International Education and Economic Growth

Abstract

Education, Education, Education. With this slogan the British Prime Minister Tony Blair set out his priorities for office in 2007. Indeed, many governments have now formulated the need for greater education spending and try to facilitate international exchange. The idea is that education is an investment that pays off in the long run through higher economic growth on a path towards a “knowledge society”. Economists, for a long time, have tried to capture the effect of education on growth and introduced the idea into a series of models, which go back to the Solow model. While these models manage to capture a broad range of the features associated with education, such as positive externalities and opportunity costs included in Lucas (1988) or the necessary monetary investment in Mankiw et al. (1992), they have not yet attempted to embrace international education. However, international education has left the ivory tower and is becoming a mass phenomenon which can impact economic growth. Multiple interesting transformations are linked with this development. On the one hand it is engaging to ask whether the productivity of international education is large enough to justify the promotion of exchanges. Here, Economics faces the problem that its standard trade theory seems incompatible with models for international growth. The one casually assumes countries with different factor endowments trading different goods, while the other focuses on the “production” as a whole. More fundamentally, trade theory tends to be static and “non accumulative” and is therefore regarded as part of total factor productivity in growth models. Human Capital, however, is accumulating and should thus be treated differently.