Mechanism of Human Capital Accumulation Causing Little Social Returns on Education

Abstract

Recent cross-country studies have found that economic growth has weak correlation with educational attainment in their estimates. This paper assumes that the counterintuitive results can be attributed to heterogeneity of social returns on education and focus on little returns in low-income countries. People usually invest in education as income increases, but at the macro level, the data shows that low-income countries accumulate human capital unaccompanied by economic growth. It is probably because of a mass increase in those receiving education after gaining their independences in the 1960s, resulting in a different final schooling between the cohort entering into the adult population and the one leaving. Considering such historical socio-economic transformation in low-income countries during the recent half-century, I explore the impact of worldwide standardization of human capital accumulation in order to explain the phenomenon. The impact is defined as international external effect of education especially for low-income countries to accumulate human capital.

Using the panel data with 80 countries during the period 1970-2000, I estimate the impact of the externalities of education with Two Stage Least Squares. The results show the significant and positive effect of the international averaged human capital stock on educational attainment only in low-income countries. So the externalities explain the human capital accumulation unrelated to economic growth in these countries. As former studies indicate, continuing accumulation of human capital is the best path for low-income countries; however the findings indicate that limited social returns on education are estimated during the initial accumulation period due to the mechanism of human capital accumulation caused by the international externality of education.