What are the reasons behind the wealth and poverty of nations? Since this question has exercised the minds of thinkers from Adam Smith to David Landes, Jared Diamond and Richard Lynn, I decided to take a look at it myself. I came to the conclusion that while geography, macroeconomic policies, resource windfalls and the microeconomic environment do play important roles, by far the most important factor is the state of a country’s human capital – things like literacy rates, school life expectancy and performance on international student assessments.
This is not a new idea. A Goldman Sachs report, Dreaming with BRICs, noted that:
Many cross-country studies have found positive and statistically significant correlations between schooling and growth rates of per capita GDP—on the order of 0.3% faster annual growth over a 30-year period from an additional one year of schooling.
However, I think education is much more central to this. The problem with using years of schooling as a yardstick is that in many middle-income countries, like Argentina, Turkey or Brazil, the amount of schooling is converging to that of the developed world, but the quality isn’t. This is attested to by their performance on international student assessments like PISA. For instance, in the 2006 PISA Science assessment, only 15.2% of Brazilians were at Level 3 or higher (the threshold for moving beyond purely linear problem-solving), compared with 47.6% of Russian, 51.3% of American and 66.9% of Australian students. Is it really then surprising to discover that from 1997 to 2007 purchasing power GDP per capita in Brazil and Russia, both medium-income countries, has grown at 1.3% and 6.0%, respectively, i.e., that Russia is playing the game of economic catch-up much more successfully?