Education as the Elixir of Growth II

A while ago I wrote Education as the Elixir of Growth on DR, in which I noted that in most countries the educational profile is closely correlated to their level of productivity. The major exceptions are nations with resource windfalls (inflated productivity) and socialist legacies (deflated productivity). Furthermore, the greater the gap between the ‘potential productivity’, as suggested by the human capital level, and actual productivity, the greater will be the rate of economic convergence. This rate in turn depends on the openness of an economy (i.e. the rate at which it can absorb the latest know-how). Some countries, however, cannot converge to advanced industrial levels, since their human capital is set at a low level – they have reached an asymptote relative to the developed world and cannot converge without improving their educational profiles relative to the latter.

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Why Obama Will Almost Certainly Win

Read these two posts by Krugman at Conscience of a Liberal, here and here.

1. A looming recession, after seven years of stagnation in the US median wage, means that the likelihood of positive income growth this year is very small. Even assuming it’s 0% would mean that the incumbent party’s nominee, McCain, can be expected to lose by an 8% margin in the straight line fit below. To break even income needs to grow by around 2%, which looks more unlikely with every new financial breaking story.

More likely, it will be around 0% or worse and McCain would be facing a landslide defeat, as in 1980.

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Victimized Venezuela

Chavez is frequently shafted in the Western media, who allege that the only reason the Venezuelan economy is doing well is because of record oil prices. This is not to mention all the invective hurled against the Chavez administration for its supposed disrespect for democracy, from refusing to renew the licenses of TV stations support foreign-sponsored coup attempts against him (while ignoring human rights violation in friendly countries in the region like Colombia, where more union workers are killed annually in than in the rest of the world combined) to the latest smear job by the Economist about crime.

But let’s focus on the economic-boom-is-because-of-oil mantra. Having disproved similar claims about Russia, I decided to investigate this further. Novel Prize winning economist Stiglitz has praised Venezuela’s economic policies. And I found this excellent paper, Update: The Venezuelan Economy in the Chávez Years by Mark Weisbrot and Luis Sandoval from 2008. I’ve quoted its main findings.

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Education as the Elixir of Growth

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?

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