GROUP VI

PRESENTS:

Human
factors
in development

WHAT IS ECONOMIC
DEVELOPMENT?

ROLE OF
EDUCATION IN
ECONOMIC
DEVELOPMENT

HISTORICAL BACKGROUND
A man educated at the expense of
much labor and time...may be
compared to oneexpensive
machineThe work which he learns to
performover and above the usual
wages of common labor will replace
the whole expense of his education.
Adam Smith, 1904.

MICRO AND MACRO

ESTIMATES
The estimation of rates of return to
education is important for setting policy
guidelines and evaluating specific
programs as estimates (micro and
macro) act as useful indicators of
productivity of education.

Micro Estimates: Private returns to

schooling are usually estimated using
standard Mincers semi logarithmic
specification and OLS technique.

where, w represents wage rate, s is the number of

years of schooling completed, exp is years of
labour market experience, exp2 is experience
squared, and is a random
disturbance term capturing unobserved
characteristics. In this function, the coefficient on
years of schooling can be interpreted as the
average rate of return (or the percentage change
in wages) to an additional year of schooling. The
function assumes the rate of return to be the same
for all levels of schooling. The experience variable
is incorporated in the equation since an individual
with higher experience in a job is likely to earn
more. The experience squared term captures the

MACRO ESTIMATES
The returns to education using the macro approach are
estimated either by:
an aggregate production function explaining GDP; OR,
an aggregate macro-Mincerian earnings function
where the units of observation are individual countries.
New growth theories of Romer and Lucas reinforced the
importance of education in the growth process.
First, beyond the human capital used by different firms
in the economy, total output also depends upon the
average level of human capital.
Second, human capital is endogenous, rather than
exogenous, in the system; that is, human capital is
produced by using resources.

Conclusions are:
Returns higher in lower income areas due to
relative scarcity of human capital.
Global average rate of return is 10%
Social and private returns at all levels largely
decline by the level of the countries per capita
income
Private returns are higher than social returns at
all levels
Although the concept of the rate of return to investment
in education is unassailable, empirical applications have
been attacked on a number of grounds. The most
important issue is that of differential ability between
those who complete different levels of schooling

EQUITY

PERCENTAGE
DISTRIBUTION OF
EDUCATIONAL
ATTAINMENT

1987

illiterate
below primary
primary
middle
secondary
graduate and
above

199
3

2004

WIDER HUMAN
CAPITAL

Education reduces:
Fertility in women
Infant mortality
Maternal
mortality

NON-MARKET BENEFITS AND EXTERNALITIES

Source: Based on and adapted from Wlfe and

Zuvekas(1997)

POLICY
IMPLICATIONS
Emphasis on Primary
Education
Emphasis on
general over
specific skills
Emphasis on cost recovery
in higher education

CONCLUSION
The concept of human capital has a long history in the
economics literature.
It has been found that spending on education is an
investment with an economic return. Firm conclusions
about educations contributions to productivity have
been established.
The link to growth has been especially critical in
recent years. Data limitations are partly to
blame for a lack of consensus among
researchers, but much more needs to be done to
reconcile for example the high and robust
returns to schoolings at the individual level, with
the mixed signals at the macro or cross-country
level.

The more educated the parents,

particularly the mother, the lower
is maternal mortality and healthier