Role of Government Expenditures on Education in Stimulating Human Development

Abstract

The paper aims to compare the impact of government expenditure on education on the human development index (HDI) at the level of three groups of countries – developed, developing and least developed ones. The Granger causality test underlies the methodological approach of the research. The author proves a cyclical nature in the efficiency of government expenditure on education and its dependence on the starting socio-economic conditions. The highest efficiency of the former was found in the group of developing countries, especially countries with middle income and relatively higher economic growth rates. With a relatively high proportion of people with completed secondary education, additional investments to education are converted into an increase in years of study, the rising proportion of people with a higher or post-secondary education, and a consequent increase in incomes. The return on investment in education is skyrocketing. At the same time, the groups of developed and least developed countries show no significant impact of a stimulating fiscal policy on the HDI. The least developed countries are in fact on the first stages of building the education system, and this is associated with a substantial demand for investment in educational infrastructure, has extremely low profitability and long payback periods. Accordingly, in the short and medium term, there is no effect from rising public investment in education. Simultaneously, upon reaching a certain level of educational maturity (in developed countries), the marginal efficiency of public investments begins to decline. In fact, the law of diminishing marginal productivity of government expenditures begins to work, when their additional increase does not lead to a significant increase in the human development index.