Social Equality Education, Social Equality, and Economic Growth: A View of the Landscape Thorvaldur Gylfason and Gylfi Zoega

The Scheme of Things: Sources of Growth ++ + denotes a positive effect in the direction shown

The Scheme of Things: Sources of Growth ++ + denotes a positive effect in the direction shown Adam Smith knew all this, and more

The Scheme of Things: More Sources of Growth denotes a positive effect in the direction shown ?

The Scheme of Things: More Sources of Growth denotes a positive effect in the direction shown ? Arthur Lewis: x is trade, stable politics, good weather Then Solow came along and said: growth is exogenous

The Scheme of Things: More Sources of Growth –– + denotes a positive effect in the direction shown – denotes a negative effect in the direction shown ? Endogenous growth: x can be almost anything!

The Scheme of Things: Inflation and Growth –– + denotes a positive effect in the direction shown – denotes a negative effect in the direction shown – My first x was inflation (1976, 1991, 1996, 2001)

The Scheme of Things: Resources and Growth ––– – –

The Scheme of Things: Ownership and Growth ––– – –

The Scheme of Things: Aid and Growth ––– – – A new x will be foreign aid vs. FDI (with Radetzki et al.) – – +

The Scheme of Things: Inequality and Growth ––– – Today x is inequality (with Zoega) –

Aims and overview inequality and education Explore the relationship between inequality and education across countries since 1965 education and economic growth Explore also the linkages between education and economic growth across countries since 1965 Hypothesis: Education stimulates growth Hypothesis: Education stimulates growth through increased equality

Background Commonly held view: efficiencyequality Economic efficiency and social equality are incompatible, like oil and water big trade-off Okun’s “big trade-off” Redistribution is costly Blunts incentives to work and save and invest in education Leaky-bucket analogy

Background: More recent arguments 1. Political economy redistribution Inequality may trigger demands for redistribution that hurts growth education It may also trigger demands for more and better education that helps growth 2. Social cohesion social conflict political instability Inequality may lead to social conflict and political instability that hinder growth volatility It may also lead to economic volatility

Background: More recent arguments 3. National saving Inequality may stimulate saving and hence also economic growth That is, if the rich save more that the poor But count the yachts! 4. Education hurt or helpeducation Inequality may hurt or help education Help? Poor countries and politics Hurt? Rich countries and imperfect markets

Research strategy Study 87 industrial and developing countries from 1965 to 1998 cross-country patterns Look for cross-country patterns in data from the World Bank Inequality and growth Inequality and education Education and growth regression analysis Dig deeper through regression analysis

Inequality and economic growth 75 countries What is the empirical evidence? A 12 point increase in the Gini index goes along with a decrease in per capita growth by nearly 1% per year. r = rank correlation r = -0.50

The Gini index and the 20/20 ratio 20/20 ratio The Gini index is closely related to the 20/20 ratio Gini = 25  ratio = 3 (Nordic countries) Gini = 30  ratio = 4 (Germany) Gini = 35  ratio = 6 (Britain) Gini = 40  ratio = 8 (US, China, Russia) Gini = 50  ratio = 15 (Nigeria) Gini = 60  ratio = 26 (Brazil) rich and poor Relationship between inequality and growth also holds for rich and poor separately

The Gini index and the 20/20 ratio 20/20 ratio The Gini index is closely related to the 20/20 ratio Gini = 25  ratio = 3 (Nordic countries) Gini = 30  ratio = 4 (Germany, Greece) Gini = 35  ratio = 6 (Britain) Gini = 40  ratio = 8 (US, China, Russia) Gini = 50  ratio = 15 (Nigeria) Gini = 60  ratio = 26 (Brazil) Each ten-point increase in the Gini index roughly doubles the 20/20 ratio

Education and inequality: The missing link? Now consider the linkages between inequality and different measures of education The aim is to see if such linkages can help explain the observed cross- country pattern of inequality and economic growth

More on education three Specifically, consider the relationship between inequality and three different measures of education inputs, outcomes, and participation: 1. Public expenditure on education 2. Expected years of schooling for girls 3. Secondary-school enrolment

Expenditure on education and inequality 74 countries An increase in public expenditure on education by 1% of GNP is associated with a 2.3 point decrease in Gini. r = -0.36

Expenditure on education and economic growth 87 countries An increase in public expenditure on education by 3½% of GNP is associated with an increase in per capita growth by 1% per year. r = 0.29

Years of schooling and inequality 46 countries An increase by one year in the schooling that girls can expect is associated with a decrease of almost one point on the Gini scale. r = -0.49

Years of schooling and economic growth 49 countries An increase by four years in the schooling that girls can expect is associated with an increase in per capita growth by 1% per year. r = 0.50

Secondary enrolment and inequality 75 countries An increase in the secondary-school enrolment rate by five percentage point goes along with a decrease of almost one point on the Gini scale. r = -0.54

Secondary enrolment and economic growth 87 countries An point increase in secondary-school enrolment goes along with an increase in per capita growth by 1% per year. r = 0.69

Secondary enrolment and growth, again 87 countries Diminishing returns to education: The additional benefit from education becomes smaller as enrolment increases r = 0.69

Kuznets The Kuznets curve 75 countries Inequality tends to increase with income at low levels of income and to decrease with income at higher levels of income

Summary of results We have seen that, across countries: 1.Economic growth varies inversely inequality 2.Three different measures of education intended to reflect education inputs, outcomes, and participation are all inversely related to inequality 3.Economic growth varies directly with all three measures of education

One possible interpretation of results Growth Inequality Growth Education Inequality + =

Another possible interpretation Growth Education Growth Inequality Education + =

Regression results Note: 87 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Initial income Natural capital Investment rate Enrolment rate Gini coefficient R2R2R2R2 Economic growth -1.04(5.51)-0.06(4.22)0.13(4.61)0.71(2.60)-0.03(2.28)0.67 Investment rate -0.20(3.97)0.15 Enrolment rate 20.42(13.13)-0.71(4.50)0.72 Gini coefficient -0.16(4.97)0.31

Regression results Note: 87 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Initial income Natural capital Investment rate Enrolment rate Gini coefficient R2R2R2R2 Economic growth -1.04(5.51)-0.06(4.22)0.13(4.61)0.71(2.60)-0.03(2.28)0.67 Investment rate -0.20(3.97)0.15 Enrolment rate 20.42(13.13)-0.71(4.50)0.72 Gini coefficient -0.16(4.97)0.31 Direct effect of natural capital on growth is -0.06

Regression results Note: 87 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Initial income Natural capital Investment rate Enrolment rate Gini coefficient R2R2R2R2 Economic growth -1.04(5.51)-0.06(4.22)0.13(4.61)0.71(2.60)-0.03(2.28)0.67 Investment rate -0.20(3.97)0.15 Enrolment rate 20.42(13.13)-0.71(4.50)0.72 Gini coefficient -0.16(4.97)0.31 Indirect effect through investment is -0.20·0.13  -0.03

Regression results Note: 87 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Initial income Natural capital Investment rate Enrolment rate Gini coefficient R2R2R2R2 Economic growth -1.04(5.51)-0.06(4.22)0.13(4.61)0.71(2.60)-0.03(2.28)0.67 Investment rate -0.20(3.97)0.15 Enrolment rate 20.42(13.13)-0.71(4.50)0.72 Gini coefficient -0.16(4.97)0.31 Indirect effect through education is -(0.71/E)·0.71  E = 35

Regression results Note: 87 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Initial income Natural capital Investment rate Enrolment rate Gini coefficient R2R2R2R2 Economic growth -1.04(5.51)-0.06(4.22)0.13(4.61)0.71(2.60)-0.03(2.28)0.67 Investment rate -0.20(3.97)0.15 Enrolment rate 20.42(13.13)-0.71(4.50)0.72 Gini coefficient -0.16(4.97)0.31 Total effect of natural capital is  -0.10

Regression results Note: 87 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Initial income Natural capital Investment rate Enrolment rate Gini coefficient R2R2R2R2 Economic growth -1.04(5.51)-0.06(4.22)0.13(4.61)0.71(2.60)-0.03(2.28)0.67 Investment rate -0.20(3.97)0.15 Enrolment rate 20.42(13.13)-0.71(4.50)0.72 Gini coefficient -0.16(4.97)0.31

Regression results Note: 87 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Initial income Natural capital Investment rate Enrolment rate Gini coefficient R2R2R2R2 Economic growth -1.04(5.51)-0.06(4.22)0.13(4.61)0.71(2.60)-0.03(2.28)0.67 Investment rate -0.20(3.97)0.15 Enrolment rate 20.42(13.13)-0.71(4.50)0.72 Gini coefficient -0.16(4.97)0.31 Direct effect of education on growth is 0.71/E  0.02 E = 35

Regression results Note: 87 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Initial income Natural capital Investment rate Enrolment rate Gini coefficient R2R2R2R2 Economic growth -1.04(5.51)-0.06(4.22)0.13(4.61)0.71(2.60)-0.03(2.28)0.67 Investment rate -0.20(3.97)0.15 Enrolment rate 20.42(13.13)-0.71(4.50)0.72 Gini coefficient -0.16(4.97)0.31 Indirect effect through inequality is (-0.16)·(-0.03)  0.005

Regression results Note: 87 observations. Method of estimation is SUR. t-statistics are shown within parentheses. Dependent variable Initial income Natural capital Investment rate Enrolment rate Gini coefficient R2R2R2R2 Economic growth -1.04(5.51)-0.06(4.22)0.13(4.61)0.71(2.60)-0.03(2.28)0.67 Investment rate -0.20(3.97)0.15 Enrolment rate 20.42(13.13)-0.71(4.50)0.72 Gini coefficient -0.16(4.97)0.31 Total effect of education is 0.71/E + (-0.16)·(-0.03)  E = 35

Summary of results on education 20 An increase in enrolment by 20 points increases growth directly by 0.4 percentage points reduces the Gini index by 3.2 points... and this, in turn, increases growth further by 0.1 percentage point 0.5 So, the total effect on growth is 0.5 percentage points – not small at all!

Marshall got it right There is no extravagance more prejudicial to growth of national wealth than that wasteful negligence which allows genius that happens to be born of lowly parentage to expend itself in lowly work. No change would conduce so much to a rapid increase of material wealth as an improvement in our schools. ALFRED MARSHALL (1920)

Conclusion The End Education encourages economic growth 1. by increasing and improving human capital and also social capital, by reducing inequality There is no evidence, however, that education influences economic growth through physical capital