Enhancing economic growth involves two kinds of efficiencies. Shifting physical capital and labor from low-value, low-productivity uses to high-value, high-productivity uses yields what economists call “allocative efficiencies.” Cars cost more than corn, so labor in automobile factories produces more value labor in fields. Because growth rates depend upon initial per-capita GDP, poor countries can achieve higher growth rates by reallocating physical capital and labor. Over time, however, growth from reallocation declines because returns on labor and physical capital diminish. Certain things simply have a limited range of uses; there's only so many things you can produce from a tree.
The second source of growth, productive efficiencies, involves figuring out new ways to extract more value from physical capital and labor. Unlike things, however, innovative ideas yield increasing returns. This characteristic of ideas comes from the fact that their value, like that of any economic good, depends upon rivalry and the ability to exclude. So, for example, a physical thing like a cow has value because only a limited number of people can consume it, and because physical and legal constraints allow a rancher to exclude others from exploiting his cattle. (See Romer on this idea) An idea like Einstein’s theory of relativity, however, “can be accumulated without bound on a per capita basis, whereas a piece of human capital such as the ability to add cannot.”
But ideas require human capital. Indeed, human capital—the skills, knowledge, talents, and abilities that workers gain through education and experience—is the most important production input in modern economies. For individuals, investments in human capital boost wages, productivity, and living standards. For nations, each year of added average educational attainment expands GDP growth by 0.44 percent, on average. And eventually, investments in education lead to valuable ideas that eventually spill over to the broader economy.
Critically, though, boosting educational attainment does not automatically boost economic growth. In fact, increased schooling is entirely irrelevant to economic growth! For years, though, economists have measured and compared educational enrollment and attainment across regions because the data is more readily accessible, so they have equated measures of human capital quantity with human capital quality. As such, “a year of schooling in Papua New Guinea is assumed to create the same increase in productive human capital as a year of schooling in Japan.” Upon deeper examination, however, it turns out that improved cognitive skills play a more crucial role in economic growth than how many people in a particular country go to school, and how long they do so.
Instead, cognitive skills are one of THE key determinants of sustained economic growth. Developing Nations have spent millions trying to build more schools, to provide better access to education, and to hire teachers with better degrees. But it turns out that smaller classes and better-credentialed faculty do not produce better skills, and that expanded educational access does not improve public wealth. Instead, higher scores on standardized tests bear a much stronger relationship to private earnings for both average students and the overachievers. Better quality teachers also boost cognitive skills, regardless of their credentials. Indeed, “cognitive skills seem to improve income levels mainly though speeding up technological progress, rather than shifting the level of the production function or increasing the impact of an additional year of schooling.” Reforms that boost average test scores by a standard deviation of 0.4 over 20 years on an internationally comparable standardized test like the Programme for International Student Assessment (PISA) boosts per-capita GDP by five percent over 30 years. As one might expect, however, the effect of improved cognitive skills on economic growth depends upon complementary institutions like openness to international trade and the security of intellectual property rights.
From a policy perspective, then, “it is fair to conclude that policies aimed at improving school quality (and educational outcomes) will affect income distribution.” Economic growth can benefit from investments in public education, public land grant universities, peer-reviewed academic research, and public-private research partnerships, so long as those investments emphasize education quality. Improvements in education may likewise enhance innovation capacity and innovation diffusion.
And for developing countries, recognizing and responding to gaps in cognitive skills is especially important. Policies must pay more attention to the quality of schools, and not just to enhanced access and resources. To be sure, a variety of factors affect cognitive skills, including families, peers, schools, and innate abilities. As such, there is no “magic bullet” that will improve the quality of education, as demonstrated by a variety of policies initiatives that have failed to boost student achievement. Regardless of the source of the impact, however, the goal is to boost cognitive skills and not just school resources, as boosting school resources does not measurably influence education quality. At present, it appears that three policies may serve to improve upon the cognitive abilities of students: “strong accountability systems that accurately measure student performance; local autonomy that allows schools to make appropriate educational choices; and choice and competition in schools so that parents can enter into determining the incentives that schools face.” The key, however, is creating a system of incentives within education that is tied to enhanced student performance.
Guess what: China's not quite there yet. But, as I'll get into later, they've got an opportunity to work on it.
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