Education and productivity in developing countries : an aggregate production function approach

The estimated rates of return to education are typically (often considerably) above 10 percent a year in real terms - a respectable rate of return. The rates of return are highest for primary education, and higher in countries where educated manpower is scarcer, and the durability of educational capital can be as high as 50 years. The effect of education on real output has not been well documented. The authors have pooled data on 58 developing countries, from 1960 through 1986, to estimate an aggregate production function using as independent variables the quantities of capital, labor, land, average educational attainment of the labor force, and chronological time. They measured the percentage change in a region's real GDP in response to an increase of one year in the average educational attainment of the working age population in 1985. The estimated effects range from negative to more than 5 percent a year. The results suggest : a) a positive relationship between the level of primary schooling achieved and the size of its effect; b) a threshold of four years of schooling before primary school has an effect; and c) the effect of secondary education seems to be independent of the level of secondary schooling attained, although local factors may predominate here. The authors conclude that education is an important determinant of aggregate real output and productivity but that its effect varies considerably across countries and regions.