Importance Of Education To Economic Development Economics Essay

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Education plays a major role in the contribution of economic development of any country. Education is considered to be very important as it generates demand for the increasing rates of consumption of labour and labour productivity. It also helps to gain large economic and individual returns through as education increases the income and productivity of the people. Education is also considered to be an important tool to enhance skills and knowledge of the work force (Woodward et al., 2000; OECD, 1994; Bloom et al., 2006).

Countries with well developed education systems also gain benefit by increasing the proportion of the working population and encourage them to remain in the work force. A good education system in a country also helps to maintain competitive position in the global economy by minimizing the impact of unemployment than countries that do not invest in such education and training (World Bank, 1990; Economic development indicators, 2007).

Education also plays a key role in achieving a higher standard of living by enhancing the skills and knowledge of people. It also contributes and benefits the population from the scientific and technological advances in the form of new technology, new products, new ideas which may in turn result in higher earnings of people and lead to economic development (Stevens and Weale, 2003).

However, it cannot be denied that there is always a need for people to improve and update their skills and knowledge to compete in the increasingly knowledge based economy. Hence, it becomes necessary for people to undertake both qualitative and quantitative education and training. The quality and quantity of education varies from one country to another. However, education is considered to be an important factor in the contribution of economic growth (Becker and Lewis, 1993; Woodward et al., 2000).

For example in developed country like Australia, education is considered to be one of the largest industries and contributes to about 6 percent of GDP. The Australian government lays more emphasis on the quality of education and incurs its expenditure on education in such a way that it brings qualitative output. The government's bursary on education during the 90's was approximately $17.6bn which is reducing at present and the cost of higher education is borne by the individuals. The expenditure made by individuals and firms is about $4.7bn. Along with the encouragement of people to attain higher levels of education, a high quality standard is also being laid by the government in order to improve the Australia's education system, attracting large students from different countries (Burke, 1992 cited in Marginson, 1993; Australian Government, 2008).

However, there has been a lot of debate in the literature as to whether the quality of education is important of the quantity for a country's economic development.

(Link and Ratledge, 1975; Woodward et al, 2000; Bloom et al. 2006) states that, the quality of education plays a vital role while counting the benefits from education. This is because through quality of education people develop more skills and knowledge and when people enter the labour market, such developed skills help them to increase their productivity and earnings which in turn contributes to the economic development of a country. As quality of education increases the earnings of individuals, it also encourages the population to attain more education.

However, quality of education is considered to be biased and in order to get the right estimates of returns from the quality of education, it is important to measure quality which seems to be difficult. This is because people who are intelligent may undertake high levels of education and may earn good returns even if they do not undertake any further education. Due to such bias nature of quality, it becomes difficult to determine how much does quality of education contributes to the earnings of individuals and to the economy as a whole (Quiggin, 2000; Marginson, 1993).

But, the case of Singapore shows that quality of education is measurable and has helped the country to increase its national income. The per capita GDP of the country increased to 6.7 percent between 1970's and 1990's. The main reason for the increase in the GDP was due to the changes in the education policy. The government focused its policy on upgrading the quality of education and increasing the productivity by improving the skills of people. The schools and colleges, helped to develop more skills and knowledge by providing practical knowledge i.e. by applying the school learning to real world problems. This policy resulted in increased participation of workforce in the labour market with high knowledge and skills and hence, the quality of education contributed into the economy by generating a knowledge driven work force leading to the economic development of the country (Kozma, 2005).

However, (Cheng and Ghulam, 1997; Lee, 2005; Barro, 2001; Sianesi and Reenen, 2002; Dowrick, 2002) are of the view that quantity of education is more important as every additional year of schooling contributes to approximately 0.44 percent growth in a country's per capita GDP. The quantity of education also helps people to attain more years of education and earn higher wages in the labour market. At present, attaining more years of education is also becoming crucial as there is a need for higher level of education in order to meet the challenges of changing demands which are arising out of advanced knowledge and technologies.

(Pianalto, 2004; Bosworth and Collins, 2003) states that, in developed countries like Australia, more emphasis is being laid on the quality of education as it enhances the standard of living by increasing the earning and productivity of the people. Even the governments of both developed and developing countries are striving hard to improve the quality of education.

For example, In order to improve the quality of education, the Australian government has set up the Australian Universities Quality Agency (AQUA) which is a national quality assurance body and inspects the quality, standards and reliability of all the Australian universities. It also maintains the regulation and quality of education provided in all universities and brings out the improvement plans in the education sector every year so that people get quality of education which is very important for economic growth (Australian Education system).

There also seems to be a strong relationship between the nature of what a population learns i.e. quality of education and economic development. Quality of education is important because, people who do not possess enough knowledge and experience while leaving or graduating from high schools and colleges may find it difficult to meet the demands of the labour market. The lack of knowledge and skills can also result in low productivity and earnings which may in turn have low impact on the economic development (Arcaro, 1995; Marginson, 1993 and Barr, 2002).

However, (Access Economics, 2005; World Bank, 1990) contradicts these views and states that there also seems to be a relationship between attaining higher levels of education and economic growth. This is because, what a population learns may be different from what the employers may demand in the labour market. Attaining a low level of education i.e. quantity may also have low returns to individuals and to the economy. More years of schooling also results in more skilled workforce in the labour market. Such skilled workforce, in turn results in higher productivity, higher participation and higher employment in the country. The workforce with more education brings a higher level of skill to the work place. Hence, it increases the productivity. More years of education also increases the participation of people as workers with high skills can increase the participation of the workforce. People who attain more education are also more likely to be employable and enjoy a lower unemployment rate which helps in development of the economy.

Education delivers high pay to Australians

Source: OECD Earnings of people by increased level of education (fig. 1.1)

Average wage of those who finish school =100

(World Bank, 1990) further adds that people who do not attain more levels of education, they are likely to earn lower average returns as compared to those people who have attained more levels of education. For example in Australia, in 1999, people who did not complete year 12 earned almost 20 percent less than those who completed. While people who attained university education earned almost 40 percent more than those who completed year 12 and almost earned 75 percent more than the least educated (Access Economics, 2005, fig.1.1).

However, it has been argued that people with low years of education i.e. quantity are more likely to get a temporary job, peripheral job due to the lack in the skills and knowledge. This can result in lower productivity and lower earnings of individuals. While people who attain high levels of education are more likely to have a positive effect on labour market and get permanent jobs, core jobs. This is because, though the process of education takes time and involves opportunity cost, however, the outcome from the investment in the years of schooling can be considered to be certain in a sense that those individuals who undertake higher levels of education will be skilled labourers in future which will increase productivity and lead to economic growth (Nam et al., 1994; Temple, 2000; Muffels, 2008).

But (the economists, 1992; Link and Ratledge, 1975) are of the view that, both quality and quantity are important for economic development as a large proportion of uneducated may result in unemployment and people who do not complete their schools do not have significant impact on their earnings. The people who attain quality of education also improve the skills of people and as there is a mismatch between the skills offered by the people and the skills needed by labour markets, there is a need for people to attain quantity levels of higher education (the economists, 1992; Link and Ratledge, 1975).

A good example in this case is of Finland. This example illustrates how quality and quantity of education of education helped in the economic development of the country. In the beginning of 1990's, due to economic slowdown in the country, the GDP growth rate of Finland was -3.68 percent from 1990 to 1993. However due to the change in the education policy of the government, the per capita GDP growth rate resulted at 4.39 percent from 1994 to 2000 (Hugh, 2009; fig.1.2). During these periods the unemployment rates in the country reduced to a great extent. The reason for such a drastic change in the economy was due to the change in the education policy of the government during the period of recession. The government invested its funds in education, research and development and in the infrastructure of the country, laying emphasis on the education sector. The government supported people to undertake high quality of education which provided high skills and knowledge and to develop these skills it encouraged people to attain higher levels of education. Hence, it led to economic development of Finland (Kozma, 2005; Hugh, 2009).

But, it has been argued that, quality and quantity of education will be improved only if the individual bear the cost of education. This is also the case in Australia, where the government is reducing its spending on higher education. The reason for this lies that as individuals pay for higher education, individuals will give more importance more to the qualitative aspect of education as it will affect their earnings in future and due to competition in labour market, it will aspire individuals to attain higher levels of education i.e. quantity. This will in turn have a positive impact on the development of the country (Mwiskisa, 1999 and Korb et al., 2001; Kozma, 2005; Gillard 2008 and Quiggin, 2000).

However, (Woodward et al., 2000 and Harrison, 1997) contradicts the above views and states that the government should bear the cost of education because if the government pays of education then it will lay more emphasis on improving the quality of education. The investment in education by the government can also help to increase the quantity of education as more number of people will be encouraged by the government to undertake education. This will also increase the demand for education as the government will be subsiding the fees that individuals pay for getting educated and hence and will encourage more number of people to undertake education.

(Kozma, 2005; Harrison, 1997; Cohen, 2003), are of the view that, both individuals and government should bear the cost of education equally. If the government does not pay for education, it may affect the quality of education and also may increase inequality in education. This is because; if individuals have to pay for education then they may consider education as expenditure and not as investment and hence, consider a secondary issue which may raise poverty and unemployment in the country, which may curtail the economic growth of the country. And the amount spent by the individuals will also benefit them as they will learn new skills and increase their efficiencies. This will also lead to technological development in the country by introducing new technologies, developing new products and services and generating high quality of workforce. Hence, quality of education is more important as it will prepare a labour force which can take up new technologies, new ideas, new skills, and new knowledge and improve their standard of living which is important for the development of the economy of any country.

Schools also play an important role in improving the quality of education. Learning in schools also has a huge impact on earnings and growth as people start to learn and develop their skills from schooling. More years of schooling also leads to a rise in the income of individuals. Basic education i.e. schooling has also been a main priority for every county. This is because; people who attend schools are more likely to earn higher wages than the one who leave schooling. People who do not continue schooling also may not able to earn higher incomes and may not be productive in the labour markets. Lack of schooling also leads to more illiteracy rates and the growth of the economy. Basic education also gives more social returns than private returns by increasing the productivity. Even in Australia, basic education is given a high priority by the government as it will increase the literacy rates and encourage people to attain higher education which will also raise the standard to living of the population (Hanushek and Wobmann, 2007; The Commonwealth Budget, 2001).

However, it has been argued that the qualitative education in schools may have little or no effect on the growth of the economy. The reason for this can be that schools may not provide an adequate supply of well skilled and technically qualified people. Encouraging only schooling may also result in high supply of workforce with only basic skills and knowledge may raise the unemployment rates as in the case China (Horri et al., 2008).