium analysis of the political economy of public education", Journal of Population Economics, 19 (2), 367-389. Springer. Vladimir, K.T & Andrade, J 2008, "Public investment in basic education and economic growth", Journal of Economic Studies, 35 (4), 352-364. Woessmann, Ludger 2002, Schooling and the Quality of Human Capital. Berlin: Read More