Monday, 12 January 2009

Causality between growth, investment, and education

The relation between economic growth, investment, and education is interesting in all causal directions. On one hand, the determinants of economic growth are studied widely; on the other, the impact of economic growth on its determinants indicates the extent of influence economic outcomes exert on the allocation of resources. If high growth tends to lead to high education rates at the same time as education leads to growth, it would seem that society tends to adjust its resource allocation to promote further growth. A slightly longer route of influence might have education leading to increased investment and then investment leading to increased growth; in which case higher education might be demanded by the providers of investment.

Here is a VAR analysis of the relations

X1 = (B0,B1,B2,B3)*(1,L.X1,L.X2,L.X3)' + normal zero mean error

where X1, X2, and X3 are the three variables and ' denotes transpose. L. denotes their first lags. The analysis is for three European countries, and three African countries. Data is from the Penn World Tables and Barro and Lee, dating back to 1960 and grouped in five year sets.

In all countries, either education or investment is associated with future increased growth; their lack of individual significance or their negative signs may indicate collinearity. In all countries education is associated with increased future investment share; it may be that education encourages investment.

In the European countries, investment is associated with increased future education, as would be expected in a growth motivated society. In two of the African countries, investment is associated with lower future education; the link between growth and education provision seems weaker. It is possible that business has less lobby power on the state, or does not require a high level of education, or education is a national priority to compensate for low investment.

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