Public Spending on Education and Economic Growth: Cross-Country Analysis

Abstract

This paper aims to identify the relationship between public spending on education and GDP in two groups of countries: members and non-members of the OECD, based on statistical and econometric methods, including the methodology for international comparative analysis. The two selected groups of countries differ in their level of economic development: the OECD, the so-called ‘rich countries club’, and the second group, relatively low-income developing countries. The first part of the article deals with theoretical and information and methodological issues related to research on the relationship between educational development and economic growth, in particular the general theory of human capital investment, human capital in endogenous growth models, principles for empirical estimates of the relationship between education spending and economic growth. In the second part of the article, were tested the hypotheses concerning key factors of economic growth. The authors based them on studied theoretical sources, empirical works, and the proposed statistical base of empirical calculations. The paper substantiated the degree of impact of various factors using different groups of countries as an example. Based on panel data for 1995–2018, we estimate econometric models of the relationship between GDP and education expenditures, using time lags. The results confirm the positive impact of total education spending on GDP in the long term. However, the results differ for the two groups of countries. While in rich countries, investment in all levels of education has a positive impact on GDP, in poor countries, only primary education has a positive return, while spending on secondary and vocational education reduces GDP. This may be due to the lack of demand for high-level education in economies with poorly developed technologies and labor markets. As conclusions, the authors formulate proposals of a managerial and methodological nature regarding the need to consider the country’s development level in its educational policy and choose investment directions that are adequate to the current needs of the economy. In countries with a low level of development and a low level of education for the majority of the population, diverting public resources to finance professional education may slow economic growth in the short term. Conversely, increased coverage of mass primary education may contribute to rapid growth in the near future.