Economic growth is probably the single most studied topic in economics, dating back at least as far as Adam Smith’s 1776 book, An Inquiry into the Nature and Causes of the Wealth of Nations.
After almost 250 years of study, you’d think we have the answer to what causes the wealth of nations.
But, alas, science is never settled, so economists keep coming up with new answers.
For example, the idea of microlending has been all the rage lately. Especially after Muhammad Yunus was awarded the Nobel Peace Prize for his work in microcredit.
But, does it really matter?
Harvard development professor Lant Pritchett describes a “Eureka!” moment when he realized that maybe micro efforts produce only micro results.
Pritchett was in West Bengal with a World Bank team researching a program that built and financed women’s self-help groups as a means of increasing women’s productivity and incomes. At one point, one of the women asked: “You all are from countries that are much richer and doing much better than our country so your country’s women’s self-help groups must also be much better, tell us how women’s self-help groups work in your country.”
That’s when it hit him:
We all looked at each other blankly as none of us had any idea whether there even were at any time in our countries’ history such a thing as “women’s self-help groups” in our countries (much less government program for promoting them). We also had no idea how to explain that, yes, all of our countries are now developed but no, all of our countries did this without a major role from women’s self-help groups at any time (or if there were a role we development experts were collectively ignorant of it), but yes, women’s self-help groups promote development.
Think about that for a second.
A bunch of First World experts are telling a bunch of women in a Third World country that microlending is a path to economic development. But, the “experts” don’t know of any such lending in their own countries. If the US, UK, Germany, New Zealand, and other “developed” countries advanced so far without microlending, why would anyone expect microlending to be the path to economic growth for developing countries?
Pritchett’s “Ah Hah!” moment led him to develop a four-fold “smell test” for determining what is important to development:
- More developed countries must have more X (e.g., natural resources, access to warm water ports, educational attainment) than less developed countries.
- The developed countries must have more X than when they were less developed; in other words, they unlocked some potential.
- Recent development successes must have more X than development failures.
- Countries that are developing rapidly must have more rapid growth of X than those that are developing slowly.
Economist Paul Romer jumped on this observation and applied the “smell test” to urbanization. He concludes that urbanization passes the smell test, meaning that urbanization is important to economic development.
Can education pass the smell test?
Here at Econ Minute, we decided to perform our own “smell test” on education and economic development. We chose education because there is very little debate that greater educational achievement is associated with better economic growth. Because it is relatively uncontroversial, it’s a good test of Pritchett’s Smell Test.
We used data from the World Bank on education and per person gross national income see the relationship between lower secondary education completion and per capita GDP. (Details of the data—including why education completion rates can be greater than 100 percent—are available from the World Bank.)
The first figure (below) shows the education completion rate and gross national income per capita. The figure shows the strong correlation of education completion with GNI per capita.
The second figure (below) is the same as the first, only GNI is on a natural logarithm scale because economists love natural logs. As with the first figure, the figure below shows the strong correlation of education completion with GNI per capita.
The third figure (below) shows one simple way to get at the cross-sectional variation, by looking at only a single year, 2012. That year was chosen because it was the most recent year with many observations. The data suggest that in 2012, more development countries had higher education completion rates than lesser developed countries.
The fourth figure (below) looks at the changes over time. For each country, over the interval 1970 to 2013, it shows the 10-year percentage point change in educational completion and the 10-year percent change in GNI per capita.
As noted in Romer’s post, this kind of relationship measuring changes is less tight than the relationship in levels, but the simple correlation is still positive, and a fitted curve that allows for constant plus a nonlinear relationship suggests that the association between the two is particularly strong for countries that experience a rapid growth in the secondary education completion.
In other words, the figure suggests that countries that have a bigger increase in GNI per capita also tend to have a bigger increase in secondary education completion.
The fifth figure (below) provides an overlay of China’s experience. In contrast to Romer’s analysis, the World Bank data begins in 1990 for China, so we do not have the clear before- and after-reform break. Also note that what appears to be a big jump simply reflects missing data between 1997 and 2007, so what appears to be a big jump is actually a 10 year jump. Nevertheless, increases in China’s GNI per capita have been accompanied by increases in educational completion.
At this point, you begin to hear a chorus of voices turn to shouting, “Correlation is not causation!”
And, the chorus is correct. Indeed, one could make a very good argument that improving incomes cause greater educational attainment. As incomes improve, family can afford the time and money it takes to better educate their children. As a country’s national income improves, greater resources can be devoted toward public education.
Nevertheless, this exercise was not meant to end the debate, but really to start a conversation about what matters in economic development and how to measure it.