Source: Zaric, S. and Babic, V. (2014) "Education as a Factor of Economic Growth: CIS and European Countries" in: Ed. ..

(eds.), XXI : , , ,
- , . 63-69

Sinisa Zaric, PhD

Faculty of Economics, University of Belgrade (Serbia)
Vojislav Babic, PhD
Faculty of Economics, University of Belgrade (Serbia)
EDUCATION AS A FACTOR OF ECONOMIC GROWTH: CIS AND EUROPEAN
COUNTRIES

Abstract: The research is measuring the impact of education on economic growth.

Three groops of countries (CIS countries, Balkan countries and mature market
economies) were the subject of the comparative analysis. The research proved strong
correlation between education and GDP indicator. The classical contributions of
Becker, Mincer, Blaug (critical methodological approach) and the group of the
theoreticians of Acemoglu research group in the recent period give fundamental
theoretical foundation for the deeper understanding of the problem.
1. Significance of education for economic prosperity
Education represents an important human capital input variable that positively
influences the quality of business environment, investments, work productivity and
economic growth. In order to illustrate this, we will mark individuals with the index j (j
= 1, 2....n), physical capital economic stock with K, while Lj will be the work hours
invested by the individual j. We will not specify the property rights dominant system for
physical capital, nor the character of employment. It is important to bear in mind that in
well-developed types of economies, K is distributed in private property, while in other
types of economies, it is mostly found in public or municipal property. We will mark the
individual js human capital with hj (years of education, health). We will mark their
effective labor input with hjLj. The parameter hj is what is called the traditional human
capital. For the moment, we will leave aside the social networks the individual j belongs
to. In order to facilitate the interpretation, we will include in the physical capital the socalled manufacturing capital: buildings, factories, roads, bridges, machines. We will
ignore, in this case, the natural capital. The human capital is embodied in workers.
Together with the physical capital, the human capital produces the output Y that we call
the gross national product, GNP. Each of the GNP aggregate value members (h and K)
indicates the necessity to know the production price for different components it consists
of. In the industrial market economies, the requested prices are typically the market
ones. We will mark the aggregate human capital with H in the following text, H = j

(hjjLj). We will assume that the production possibilities are defined through the
following relation:

Y = AF (K,H)

(A > 0)

(1)

where F represents the overall production function. The function F is never negative and
assumes the increasing function of K and H. In the equation No. 1, A represents the
production functions scalar factor. The economists represent it as the total-factor
productivity and see it as an index combined of the institutional abilities and the public
distribution of knowledge. Macro economy characterized by function F would produce
more if other factors remained unaltered, while A increased (if the public distribution of
knowledge and information increased, and the institutional abilities reached a higher
level). The economy would also produce more if K or hj or Lj increased, while other
factors remained unaltered. Therefore, the technological possibilities of physical and
human capital service transformation into the output Y, when these are embodied in the
dominant institutional economy structures, are defined by the equation No. 1.
Now, we shall consider the scenario in which the level of civic cooperation in the
community increases. The increase would allow for a more efficient allocation of
resources and production. Furthermore, the following question could be imposed:
whether the increase in civic cooperation appears as an increased value of A, as an
increased coefficient H, or it causes the increase in both parameters. It is necessary to
assume that the production function does not have the Cobb-Douglas form: AF(K, H) =
AKaHb, where a, b > 0. Otherwise, it would be impossible to separate these two
influences. If the externalities are limited to small groups, it will reflect most on the
human capital hjs which leads to an increased cooperation in the analyzed group. On the
other hand, should the externalities be extended to the entire commercial system, there
will be a change in beliefs even in members of the social community who do not know
each other. This will primarily reflect in the increase of the production scalar factor A,
which further leads to an increase of the GNP (represented as Y in the equation No. 1),
increase of wages, salaries, profits and possible investments in the physical and human
capital. Analyzed in the long-term, it could cause the reduction of economic inequalities
and the promotion of nations health if the production increase is followed by a
proportional allocation of citizens resources to the medical care. Jacob Mincer analyzed
the connection between the cost of school attending and the increase of earnings (1974).

According to Mincer, the earnings logarithm is a sum of years of education and the
squared function of years of the potential work experience (equation No. 2)
lny = lny0 + rS + 1x + 2x2

(2)

where y = earnings, y0 = earnings of an individual with no education and work

experience, S = years of education, x = years of potential work experience. According to
Mincer and Mincers equation, each year of education has a linear effect on earnings
(Mincer 1974). Under the Mincers influence, Krueger and Lindahl continued research
in this area (2001). According to these authors, each additional year of education causes
in the USA an approx. 10% increase in individuals earnings (ibid). However, the costs
of education should also be considered. The overall costs include the governments
expenses for education plus the opportunity costs (wages lost due to studying).
According to the Eurostats reports, the overall education costs in the EU countries
amounts to approx. 10% (Reis 2008).
When it comes to the return on investment in education, it is important to point out
that there are certain difficulties in calculations due to non-standardized data and the
inability to isolate completely the influence of other factors on the earnings. According
to Hall and Jones (1988), on the international level, the average return from education is
13.4% per year in the first 4 years of university education. In the next 4 years of
education (5-8), the return decreases and amounts to the average of 10.8% per year. For
each year following 8 years of education, the return is 6.8% (ibid). Norman Gemmell
analyzed the influence of education on the economic growth (1996). According to the
author, change in education and the beginners educational level correlate positively
with the economic growth.
As Marc Blaug (1992) used to say, Gary Beckers "Human Capital" (1964) serves
as a locus classicus of this subject. The famous methodologist Blaug concluded that the
human capital theory is not just a single theory. To Blaug, Becker has offered the
approach of economic imperialism, applying the neoclassical theory to the phenomenon
that could not be considerd economic or pure economic phenomenon besides called a
human capital. The basics of the neoclassical paradigm are applicable: the phenomena
are rather investment than consumption. Millions of people in the world , as individuals
or via society invest in resources (money, time) in education, health and welness
services, searching for jobs, migration or tranings and capacity buildings. But,
theoretically (and practically) it is not possible to enjoy the common ground for analyses
of physical capital and human capital. The human capital investments are dependent on
the imperfections in the capital market, so, investing in addditional education is not
based on estimation of the future earnings.

The problem of the non-mature market economies (such as the economies of CIS
countries or Balkan countries) is the restructuring process of both economic structure
and institutional structure. The transitional character of these economies is underlying
the uncertainty of of estimation of the social rate of return to education. Methodological
individualism, characteristic for the human capital research program, could not perfectly
work out of the free market condition (that, in fact, one could find only in US or Japan
(private demand and private schooling)). The other problem raises from additional costs
for compulsory education. Indices that are discussed in the research are still not offering
enough data on compulsory education and investments in it. This makes a significant
part of the human capital understanding nowadays. There is a lack of comprenhensive
theoretical approach to the problem of externel economies in the field of human capital.
Namely, not only the brain drain which explains a part of the problem on the macro
level, but in everyday situations , the entrepreneurs do benefit of a considerable amount
of externalities produced by the human capital performance.
2. Economic growth, human capital and the role of rule
In the discussion context regarding the formal institutions in a society, two sets of
variables seem dominant in creating economic outcomes. These are the rule of law and
the protection of property rights. This research, particularly inspired by one of the latest
contributions by Acemoglu (2014), explores the level of correlation that can be
determined for GDP/capita (ppp) with the indexes that measure the human capital, rule
of law and level of property rights protection.
Although a theoretical inspiration from North to Acemoglu can be followed, it
seems that a group of theorists, including Acemoglu, Robinson, the Author, (Gallego &
Woodbarry 2010) and others, made the development of the institutional influence
analysis on the economy offer: a) new aspects, b) a richer argumentation and c) a
sophisticated analysis.
Institutions, human capital and development relation analysis (Acemoglu et al.
2014) is based on long time series, through the use of the OLS regression, semistructured models and other techniques, in which the authors showed a significant level
of scientific creativity in expressing certain factors. While the institutional role and
importance were analyzed mostly by using the rule of law index, the importance of the
human capital was illustrated in the long term (where there were no school system data)
by the number and activities of the missionary stations. Finally, the result of this
thorough research showed that the institutions (this time in form of the rule of law)
represent a stronger economic growth factor (measured through GDP/capita, i.e.
PPP/capita of the human capital, recognized in theory as the development factor par
excellence). In their research (Zaric and Babic 2014), the authors analyzed the influence
of the rule of law index, property rights protection index and the overall human capital
4

index on the GDP. The analysis showed a high correlation level of all three analyzed
factors with the GDP/capita. From the analysis, which included the latest reports, it was
not possible to conclude, due to very high values of the Pearson coefficient (the overall
index exceeds 0,93 in all cases), what is the relative share of the human capital, rule of
law and level of property rights protection in the economic growth.
Coming back to the study researches of Acemoglu and Robinson (Acemoglu &
Robinson, 2012) Why the Nations Fail: The Origins of Power, Prosperity and Poverty,
it can certainly be concluded that creating adequate institutions and protection and
application of law represent one of the main responses to the given dilemma. A more
recent analysis (Acemoglu et al. 2014) even indicates, throughout the history of most
national countries, the rule of the laws primacy over the human capital development.
3. Twelve countries analysis
The influence of the human capital index on the GDP/capita was analyzed in the
research. Three groups of countries were chosen as the sample. First group consisted of
4 CIS countries (Commonwealth of Independent States): Russia, Armenia, Azerbaijan
and Kazakhstan. Second group consisted of 4 Balkan countries: Serbia, Croatia,
Bulgaria and Romania. Third group included developed EU countries: Finland,
Germany, Netherlands and Italy. The selection of countries in the sample was
intentional. In the selection process, the business culture, path dependence and
geopolitical position of the countries were taken into account. The human capital index
(WEFT 2013) was used as an instrument for measuring the human capital. In the
business world, the human capital represents an economic value of the employees
skillset. For the economic politics creator, the human capital refers to the capacity of the
population striving towards economic growth. Traditionally speaking, the human capital
can be related to education and experience. Lately, the human capital has also included
the nations health aspect (physical, cognitive and mental health).
The human capital index consists of 4 columns: 1. education (12 indicators
weighted by 2.08), 2. health column (14 indicators, weighted by 1.79 each), 3.
workforce and employment (16 indicators weighted by 1.56 each) and 4. the
environments level of benefits (9 indicators referring to the infrastructure quality,
cluster development, connection and cooperation between business and university,
countrys legal framework efficiency and social mobility. Each indicator is weighted by
2.78). The overall index for each country represents the unweighted average value of the
4 columns. The human capital index is measured in 122 countries. In this research, the
data were used for the first pillar of the human capital, so called education index (WEFT
2013). As for the GDP/capita values, the World Banks data (2013) were used for this

research. The tables 1-3 show the education index values, as well as the GDP amounts in
the CIS countries, Balkan countries and the mature market economies.

Country

GDP/capita ppp in
USD
Russia
0.377
23501
Armenia
0.042
6645
Azerbaijan
-0.153
10624
Kazakhstan
0.359
13917
Table 1. CIS Countries: Human capital indices and GDP /capita ppp
Source: World Economic Forum Team 2013; The World Bank 2013

Country

Education index

GDP/capita ppp
in USD
Serbia
0.053
11544
Croatia
0.394
20532
Bulgaria
0.282
15933
Romania
0.077
16518
Table 2. Balkan Countries: Human capital indices and GDP /capita ppp
Source: World Economic Forum Team 2013; The World Bank 2013

Country

Education index

Education index

GDP/capita ppp in
USD
Finland
1.601
38655
Germany
0.888
40901
Netherlands
1.106
43198
Italy
0.378
33111
Table 3. Mature Market Economies: Human capital indices and GDP /capita ppp
Source: World Economic Forum Team 2013; The World Bank 2013

According to our survey and the sub-index called Education Index, Russia has the
highest score (0.37) among CIS countries, while Finland is leading the group of
developed mature economies (1.6). Concerning the Balkan countries, Croatia has the
best performance (having the score of 0.39).

The research was based on the assumption H: Education and GDP/capita (ppp)
correlate positively. In order to test the assumption, the correlation was measured
between education index and the GDP (Tab 4).

Education
index
Education
index

Pearson Correlation

Sig. (2-tailed)
N

GDP/capita ppp Pearson Correlation

Sig. (2-tailed)
N

GDP/capita
ppp
,862**
,000

12

12

,862**

,000
12

12

**. Correlation is significant at the 0.01 level (2-tailed).

Table 4. Correlation between Education and GDP/capita ppp, Source: AuthorsCalculation

The Pearson coefficient values were high (0.86) therefore, the conclusion is that the
assumption H was confirmed.
4. Concluding remarks
Human capital theory stands one of the most progressive parts of the economic
theory in general. There is a possibility to prove the correlation between the education
and the economic growth. Societies are motivated to invest in education and health
services, knowing the positive impact of the growing human capital. Remains the note
that the education does not cover the side phenomena of human capital, that are
theoretically identified, but empirically still not operationalized (externalities,
compulsory education, job searching, etc). From the economic theory standpoint, the
firm with its "internal labor market" is still a so-called camera oscura , like the firm
itself before Coase`s "The Nature of the Firm" (1937). The research points to the high
correlations between education and GDP in the selected sample of 12 countries,
belonging to three distinctive groups of countries.
7

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