The Contribution Of Higher Education To Economic Development.doc

The Contribution of Higher Education to Economic DevelopmentCeyda ÖZSOY (PhD)Anadolu University, Eskisehir, TURKEYPhone: +90 222 3350580 int: 3241, Fax: +90 222 3350595E-mail: ceydaeanadolu.edu.trABSTRACT Education is widely accepted as one of the leading instrument for promoting economic development. But what level of education that contributes most to development: Primary, secondary, or higher education? Knowledge-based competition within a globalizing economy is prompting a fresh consideration of the role of higher education in economic development and growth. Previously it was often viewed as an expensive and inefficient public service that largely benefited the wealthy and privileged. Now it is understood to make a necessary contribution, in concert with other factors, to the success of national efforts to boost productivity, competitiveness and economic growth. Viewed from this perspective, higher education ceases to contend with primary and secondary education for policy attention. Instead, it becomes an essential complement to educational efforts at other levels as well as to national initiatives to boost innovation and performance across economic sectors. Recent evidence suggests higher education is a determinant as well as a result of income, and can produce public and private benefits. Higher education may create greater tax revenue, increase savings and investment, and lead to a more entrepreneurial and civic society. It can also improve a nations health, contribute to reduced population growth, improve technology, and strengthen governance. KEY WORDS: Higher Education, Economic Growth, Economic Development.INTRODUCTIONAfter World War II, several economists, including Milton Friedman, Gary Becker, and Jacob Mincer, developed the “human capital” theory to examine the benefits of education for individuals and society. But they have neglected higher education as a means to improve economic growth and mitigate poverty. In contrast to this early view, recent evidence suggests higher education is a determinant as well as a result of income, and can produce public and private benefits. D. Bloom, D. Canning, and K. Chan, Higher Education and Economic Development in Africa, Harvard University February 2006, p. 1. (http:/siteresources.worldbank.org/INTAFRREGTOPTEIA/Resources/Higher_Education_Econ_Dev.pdf)Higher education is an important form of investment in human capital development. In fact, it can be regarded as a high level or a specialized form of human capital, contribution of which to economic development is very significant. It is rightly regarded as the “engine of development in the new world economy”. The contribution of higher education to development can be varied: it helps in the rapid industrialization of the economy, by providing manpower with professional, technical and managerial skills. In the present context of transformation of nations into knowledge economies and knowledge societies, higher education provides not just educated workers, but knowledge workers to the growth of the economy. It creates attitudes, and makes possible attitudinal changes necessary for the socialization of the individuals and the modernization and overall transformation of the societies. Fourthly and most importantly, higher education helps, through teaching and research in the creation, absorption and dissemination of knowledge. Higher education also helps in the formation of a strong nation-state and at the same time helps in globalization. Lastly, higher education allows people to enjoy an enhanced life of mind offering the wider society both cultural and political benefits. J. Tilak, Higher Education and Development, International Seminar: University XXI, Brasilia, Brazil, (25-27 November 2003), p. 3. The purpose of this study is to examine the impacts of higher education on economic development at all aspects. HIGHER EDUCATION AND ECONOMIC GROWTHThe contribution of higher education to economic growth is presumed to occur through a number of distinct yet interacting functions. First, it is believed that higher education contributes to economic growth through the “production of knowledge” and that is largely takes place within the major universities through faculty members and their advanced students research and creative activities.Second, it is generally acknowledged that colleges and universities contribute to national growth through the “diffusion of knowledge”, which may result from the external serve activities of their faculty, staff, and students.Finally, it is universally accepted that postsecondary institutions contribute to the “transmission of knowledge” through extensive and varied teaching activities. Economists have focused their attention on this latter set of activities as measured by enrollments, man-years of postsecondary education completed, number of graduates, graduation rates, expenditures, and changes in student earnings. W.E. Becker and D.R. Lewis, Preview of Higher Education and Economic Growth, in “Higher Education and Economic Growth” Edited by: William E. Becker and Darell R. Lewis, Kluwer Academic Publishers, 1992, p. 2-3.THE RELATIONSHIP OF HIGHER EDUCATION TO ECONOMIC GROWTH: EMPRICAL EVIDENCEMacroeconomic Approaches Perhaps the simplest framework in which to look at the effects of education on economic growth is offered by the growth accounting framework. The basic model is that output is a function of factor inputs as described by Solow (1956). P. Stevens and M. Weale, Education and Economic Growth, International Handbook on the Economics of Education, Edited by G. and J. Johnes, August 2003, p. 7. For the economy as a whole there are various ways to analyze the relationship, but the most usual approach would be to suggest that grow in output (Q) is a function of the growth of inputs of labor (L) and capital (K) plus an unknown residual or error term (R). Thus the basic equation is:Q= f (L, K, R)The residual item is needed because investigations typically find that the growth in output is greater than the increase in labor and capital in the economy. G.B.J. Atkinson, The Economics of Education, Hodder and Stoughton, 1983, p. 48-49. The unexplained residual is decomposed into a portion explained by the increase in human capital, usually measured by average years of schooling, and a portion frequently attributed to technological change. This accounting typically attributes 15-25% of growth in U.S. W.E. Becker and D. R. Lewis, Higher Education and Economic Growth, Book Review by J. Siegfried, Industrial and Labor Relations Review, Vol. 47, No. 3 (April, 1994), p. 524.Pancavel (1991), in his work on the rate of education in economic growth, demonstrates how the contribution of the different levels of schooling (primary, secondary and higher education) can be derived from aggregate measures of the schooling and productivity. His estimates indicate that although the contribution of overall schooling rose from 14,78 percent to 23.41 percent, the growth in higher education and its relative contribution to economic growth in the US was much larger. Pancavel estimates that the contribution of higher education to economic growth has increased dramatically in 1990s, rising from only 1.29 percent in the 1913 to 1950 period to 14.61 percent in the 1973 to 1984 period. J. Pencavel, Higher Education, Economic Growth and Earnings, in “Higher Education and Economic Growth” Edited by: William E. Becker and D.R. Lewis, Kluwer, 1993, p. 53.W.E. Becker and D.R. Lewis, Higher Education and Economic Growth, p. 10.Bassanini ve Scarpetta (2001) have investigated the role of human capital accumulation in explaining growth paths across 21 OECD countries over the 1971-98 period via panel data analyze. They proxied human capital by the average number of years of formal education of the working age population. The results point to a positive and significant impact of human capital accumulation to output per capita growth. The estimated long-run effect on output of one additional year of education (about 6 percent) is also consistent with microeconomic evidence on the private returns to schooling. They also found a significant growth effect from the accumulation of physical capital, and a speed of convergence to the steady state output per capita growth path of around 15 per cent per year. A. Bassanini and S.Scarpetta, Does Human Capital Matter For Growth in OECD Countries? Evidences From Pooled Mean-Group Estimates, OECD Economics Department Working Papers, No: 282, (2001), p. 24.In a cross-sectional study, Barro and Sala-i-Martin found that male educational attainment, particularly secondary and higher education, had significant positive growth effects. R. J. Barro and X. Sala-i-Martin (1995). Economic Growth. New York: McGraw-Hill. An increase in average male secondary schooling of 0.68 years raises annual GDP growth by 1.1 percentage points, while an increase in higher education of 0.09 years raises annual growth by 0.5 percentage points. They find an interaction between initial GDP and human capital (broadly defined, including health and education), so that countries that lag behind tend to grow faster if they have high levels of human capital.In a time series analysis of the United Kingdom, Jenkins looked at an index of total factor productivity and its relationship to different levels of educational attainment. H Jenkins, Education and Production in the United Kingdom, Economics Discussion Paper No 101, Nuffield College, Oxford University, 1995. When higher education qualifications (including undergraduate, postgraduate, and other university graduate stock) increased by 1 per cent, annual output grew between 0.42 and 0.63 per cent.A study in Taiwan showed that higher education played a strong role in the countrys economic growth. T-C Lin, The Role of higher education in economic development: an empirical study of Taiwan case, Journal of Asian Economics 15 (2),2004, p. 355371. It found that a 1 per cent rise in higher education stock (as defined by those who had completed higher education, including junior college, college, university, or graduate school) led to a 0.35 per cent rise in industrial output, and that a 1 per cent increase in the number of graduates from engineering or natural sciences led to a 0.15 per cent increase in agricultural output. This work examined the effects of concentration in different disciplines and concluded that study of the natural sciences and engineering had the largest effect on output. Wolff and Gittleman showed that higher education enrollment rates are correlated with labor productivity growth. The number of scientists and engineers per capita is also associated with economic growth. EN Wolff and M Gittleman (1993): “The role of education in productivity convergence: does higher education matter?” In A Szirmai, B van Ark, and D Pilat (eds), Explaining Economic Growth. Amsterdam: North-Holland.Microeconomic ApproachConventionally the contribution of education to economic development is analyzed in terms of education-earnings relationships and more conveniently in the form of rates of return. Rates of return are a summary statistic of the relationship between lifetime earnings and the costs of education. J. Tilak, Higher Education and Development, International Seminar: University XXI, Brasilia, Brazil, (25-27 November 2003), p. 3. After adjusting for direct costs associated with the corresponding levels of educational achievement (for example, tuition and fees), and taking account of the fact that the value of a given sum of money will vary depending on the time at which it is spent or received, the (discounted net) earnings differentials can be expressed in classic “rates-of-return” terms. Rates of return are considered private if they are based on differences in take-home pay and the costs of schooling that come out of the pockets of students and their families. Once both private and social rates of return are calculated, it is easy to calculate the difference in these rates, how much society benefits above and beyond the private return. It is this difference that provides an economic justification for government action. If the social return exceeds the private return, this tells us that the unfettered operation of private markets (so-called “laissez-faire”) will not produce as much education as is desirable from the point of view of society. (This is because private markets base their decisions on private returns, whereas society should base its decisions on social returns.) Also, if the social rate of return to primary school exceeds that for higher education, this in turn suggests that primary school is a better social investment than higher education.Such analyses were undertaken, and concluded that the difference was greater in primary education than in higher education, and therefore that government action was more justified in the former than in the latter. But the standard rate-of-return analyses stopped there, consistently failing to reflect that the benefits of higher education extend well beyond the incremental earnings accruing to those individuals who receive it. World Bank, Higher Education in Developing Countries: Peril and Promises, The Task Force on Higher Education and Society. Washington, D.C.: The World Bank, 2000, p. 40.Psacharopoulos (1973, 1985, 1994, 2004) provides an international survey of rates of return to education. Conventional rate of return analysis shows higher education in a less favorable light than it shows primary and secondary schooling. Psacharopoulos and Patrinos reviewed 98 country studies and found that social rates of return to investment in primary education are the highest (% 18.9), followed by secondary education (%13.1). The returns to higher education are the least (%10.8). This pattern is more or less true in general with respect to private rates of return also. Such evidence is extensively used to discourage public investment in higher education and to concentrate rather exclusively on primary education. Figure 1: Returns to investment in education by level.Though the rate of return to higher education is less than that to primary education, it should nevertheless be noted that higher education does yield an attractive rate of return to the society (above 10 per cent) and to the individual as well (19 per cent), as shown in Figure 1. G. Psacharopoulos and Patrinos H. A., Returns to Investment in Education: A Further Update, Education Economics, Vol. 12, No. 2, (August 2004), p. 112.Returns to education by level of country income are presented in Table 1. The highest returns are recorded for low-income and middle-income countries.Table 1: Returns to investment in education by level, latest year, averages byper-capita income group (%)Per-capi