William C. Smith

Joseph Korbel School of International Studies, University of Denver, USA

The Education Lifespan Model is an attempt to map economic return on human capital investment.  The power of education to transform communal living standards is often seen by the belief in the ‘education gospel’ or the construction of a ‘knowledge economy’.  Misalignment, however, regularly occurs between investment in education and expected economic growth.  The five phases described in the Education Lifespan Model tracks the anticipated return on investment in accordance with the developmental level of a country’s education system.  Distinctions are made between primary/secondary and higher education and hypotheses for future studies are presented.

Keywords: International development; economic growth; education expenditure

The belief in the power of education to change lives is so engrained in today’s world that the discourse surrounding education and positive economic growth is unconsciously assumed.  Mantras like ‘knowledge is power’ and the ‘education gospel’ fuel the worlds push to increase education.  With the expansion of globalization, education, especially higher education, is increasingly intertwined with neo-liberal practice.  The result is the realization that individual, as well as national, standard of living, can only occur through the ‘knowledge economy’ – a recognition that to be globally competitive one needs to gain the knowledge deemed valuable by the major world consumers and be willing to be retrained to meet the evolving needs of business.  Such a resounding belief in the deliverance of education, however, is rattled when empirical evidence does not correspond with inherent faith.  Personally, some try identifying extraneous variables that are interfering with the “real impact” of education.  At a policy level, when dealing with limited resources this misalignment may lead countries to reduce their spending on education, assuming that the connection is weak or non-existent.  Both conjectures may actually prove false.  In a world that emphasizes the here and now temporal factors are often overlooked.  I posit a lifespan model of education spending where economic growth is dependent on the maturation of the education system and the surrounding society’s capacity to effectively absorb this transition.  Upon the initiation of compulsory education, shifting resources may actually have an effective decline in the economy.  Policy makers, however, need to recognize the long term potential for growth education can bring. 

As the graph illustrates the increase in education expenditure as measured by percentage of GDP spent on education will initially – upon the creation of a compulsory education system – result in a decrease in GDP growth, followed by a substantial increase, then moving into a period of stagnant economic impact.  This initial graph simply provides a representation of the expected path of GDP growth.  Each of the five phases in the model is described below in accordance with the foundational support extrapolated from previous studies. 

Initiation Phase

The initiation phase occurs when a country first shifts substantial resources to fulfil the promise of the ‘education gospel’.  At the policy level this can be seen when a country passes legislation to make primary/secondary education compulsory.  This initial thrust in education spending results in an initial decline in economic growth as the country attempts to shift industries and meet the demands of their new labor force.  This initial decline has been found in the studies of education spending and economic growth in developing countries (Verbic, Majcen and Cok, 2009 & Al-Yousif, 2008) and often perplexes those that hold strong to the belief that education has a direct causal link with gross domestic product.  Countries that do not recognize the positive impact of the entire education lifespan on education may reduce their spending on education believing that the correlation is a myth.

The initial inability to maximize human capital stems from structural adjustments in both the education and market sectors.  As resources are shifting to education the new system is prone to inefficiency (Cooray, 2009) and poor quality (Obradovic, 2009).  Gyimah-Brempong, Paddison, and Mitiku (2006) suggest that the low education stock found in Africa is due to inefficiency in the education system.  A turn towards education will result in a temporary reduction of the productive labor force (Verbic, Majcen and Cok, 2009).  Additionally, to increase funding for public education, countries are often forced to increase taxes.  This additional burden may reduce economic activity thereby slowing growth.  Deskins, Hill and Ullrich (2010) found that the marginal costs of higher education, when considering the effect of taxes, outweigh the marginal benefits.  In the era of globalization the comparative advantage of developing countries is impressed upon them by the premises of the Neoclassical Factor Endowment Theory.  In accordance with this theory, for developing countries to be competitive in the global marketplace they must maximize their labor abundance by focusing on labor intensive industries (Todaro and Smith, 2003).  The economic emphasis of many developing countries, encouraged by the loan practices of the IMF and World Bank, makes them naturally resistant to structural change.  When resources are moved to education “the number of people that have adequate academic references increases more rapidly than the number of available jobs” (Obradovic, 2009, pg. 382) resulting in a misalignment between the skills of the labor force and the demand from the market; a concept described by Brown (2006) as the opportunity trap.  In sum, the shift in structure towards education moves limited resources away from the established economy inducing an initial decline in economic growth as the country transitions.

Trough Phase

This phase is a trap to those countries that expect or require immediate returns for their investment.  Not recognizing the impending upward economic movement countries may retract by reducing education spending in the hope of increasing economic growth.  This can result in inconsistent education allocations as governments deal with the economic reality of limited resources while still holding true to the promise of the ‘education gospel’.  At this stage, industry is being restructured to meet the changing labor force (Obradovic, 2009).  Teachers are also being trained, although the initial quality is low.  Not all benefits of increasing education are direct; indirect benefits to the economy have been found to have only marginal initial effects on growth in countries that are low income (Cooray, 2009).

Transition Phase

In the transition phase we see accelerated growth as employment opportunities have transitioned to meet the needs of the labor force.  As education increases and more citizens have attained the skill sets required by the ‘knowledge economy’, industries within the country move from producing labor intensive goods to capital intensive goods.  With increased teacher training the quality of education improves and the student-teacher ratio decreases resulting in an increase in per capita income (Baldwin and Borrelli, 2008).  The more severe slope experienced during this phase may be due to the low initial education stocks leading to larger relative gains for the country (Gyimah-Brempong, Paddison and Mitiku, 2006).  Accelerated growth at this point can be the result of a virtuous cycle – where correlations between education and economic growth are high but directional causation is difficult to distinguish (Monteils, 2004 & Chaudhary, Iqbal and Gallani, 2009).

Maturation Phase

As the country continues its transition from a labor to a more capital intensive economy the gap between the supply of skilled employees and the demand of employer’s decreases, resulting in slowed growth.  This decreasing yield is found in a study by Monteils (2004) that discredits endogenous growth theory, claiming that human capital returns diminish over time.  In her study on education and economic growth in Serbia, Obradovic (2009) stated that “yields from education tend to decrease as a country becomes more developed because the workers with some level of education are not scarce anymore and thus ‘regulate’ lesser share on the labor market” (pg. 384).

Saturation Phase

Few countries reach this last phase in the education lifespan, as evident by the large number of studies in developed countries that still see positive growth.  At this stage the investment in education has flooded the system to the point of stagnation.  Enrolment figures tend to be maximized, access into higher education is open, and there is no distinguishable difference in completion rates amongst student groups.  The labor market has completely adjusted to meet demand, resulting in an equilibrium point.  In the saturation phase economic growth can no longer occur by simply increasing education allocations, instead measures must be adapted to improve the efficiency.  By increasing efficiency a nation can improve the quality and therefore the impact of their human capital investment.

Difference between Primary/Secondary and Higher Education

In the graph I illustrate the above five phases for both primary/secondary and higher education.  Higher education development is generally done – and most effectively done – after primary/secondary education has reached the maturation level.  We must recognize, however, that primary/secondary and higher education may have different impacts on economic growth (Deskins, Hill and Ullrich, 2010).  The trough phase in the higher education lifespan is not as extreme due to the previous structural adjustments accomplished with the funding of lower level education.  The transition of institutions to meet the needs of citizens with higher education skills, therefore, is not as drastic.  As an education level moves to universal access in a country the social yields decrease (Obradovic, 2009).  Developing countries, with primary/secondary enrolment rates that are not universal, then can see larger relative economic growth at those levels.  ‘Brain Drain’, the emigration of college-educated students, impacts both developed and developing countries.  Baldwin and Borrelli (2008) note that ‘brain drain’ occurs in the U.S. “even in states that enjoyed favorable business climates” (pg. 198).  In developing countries, often the focus of ‘brain drain’, emigration may be substantial – especially if the economy is open and the wage differential with the rest of the world is too alluring for individuals to pass up.  This phenomenon may explain some of the slow growth associated with higher education in Africa (Gyimah-Brempong, Paddison and Mitiku, 2006).

Contagion Effects

To measure the total impact education has on economic growth for countries that support both primary/secondary and higher education we must combine the Education Lifespan Model for the two levels.  For example if a country follows the suggested plan illustrated, as the impact of primary/secondary education reaches the maturation phase (i.e. diminishing positive growth) the country will initiate its spending on higher education (i.e. initiation phase = reduced growth).  The merging of these levels may result in a net reduction of growth until higher education reaches the transition phase.  Su (2004) suggests that K12 education is a prerequisite for effective implementation of higher education.  Less developed countries should, therefore, focus their resources on primary/secondary education until they have improved the quality and achieved universal access.  Increasing higher education prior to the necessary primary/secondary foundation will reduce national efficiency and amplify the negative initiation phase effects on the economy.  These findings align well with the work of Cooray (2009) which emphasizes expenditure at the primary level in developing countries, as well as that of Obradovic (2009) that found decreasing benefits for higher education in low income countries.  Sadly this lesson does not seem to be paramount in the policy of such countries.  “While average per student expenditure in post-secondary (higher) education in developed countries is approximately twice that of primary education, it is about six to ten times in African countries” (Gyimah-Brempong, Paddison and Mitiku, 2006, pg. 524).  Given this data, the state of primary/secondary education that dominates Africa (as well as most developing countries), and the framework of Su (2004) it is not surprising that Pritchett (2001) found that investments in higher education resulted in very small pay-offs amongst developing countries.

Hypotheses

In order to properly examine the proposed Education Lifespan Model future empirical work should test the following hypotheses.

Countries that more recently legislated compulsory education should be in the initiation or transition phase of the Education Lifespan Model.

Developed countries that have a long history of compulsory education should be in the maturation or saturation phase of the Education, Lifespan Model.  

Higher education allocations are more efficiently implemented in developed countries as they have reached their maturation phase in primary/secondary education.  .

Developing countries that do not have a primary/secondary education system that has reached the maturation level and choose to invest heavily in higher education will suffer from contagion effects.  
 

References

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