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IRJMSH Vol 6 Issue 5 [Year 2015] ISSN 2277 9809 (0nline) 23489359 (Print)

Public expenditure on education and economic development

Dr. Sanjeev Kaushik


Economic growth is clearly a predominant objective of public expenditure policy. Many public
programs are specifically aimed at promoting sustained and equitable economic
growth. Education is an important determinant of economic growth for any country. On the other
hand, Government budget policy affects the long - term growth rate through decisions on
priority based public spending on different sectors

Education plays an important role in human capital development which is a key to scientific and
technological advancement. Education is also regarded as a sustainable route to economic
prosperity, it combats unemployment, confirms sound foundation of social equity, awareness and
cultural vitality. It raises the productivity and efficiency of individuals and produces skilled
manpower capable for leading the economy towards the path of economic development. The
relationship between education and economic growth has been extensively investigated, with the
theoretical and empirical models, although the question of how education affects economic
growth is not yet fully resolved. One of the issues that cause controversy is that of the apparent
contradictions between the effects of education on the growth of personal income and on
economic growth .

The positive externalities to education lead to the under-production of human capital than the
amount that is socially desirable. So this market failure necessitates some sort of government
intervention to bring the private and social benefits in line with each other to produce an optimal
level of a social good. Thus, market failure in an economy provides a rational for government
intervention and government takes the role of paternalism and compels the society to consume a
good that it views to be in the best interest of the individuals and the society. This is the reason
why education is called a merit good. To get to the socially optimum level of education, the
private costs of education needs to be lowered and this can be done through increased

International Research Journal of Management Sociology & Humanity ( IRJMSH ) Page 118
IRJMSH Vol 6 Issue 5 [Year 2015] ISSN 2277 9809 (0nline) 23489359 (Print)

government expenditures on education. The increased level of public expenditure on education

gives incentive to its citizens to attain high level of education through subsidizing the cost of

Literature review

The public expenditure on education and the economic growth. The size of government
expenditures in social sector and its impact on economic growth has emerged as a major
public choice issue facing economies in transition (Devarajan et. al, 1996). Blankenau et al
(2005) carried out an empirical study on expenditure growth relationship in the context of an
endogenous growth model. They found that the response of growth to public education
expenditure may be non -monotonic over the relevant range. The relationship depends on
the level of government spending, the tax structure and the parameters of production
technologies. The literature has focused on the link between level of public expenditure on
education and economic growth; majority of the studies deal with endogenously generated
economic growth and stress on the role of human capital accumulation in economic
growth (Chakraborty, 2005). An investment in education is very beneficial to the society,
both at the micro level as well as macro level and affects the economic growth both
directly and indirectly (Dahlin, 2005).

A M Nalla Gounden in his 1967 paper showed that education expenditures are not very attractive
forms of investment and its rate of return was very low compared to that of physical capital.
However, 1967 was too early to judge it. The study further suggested diversion of resources in
favor of physical capital. Ansari and Singh (1997) use annual time series data from 1951 to 1987
to study the relationship between public spending on education and growth. They found that
there is no long run relationship between the two. Bosworth, Collins and Virmani (2007) test that
what are the major contributors to Indias economic growth and conclude that educations
contribution has been negligible. Pradhan (2009) investigates the causality between public
education spending and economic growth in India during 1951 to 2001.

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IRJMSH Vol 6 Issue 5 [Year 2015] ISSN 2277 9809 (0nline) 23489359 (Print)

Open Education

Pisarides (2000) argues that a closed economy fails to take advantage of its human capital stock.
He further says that a country can fully realise the advantages of its education investments after
adopting policies such as trade liberalization. Trade openness brings competition into the
domestic market, encourages redistribution of skilled workers to trade related activities and
reduces opportunities for rent seeking. The same point has been stressed in Murphy et. al 1991 as
well. Engaging in International trade requires conforming to international standards and
knowledge of foreign markets which only educated labour can possess.
The increased competition from trade also compels domestic producers to invest in new
technologies which expand the knowledge base of the economy. Trade encourages exchange of
ideas and technologies which implies that the developing countries like India can have access to
superior technologies. Hence it can be the case for India that education expenditures affected
growth only after the economy opened up and trade is one of the major channels through which
these investments are influencing growth. For example, investments in education lead to human
capital accumulation which, in turn, increases the productivity of the labour force. This
encourages further exports and economic growth (Chaudhry, Malik and Faridi, 2010).
Empirical studies for different countries suggest that trade promotes human capital accumulation
and vice-versa. Maybe, the above discussion explains the results obtained by Gounden (1967)
and Ansari and Singh (1997). Both these papers used the pre-liberalization time period for their
analyses. Conversely, Chandra (2010) found that education expenditures in India affect growth
positively because he covered the post-liberalization period in his analysis.
Economic growth is defined as the increase in a nations ability to produce goods and services
over time as is shown by increased production levels in the economy. There are
numerous measures to depict economic growth and the study employed GDP per capita (US $)
as a proxy for economic growth. GDP per capita is measured as GDP divided by the total
population of the country. The independent variable of the study is public expenditure on
education (US $). Public expenditure on education consists of current and capital public
expenditure on education as such government spending on educational institutions (both
public and private), education administration as well as subsidies for
private entities.

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IRJMSH Vol 6 Issue 5 [Year 2015] ISSN 2277 9809 (0nline) 23489359 (Print)

Griliches, Z. (1970). Notes on the Role of Education in Production Functions and Growth
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