Quality education is a necessary component of economic growth, according to 60 years of international test data

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International student assessments are commonplace today, although they did not exist before 1965, and few countries initially participated. Seven countries have participated in international assessments for nearly sixty years – Australia, Finland, France, Germany, Japan, the Netherlands and the United States – and one of the lessons we draw is that education is correlated with economic growth. As levels of schooling and academic achievement increased, national income also increased.

We see in Figure 1, for example, that this is the case for Finland, Japan and the United States.

Figure 1. Years of schooling and real income per capita for Finland, Japan and the United States, 1980 and 2010

Source: Barro, R. and J.-W. Lee. 2013. “A new dataset on educational attainment around the world, 1950-2010.” Journal of Development Economics 104: 184-198.

One of the likely reasons for this correlation is that economic growth and development considerations were very important to many of these countries. Finland was originally a middle-income country. Germany and Japan were experiencing a post-war boom; then Germany had to reintegrate its eastern part. These economies needed a skilled workforce to grow.

Skills development policies have therefore been undertaken. This has led, among other things, to the doubling of levels of schooling between 1950 and 2010, according to the same research on which Figure 1 is based. On average, they have increased from six to twelve years. During this period, school enrollment levels almost doubled in Finland and France. The average number of years of schooling in the seven countries has increased and, at the same time, the differences between them have narrowed. Finland developed most rapidly with a focus on access and equity, beginning with comprehensive school reforms in the 1960s and 1970s that included a gradual transition to a common, unified, compulsory curriculum, with the selection of courses postponed until the age of fifteen or sixteen. This coincided with the expansion of secondary education in the late 1980s. In addition, the disparity between countries in terms of school enrollment has decreased. Education levels have become much more equal.

The results were significant, as shown in Figure 2, the rate of return on investment in education (i.e. the costs and benefits both for individual students and for each country as a whole ) being uniformly high in all seven countries. This can be interpreted as an increase in the demand for skills and a source of supply unable to meet it. In 1960, returns on investment ranged from 10.4% in France to 14.0% in Australia. As schooling expanded, returns slowly declined, consistent with economic theory. In 1995, the average return to schooling was only 7.5%. However, these yields started to increase in the 1990s and remained high in the 2000s, reaching 11.5% in 2010.

Figure 2. Average return to schooling for Australia, Finland, France, Germany, Japan, the Netherlands and the United States, 1960-2010

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Source: Montenegro, CE and Patrinos, HA, 2021. Dataset of comparable estimates of the private rate of return to schooling worldwide, 1970-2014. International Labor Journal; Psacharopoulos, G. and H. Patrinos. 2018. Return on Investment in Education: A Decade Review of the World Literature. Economics of Education 26(5): 445-458.

While high returns despite high levels of education suggest growing inequality, they also point to a demand for skills. Employers value education and are willing to pay for it. The countries reviewed here valued education and developed it and, for a considerable time, improved its quality. The quality of education and its expansion increased incomes, which translated into national economic growth and high personal returns.

In terms of national income growth, the impact of schooling is significant and important. As shown in Table 1, the application of a simple regression model using panel data on the seven countries gives significant coefficients for schooling. Years of schooling alone have a large positive effect on GDP per capita over time. When estimating the effect of one measure of school quality – the Harmonized Learning Outcomes (HLO) score (see a fuller definition here) – the effect is even larger. Looking at the two together, it appears that the quantity and quality of schooling matter to a large extent, but the quality matters more. In panel data estimates, schooling is statistically significant even when the regression analysis controls for physical capital accumulation. Moreover, the estimated return on investment in schooling is consistent with those reported in labor force studies or other macro analyses.

Table 1. Panel estimates of income levels: Dependent variable Log GDP per capita, 7 countries, 76 observations, sample period 1965-2015

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Notes: Includes country fixed effects but not reported; t-statistics in parentheses. Capital per worker of Feenstra, RC, R. Inklaar and MP Timmer. 2015. “The Next Generation of the Penn World Table.” American Economic Review 105(10): 3150-3182. * Meaning of variables at the 5% level.

After 2005, however, the scores began to diverge. The difference today is almost as great as it was in 1965. Raising educational levels and maintaining the quality of education are not the same. Long-term convergence of quality is difficult to maintain. Japan is the only country that has managed to improve steadily and maintain high learning outcomes since 1965, as shown in Figure 3.

Figure 3. Learning outcomes for Australia, Finland, France, Germany, Japan, the Netherlands and the United States, harmonized average of scores in reading, mathematics and science, 1960- 2010

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Source: Altinok, N., N. Angrist and HA Patrinos 2018. “World Education Quality Dataset (1965-2015)”. World Bank Policy Research Working Paper No. 8314.

Nevertheless, schooling is of good quality in these countries compared to the rest of the world. The fact that quality matters in these countries shows how important skills are for development. These high-performing, high-income countries have focused on schooling to generate resources, and these efforts have been correlated with significant returns. In other words, schooling, especially the quality of schooling, is a necessary component of economic growth.

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