Does Educational Spending Promote Growth?

Back in February I had examined the matter of why education is underprovided in India. My insistence that basic education was a necessity for development prompted Alok Mittal to ask about the connection between economic development and education. Specifically, he quoted these lines from my post —

Economists are deservedly known to disagree on many issues. But on one matter there is consensus: the absolute necessity of an educated population for an economy to develop. This fact has been known for ages by almost all who have ever pondered the question of economic development and growth.

and wrote —

Being a new student to this, the above question is exactly what I had posed last week. I am still to get the linkage between education and economic growth. In my own attempt to discover the linkage, I have come across some interesting views which I would like to share with the group, and gain a better understanding from your viewpoints.

He first referred to a study in Arizona and quoted from it —

Three distinct regressions find no consistent, statistically significant impact of higher-education appropriations on states’ economic growth. Indeed, a stronger relationship is found when the models are reversed, suggesting that a better case can be made that growth drives spending, rather than spending driving growth.

and concluded that “this basically is directly opposite to the premise that education leads to better economic development.”

My claim is that basic education (not higher education) is a necessary (not sufficient) condition for economic development (not growth). I can well imagine that spending on higher education beyond a certain amount under specific circumstances may not be found to be statistically correlated with economic growth. If an economy is already very rich and economically developed, it may be close to its potential economic growth rate and therefore any extra spending on higher education will not have any significant effect on the growth rate.

Let me use an analogy. Imagine you have a tub. If it is already full, you cannot increase the level of water in it by pouring more water. So the percentage change in the “growth” of the water level is zero. But if you start off with a nearly empty tub, even a modest amount of water added will result in a significant percentage change in the water level.

The important point is that mature systems do not grow by increasing those factors that are only important during the immature stage of the system. If the population of a country does not have primary education, then resources directed to primary education will change the system more significantly than if resources were directed to higher education in an already well-educated economy.

The second relationship mentioned in the excerpt above is totally consistent with common sense — that growth drives spending. Growth implies more investable resources and that in turn means higher education gets more funding. The direction of causation is easy to explain.

It is an empirical truth that economic development drives spending on activities that increase the stock of public goods such as education (both basic as well as higher education), infrastructure, etc. It is also true that increase in the stock of public good drives economic development. There is an inherent circularity in such matters which are commonly labeled vicious circles or virtuous circles, as the case might be. How to move from a vicious circle to a virtuous circle is the challenge. Poor countries, like poor people, are unable to invest in public goods such as education and thus are doomed to be eternally trapped in the vicious cycle of low growth also known as a development trap. Unless they have the ability to borrow. If they can borrow and use the credit efficiently to create public goods, they can lift themselves out of the trap.

My prescription for India is simple: invest in education and borrow massively if need be to do so. The money will be well-spent.
I have a modest proposal which will transform India into a fully literate country within three short years and the benefit of doing so will far outweigh the cost. Tomorrow I will present the proposal.

Author: Atanu Dey


6 thoughts on “Does Educational Spending Promote Growth?”

  1. Hi Atanu,
    It is clear that most people cannot differentiate between development and growth. Secondly you need committed, educated leaders who understand the correlation between development and education and that does not seem to be the case in India at present. Most of the money borrowed might just disappear into the black hole of greed with no positive impact whatsoever. Unless we have a reformed bueracracy , educated and enlightened leaders who understand the priority of the hour, nothing will change. And yes, unity on this issue is very important. Right now there is no unifying factor in India, it is too deeply divided and fragmented on issues of religion, caste, gender and so on.In my opinion, it might take India 200 years, when the generation might get wise to the situation to do anything about it.


  2. Hi Atanu!
    is it any worthy talking about the Education scenario in India? PC introduced another cess of 2% in the poor salaried individual. i guess already crores have been earmarked for education. who cares if money goes for the right job? another 2500 crores to the kitty for ministers to enjoy free transport, accomodation and luxurious stays! When would these things change??? and, you had mentioned one day that Indians are in general fall in low-productive category. i totally agree to it. but i was not able to convincingly give more points to it. do you have any analysis on it. could you please present it in one of your articles? Thanks Atanu!


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