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If you don’t grow, you’re dead. That appears to be the mantra of a country’s economic development. A GDP growth rate of zero is the ultimate failing grade of any economic policy. Small wonder, then, that so much research has been devoted to the economics of growth. And yet, such research has produced surprisingly few resilient results about policies that might promote long-run growth in developed countries. This is what CESifo researchers Eric Hanushek and Ludger Woessmann attempt to correct with their latest CESifo Working Paper. Focusing on long-run growth differences among OECD countries, the authors find that educational outcomes play a leading role in explaining such differences. This prompted them to estimate how much improvements in educational outcomes could matter for developed economies. They do this, however, not by using school attainment or years of school completed, but rather resorting to cognitive skills. The life-cycle interpretation propounded by Nobel laureate and CESifo researcher James J. Heckman asserts that early skills facilitates the development of subsequent skills, so that outcome measures of learning in school are a good predictor for the accumulation of further skills in life and the capacity to deploy these skills effectively. The authors acknowledge that the leading candidate for explaining economic growth is the quality of a country’s economic institutions, such as secure property rights or economic openness. But, as they show, such measures are not readily applicable to explaining growth differences among rich countries, since such countries exhibit little variation in terms of institutional quality. Another area that has attracted the attention of scholars attempting to explain growth differences are the regulations of labour and product markets, red tape and the like, but their empirical application has mostly addressed only short-term growth effects at the industry level within countries. So, neither institutional quality nor market regulation are found to help in explaining the differences in long-run growth rates within the group of OECD countries. Something that can really be a source for them, find the authors, are cognitive skills, a measure of human capital. Using data from international tests given over the past 45 years, the authors could rely on a solid measure of cognitive skills for their analyses. They then performed projections of the economic value of a set of education reform alternatives for each OECD country under different parameter assumptions, taking into consideration that programmes to improve cognitive skills through schools take time to implement, that the impact of improved skills will not be realised until the students move into the labour force, and that the economy responds over time through the development and implementation of new technologies. The first educational reform consists of improving student performance by 25 PISA points (PISA, of course you know, is the Programme for International Student Assessment, a worldwide evaluation of 15-year-old pupils’ performance repeated every three years; the latest findings were released this month). The second, bringing all countries in the OECD up to the level of Finland, the best-performer in the PISA sweepstakes (at least until Shanghai dethroned it in 2009), and third, bringing all students in the OECD countries to a minimum proficiency, set at 400 points on the PISA tests. The authors then subject their projections to a wide range of detailed sensitivity analyses using alternative specifications and parameter choices, including various working life durations, different time horizons and so on. Surprisingly, the authors find that tertiary attainment, that is, a university degree, is not significantly associated with long-run growth differences across OECD countries (as it is for developing countries), while basic skills are indeed robustly related to OECD-country growth. For the first scenario, they find that if a reform is started in 2010 that would yield the 25-point increase in PISA scores by 2030, remaining thereafter at that level for all subsequent students, GDP across all OECD countries by 2041 would be more than 3 percent higher than without improvements in human capital. If France, for example, were to raise its PISA score from the current 505 to 530 points, it would be expected to have a GDP (in 2010 dollars) of $3.72 trillion in 2041, which is $108 billion higher than otherwise. The best thing, though, is that the impacts of improved cognitive skills continue to occur far into the future. The 3.0 percent improvement in 2041 rises to 5.9 percent in 2050, 15.3 percent in 2070, and 26.3 percent in 2090. For the second scenario, raising the PISA score to Finland’s shiny 546 points, would see the present value for OECD improvement reach a whopping $275 trillion, or more than six times current GDP. The US, for example, would see an improvement of over $112 trillion, while Germany would clock a $17-trillion boost, equal to more than five times current GDP. Reaching this PISA score, however, implies different hikes for each country, as those with lower scores, such as Mexico and Turkey, would have to improve much more than those now close to the top. But these bottom-of-the-heap countries would see their economies completely transformed as a result. The third scenario, achieving a “passing” score of 400 PISA points, would bring about a GDP improvement of $226 trillion, varying from a 219-percent improvement for Canada to more than five times current GDP for nine other countries. Even Finland could double its current GDP through bringing its relatively modest proportion of low performers (4.7 percent) up to scores of 400. The evidence, thus, indicates a strong impact of skills that can give rise to immense long-term benefits, so the case for raising the skills levels is indisputable. How to go about it? According to the authors, the available evidence shows that simply providing more funds for schools or reducing class sizes do not provide much hope for significant improvements in student achievement. In contrast, institutional reforms, in particular as regards schools’ competition, autonomy and accountability, create incentives for improving outcomes. Teacher quality plays a substantial role. These enormous gains far exceed the level of stimulus funds in the current global recession. But such rewards do not materialise within one or two political legislation periods: they require a perspective that fully considers the time horizon of a child born today. As the authors point out, “in the discussion of climate policies it has become custom to consider expected outcomes that materialise several generations from now. Education policy needs a similar long-term perspective to fully capture the consequences of possible current reforms.”
Eric Hanushek & Ludger Woessmann: How Much do Educational Outcomes Matter in OECD Countries?, CESifo Working Paper No. 3238
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Note: This text is the responsibility of the writer (Julio C. Saavedra) and does not necessarily reflect the opinion of either the person(s) cited or of the CESifo Group Munich. Copyright © CESifo GmbH 2004-2010. All rights reserved. |
