How can education aid economic development?

There are more children in school today than ever before. For example, in 1950 the average level of schooling in Africa was less than two years. It is more than five years today. In East Asia and the Pacific, the schooling of the population went from two to seven years between 1950 and 2010. This is a more than a 200 percent increase!Globally, average years of schooling are now projected to rise to 10 years by 2050. This is larger than a five-fold increase within a century and a half.

Yet, there are still 124 million children and adolescents not in school. Also, more than 250 million school children cannot read, even after several years of schooling.

Here are five things you should know about the pivotal role of education in economic development:

Education is an investment

The importance of knowledge and learning has been recognized since the beginning of time. Plato wrote: “If a man neglects education, he walks lame to the end of his life.”

But it was really the Nobel winning economists that put the argument of education as investment. T.W. Schultzargued that investment in education explains growth and Gary Becker gave us the Human Capital Theory.

In a nutshell, the Human Capital Theory posits that investing in education has a payoff in terms of higher wages. Moreover, the theory and empirical estimates are backed up by current science, as explained by James Heckman.

Neurogenesis tells us that learning can continue into advanced ages. The relative costs and benefits to investments in older persons compared to younger persons differs. Investments in more able workers at any age generate higher returns than investments in less able workers, and ability is formed at early ages.

Education pays

Overall, another year of schooling raises earnings by 10 percent a year. This is typically more than any other investment an individual could make:

The value of human capital – the share of human capital in total wealth – is62 percent. That’s four times the value of produced capital and 15 times the value of natural capital. Globally, we – governments, private sector, families, individuals – spend more than $5.6 trillion a year on education and training. Countries spend 5 percent of GDP on education or 20 percent of their national budget. Education employs about five percent of the labor force.

Moreover, private returns to schooling – what individuals receive in the labor market – have been increasing. Returns are increasing by more than 20 percent in Africa and more than 14 percent in East Asia and the Pacific. The big change recently has been that the returns to tertiary education are now highest.

Skills demanded by the labor market are changing

One of the reasons for the change in the returns pattern is the race between technology and education, as labor markets adjust to automation. In this new world, the ability of workers to compete is handicapped by the poor performance of education systems in most developing countries. Technological change and global competition demand the mastery of competencies and the acquisition of new skills for many.

Countries can compete- and succeed

To promote success in today’s labor market, one needs to invest early, and then invest in the relevant skills (see below). Above all, countries need to invest smartly, by promoting attention to the 3 A’s: Autonomy, Accountability, Assessment. They need to pay attention to teachers, early childhood development and culture.

It’s important to focus on results

Education systems that do well prepare children early on, reform continuously, and use information for improvement and accountability. Information for accountability works, as do high stakes assessment; but so do low stakes assessments. Either way, test-based accountability is cost-effective. "Even if accountability costs were 10 times as large as they are, they would still not amount to 1 percent of the cost of public education" (Hoxby).

Expand opportunities but pay attention to equity

Countries need to improve quality, strive for excellence, and expand opportunities, based on efficiency and equity. This means ensuring that disadvantaged youth enroll and succeed.

While the returns to schooling are high on average (Psacharopoulos and Patrinos 2004), results vary (Montenegro and Patrinos 2014). There must be better information for such student who don’t perform well and greater support networks to help them take on the challenges of completing their tertiary level education. More information will also benefit students and families from disadvantaged backgrounds, who tend to overestimate benefits and underestimate costs.

Education is truly one of the most powerful instruments for reducing poverty and inequality and it sets the foundation for sustained economic growth. Let’s start investing in it more.