The Dividends of Institutional Quality Education and Growth

The Dividends of Institutional Quality Education and Growth

This study formally highlights the existing interaction between the quality of institutional governance, the educational sector and economic growth. Given the substantial educational policy reforms in the world, it is worthwhile to theoretically analyze at a macroeconomic level, the main mechanisms through which the positive impact of education on growth (and economic development) occurs. We theoretically demonstrate how incentives offered by the government directly affect human capital accumulation initiatives, which ultimately influence the economic landscape in a positive manner. Our economic analysis of the role of education in growth highlights two main channels through which economic growth passes. The first channel highlights the positive direct effect of educational institutional quality on the incentive to accumulate human capital by individuals, which makes them more productive. The second channel appears in the explicit function of the economic growth rate. As a policy implication, we have shown that the growth rate depends on the rate of return on human capital or this rate of return itself depends on the quality of governance, which further increases growth. As a result, large institutional qualities have a double dividend, which suggests large benefits to large educational reforms.

Key Words: Institutions, Human capital, Education, Growth JEL Classification: H11, O15, O43