Background and Design
The perceived impact that public investment in education has
upon economic growth cannot be overstated. Governments worldwide invest
billions of dollars and dedicate hours of human resources to the cause to promote
education. Such efforts aim to improve education, which – many believe – is a
key to driving greater economic growth and development. Given the immense
amounts of resources – particularly money – spent towards these ends, it is
important to assess whether investment in education does in fact improve
economic growth, as measured by the proxy gross domestic product (GDP).
It is commonly believed that increased investment in
education breeds greater economic growth. Such proponents argue that a more
highly-educated labor force is easier to train, is more productive, and is even
inventive, culminating in higher wages, which fuels overall growth. Empirical
evidence that countries with higher levels of economic growth tend to also have
higher levels of formal schooling supports this view. Therefore – proponents of
this logic conclude – an increase in the population’s education levels leads to
higher earnings, which consequentially increases economic output and growth
rates (World Bank, 2007). However, there
are no robust results that definitively prove there exists a relationship
between public investment in education and economic growth. Some studies
suggest that there is no relationship between the two, while others claim that
public investment in education and economic growth are in fact correlated.
I seek to explore whether public investment in education is
positively correlated with economic growth or not. To do so I will use a difference
in difference model and will concentrate on two countries, Peru and Bolivia,
chosen for their similarities across various characteristics: geography, political history, ethnicity, large
indigenous populations, language, and economic growth rates. The period studied
is 1998 to 2012. While the similarities between the two countries are critical,
their difference are likewise acknowledged. For example, Bolivia is landlocked,
a factor known to significantly limit economic growth.
For the treatment event I will use the rise of Evo Morales to
power in Bolivia in 2006. Before 2006, both Peru and Bolivia had followed
neoliberal guidelines for their social investment policies, which tended to
restrict public expenses. Further, before 2006, both countries experienced
hyperinflation in the 1980s and were mostly ruled by a white minority aligned
with the Washington Consensus, which similarly restricted public expenditure in
education. Given this background, I explore the effect of the rise of Morales,
followed by the change in public expenditure in education, to assess whether
this had a positive effect on the economic growth of Bolivia.
The model uses Bolivia as the treatment group, Peru as the
control group, and two periods of time: before
and after 2006. The dependent variable is GDP growth per capita and the independent
variable is government expenditure in education (% of GDP). The data source is
the World Bank. A difference in difference model was selected so as to create
a design that resembled a randomized experiment. To achieve this, two samples
that were as homogeneous as possible had to be used. However, despite the
similarities mentioned above, Bolivia and Peru are not similar in gross
indicators, such as their populations and GDPs; therefore, the model uses comparable
variables.
Analysis
It is clear that Peru’s
economic growth is higher than that of Bolivia. This fact is not surprising
given Peru’s much larger economy. Bolivia’s baseline in public expenditure in
education is notably higher than that of Peru. Peru’s public expenditure in
education remains roughly the same, with a slight decrease, while Bolivia’s education
expenditure exhibits a slight upward slope with a significant increase in 2006,
the year Morales took office. After 2009, Bolivia’s education expenditure clearly
declines; however, it is important to consider a possible time lag for the
potential impact that Morales’ socialist policies may have. That is, given more time to take effect,
Morales’ policies may actually reverse this declining trend in education
expenditure – a point to consider as future data becomes available beyond 2012.
(See appendix for descriptive statistics).
The difference in difference
analysis shows that the difference between Peru and Bolivia’s GDP growth before
and after Morales is not significant. Therefore, according to this study, the
rise of Morales to power in 2006 – and increase in expenditure on education –
did not have a significant effect on the GDP growth/capita. The study, however,
does show that the difference of Peru’s GDP growth per capita before and after
Morales was significant, as well as the difference between Bolivia and Peru’s
GDP before 2006.
Finally, a regression
analysis shows that there is a negative, significant relationship between
public investment in education and economic growth in Bolivia during the years
1998-2012. It follows that for every 1% increase in public expenditure in
education, GDP decreases in 1.5%. (Please see appendix for regression table).
Conclusion
The results empirically show
that public expenditure in education does not contribute to economic growth. The
rise of Evo Morales to power in 2006 was thought to have increased public
expenditure in education, and, therefore, increase the GDP growth rate of Bolivia.
However, the results show that, although Bolivia’s public expenditure in
education did increase with Morales as president, this situation did not have
an effect on the economic growth of Bolivia. Moreover, the regression analysis
shows that in the case of Bolivia, public expenditure in education and GDP
growth are in fact negatively correlated. Despite these results, it is
important to remember that education is a long-term investment whose effects
need to be studied years after initial investments. It may well be that Bolivia’s
increased expenditure in education after 2006 may not yield significant results
in stimulating the country’s GDP growth until many years into the future.
Appendix
Bibliography
- Aghion , L. Boustan , C. Hoxby, J. Vandenbussche. “The Causal Impact of Education on Economic Growth: Evidence from U.S.”. March 2009
- Ke-young Chu, Sanjeev Gupta, Benedict Clements, Daniel Hewitt, Sergio Lugaresi, Jerald Schiff, Ludger Schuknecht, and Gerd Schwartz. “Unproductive Public Expenditures A Pragmatic Approach To Policy Analysis”. Fiscal Affairs Department. International Monetary Fund., 1995.
- World Bank. “The Road Not Traveled Education Reform in the Middle East and North Africa”. World Bank Report, 20007.
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