Researchers Confirm Correlation Between Education Expenditure and GDP Growth

© Daniil Prokofyev / HSE University

HSE University researchers have analyzed the economic performance of almost a hundred countries to understand whether government investment in education pays off. The economists explain what kind of recommendations may be offered to governments—and how they vary based on a country's level of development—in the Voprosy Statistiki journal.

Countries with a larger proportion of educated people have higher-quality human capital and labour productivity, more successful rollout of new technologies, and more efficient policies to prevent poverty, unemployment and crime. Education is expected to improve the income of individuals and the organizations where they work, contributing to GDP growth as a result.­ However, empirical studies do not always validate this hypothesis. Using a large volume of data, HSE University researchers decided to verify whether education expenditure is justified in the short and long term.

The economists used World Bank data for 32 developed member nations of the Organization for Economic Cooperation and Development (including the United States, the United Kingdom, Germany, Japan, and Australia) and 59 developing non-members (including Russia, Argentina, and India). Details of GDP per capita, government spending on education (overall and by individual stage), the share of economically active citizens, and gross investment in the economy were available for 1995–2018. The economists also applied mathematical models to verify the degree of correlation between national GDP and education expenditure (a proxy measure of human capital in this case).

The calculations revealed a positive correlation between GDP and expenditure at all educational stages for the first group of countries (OECD members). The correlation is stronger over the long term (five to ten years) for secondary and professional education expenditure. The economists believe that this correlation also operates in reverse—governments invest in education because they are wealthy and can afford to, but the effect of these investments on GDP can also be monitored with a 5–10 year delay. Primary education expenditure has the smallest effect. This can be explained by the fact that in developed economies, almost the entire population has a primary education. The return on such investment is low because modern labour markets require increasingly complex knowledge and skills.

The relationship between GDP and education expenditure is minimal in countries of the second group in the short term. A material (and positive) delayed effect can only be seen in the case of expenditure on primary education. The relationship observed between GDP and expenditure on secondary and professional education is negative— in developing economies, increased investment in these stages has not yet borne fruit, and contributes to GDP growth deceleration. This occurs in countries where people can get a university degree, but there are not enough corresponding jobs. Those with specialized education often leave for more developed countries, meaning that education expenditure does not stimulate economic growth.

The study shows that there is a relationship between education expenditure and economic growth, but its manifestations depend on the nation’s level of development.

Marina Kolosnitsyna, Professor at the Faculty of Economic Sciences, co-author of the study

'It should, of course, be understood that countries differ by GDP and investment in education both within the OECD and outside the organization. The conclusions are therefore more likely to apply to an ‘average’ country in each group, but not necessarily to each of them to the same extent. Russia is obviously not an average country in the second group. It is comparable to less-developed countries in the OECD group in terms of GDP, and even outpaces many of them by level of education.'

The authors of the study emphasize that although education expenditure positively influences a nation’s economic performance in most cases, governments should factor in the level of economic development when choosing specific areas of investment based on the requirements of national labour markets.

'Investments in education in emerging economies must be phased: the top priority should be the primary education of the entire population, followed by professional training programmes commensurate with the level of economic and technological development. Only by doing this will government expenditure promote GDP growth, as is the case in developed economies,' Professor Kolosnitsyna concluded.