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Why Some Economies Grow and Others Don't

Why do some countries grow rich and others languish in poverty?  This is the question addressed in a very important new book, The Knowledge Capital of Nations, by Eric Hanushek and Ludger Woessmann, and in a paper by the same authors titled, "Universal Basic Skills: What Countries Stand to Gain," published by the OECD with an introduction by Andreas Schleicher.  The book and paper make a very carefully documented and well-reasoned case that the academic skills of a nation's labor force, as measured by the skills they leave high school with, contribute far more than any other single factor to national economic growth in the long run.

Over the last few decades, leading economists have been working hard to quantify the contribution made by the education and training of the labor force to the growth of national economies.  But this effort to quantify the contribution of education to national economic growth has had its problems. They used the average numbers of years of education among the workers in a nation as a measure of how well educated that workforce was.  When they correlated the number of years of education in the workforce over time with economic growth in the same economy, they got a significant effect, but they also got lots of anomalies. 

Take Latin America and East Asia, for example.  Back in 1960, average income in Latin America substantially exceeded that in East Asia.  And the workforces in Latin America were much better educated, as measured by average years of education attainment.  The income head start, combined with their great advantage in educational attainment, should have enabled the Latin Americans economies to have grown much more quickly than the Asian economies, leaving East Asia as a whole far behind.   But, as we all now know, that is not what happened at all. The East Asian economies quickly outstripped Latin America with growth rates that have eclipsed Latin American growth rates for decades.  How could that have happened if education is the principal driver of economic growth?  Over time, questions of this sort have led analysts and policy makers to have less faith in investments in education as an essential driver of economic growth.

But, as it turns out, it is all in the measure that is being used.  In this case, the measure of education and skill being used was average number of years of educational attainment.   What Hanushek and Woessmann wanted to know is what would happen if, instead of using quantity of education as the measure of workforce quality, we used the quality of education instead.  Back in 1960, there was no reliable measure of education quality that could be used on an international scale to compare school academic achievement.  Years of attainment was all that the economists of the time had to go on.  But since then, such measures have been developed, most importantly TIMSS, PIRLS and PISA.  The researchers used the simple average of all observed math and science scores between 1964 and 2003 for each country in their study. The results are startling.

The Latin America anomaly simply goes away.  When economic growth rates for Latin America and East Asia are plotted against school test scores, they are almost perfectly correlated.  When economic growth rates for the two regions are plotted against years of attainment in school, there is hardly any correlation at all.  This holds true over a period of 50 years.

Impact of Education on Economy

What is really eye opening is not the finding that education makes a big difference in economic outcomes but how much of a difference it makes.  The achievement-based models used by the authors accounted for three-quarters of the international variation in economic growth rates.  Compare this with the old models, based on educational attainment, which accounted for only one-quarter of the economic growth in the countries studied. The authors calculate that a difference of one standard deviation in the cognitive skills of a country's workforce is associated with approximately two percentage points of higher annual growth in GDP.  A full standard deviation is a lot to expect under any circumstances, but one quarter of that (about 25 points on the PISA scale) has actually been accomplished by Germany, Mexico, Poland and Turkey recently and in Finland earlier.  So let's imagine what a gain of one half of one point in the annual growth rate of GDP (the amount produced by an average gain of 25 points on the PISA scale) would do for the United States.  According the Congressional Budget Office, the cumulative losses from the Great Recession from 2008 to 2012 were about $4 trillion.  But an improvement of just 25 points on average for American students would bring in about $67 trillion over the next 50 years.  How's that for a return on your investment? 

Projections of this sort are based on models.  The researchers make assumptions, plug them and the data into their models and watch the results pour out the other end.  Again and again, the authors use their models, the conceptual frameworks that underlie them, the data they have gathered and their statistical skills to make their points in a very convincing way.

With one exception.  By the end of the next-to-last chapter, the reader wonders how anyone can doubt the author's claims that school achievement is a very powerful contributor to economic growth at a national scale.  But that leaves the convinced policymaker with an important question.  Just what is it exactly that I need to do to make sure that my country is doing what is necessary to raise the academic skills of our high school students so we can enter the ranks of the wealthiest countries?

At this point in the narrative, all the models, data and statistical finesse of the rest of the book cannot be used to answer this question.  While I can easily agree that the best research concludes that the quality of a nation's teaching force has a very strong bearing on the achievement of its students, I have a little more trouble with the use of relative teachers' salaries as the measure of teacher quality.  I have even more trouble with basing the claim that school choice is an essential component of high-quality schooling based on the claim that high proportions of students enrolled in Catholic schools produce superior national education results.  The authors would have done much better, in my opinion, to have left this part of the argument to others.  Indeed, on this point, I would refer you to Andreas Schleicher's clear, well-argued and passionate introduction to the paper the authors did for the OECD, which he ends with a much more compelling summary of what the data say about what makes for effective education systems than the one supplied by the authors.

So far, I have stuck to the main line of the story--how higher school achievement leads to stronger economies.  But there is a subtext related to equity that has many dimensions and is very important.  First there is Andreas Schleicher's invitation to the authors to write a paper focusing on what the economic outcomes would be for countries that succeed in bringing all their students up to the Level I level of proficiency on the PISA tests, the lowest level on the PISA scale.  One quarter of United States students do not meet this standard.  In many underdeveloped countries, that percentage is much higher, but in many developed countries, it is much lower.  If the United States were to achieve this goal of universal basic skills, it would add $27 trillion dollars to the gross national product over the working life of the students.  But the authors show that, in addition to adding an enormous amount to the wealth of the country as a whole, it would greatly reduce the growing gaps in income that are beginning to threaten the social fabric of the country.  Schleicher points out that this is very different from and much more acceptable to many Americans than addressing income inequality by using tax policy to take earned income from one class of citizens and give it to another.

But better education is not an elixir. The models do not produce the predicted results when national economies cannot absorb better-educated workers. Sound fiscal and monetary policy still matter.  Many countries whose economies depend largely on the sale of natural resources, especially oil, might have used their wealth to educate their people against the day when their natural resources run out or are no longer needed, but have failed to do so.

But these points do not in any way detract from the contribution that Hanushek and Woessmann have made with their analysis. It is stunning.

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