Cognitive Skills and Economic Growth

The idea of economic growth and determinants of its long-run process is a crucial problem to understand from a social point of view. If we will be able to pin down the causal network of economic development across countries, then the missing necessary or supporting conditions to establish a stable growth path could be introduced. Nonetheless, we need to keep in mind that growth is a contextual process confounded by thousands of local rules. This makes it quite difficult to establish universal propositions related to economic development across countries.

In a paper, Hanushek and Woessmann (2012) try to reveal one of the causes of economic growth, namely cognitive skills. Authors believe that the average cognitive skill level of a nation has a causal link to that nation's growth path. To do so, Hanushek and Woessmann (2012, p 267) " develop a new metric for the distribution of educational achievement across countries that can further track the cognitive skill distribution within countries and over time". Based on this metric, they claim to reveal a stable cross-country relationship between educational achievement and GDP growth. In the words of authors: "[c]ross-country growth regressions generate a close relationship between educational achievement and GDP growth that is remarkably stable across extensive sensitivity analyses of specification, period, and country samples".

Besides, they implement instrumental variables approach to narrow the range of plausible interpretation for this claimed strong cognitive skills-growth relationship. Thus, they interpret these results as if they were a causal identification. Based on the results of this paper, the authors provide school policy recommendations to spur growth across countries via the causal link of quality education.

The growth model behind the empirical estimation of cognitive skills is the endogenous growth model. Growth is explained as a function of the skills of workers and other factors which may include economic institutions, technology, and innovation level, and many other structural factors. Now the problem is to test how the cognitive skills of workers, in reality, affect the economic growth in a country. Across countries, people's cognitive skills are confounded by many factors such as political regime, culture, geography, and many more factors that are difficult to control. Hanushek and Woessmann (2012) utilize the instrumental variables (IV) approach in Econometrics to purge the endogenous variable of its endogenous component, thus only estimating the exogenous impact of cognitive skills on income per capita growth. However, finding a valid instrument to test this hypothesis is an arduous journey.

Using relative teacher salary and external exit exam availability in a country, I replicate the results while extending the dataset that Hanushek and Woessmann use. The results when testing the impact of cognitive skills on income per capita growth through our instruments demonstrate that while keeping all other factors constant cognitive skills has a significant impact on a country's development path.

Figure: GDP per capita growth explained by cognitive skills, controlled for some other variables

The figure above is the result of cross-sectional data analysis for 50 countries for 1984 and 1995. On average an increase in overall cognitive skills in a country could lead to a 4.9 percent increase in income per capita growth rate. From a long-run perspective, this could re-shape the future of a country immensely. If true, this has wide-reaching implications. A country could double its GDP per capita in less than 16 years. Nevertheless, trying to increase cognitive skills in a country is easier said than done.

When one tries to reveal any causal links in social sciences, perhaps caution is the best. Most of the causal links revealed in some countries under investigation only turn out to be local realities and not applicable to countries across the globe. At first glance, the idea of a causal connection between cognitive skills level and income per capita growth appeals strongly. Yet, when one approaches closer too many difficulties may arise. Such as in a country where people have high cognitive ability but no political or economic freedom to implement their desired business plans. The real world is full of such examples in autocratic and oil-rich countries of Central Asia.

This implies that the policy recommendations of Hanushek and Woessmann (2012) concerning school policy may be in the correct direction. Nonetheless, the question is what type of school policy under which circumstances? Hanushek and Woessmann revealed what has worked and claim that this shall work. This is not how sound policies are developed.

Reference:

Hanushek, E.A., Woessmann, L. Do better schools lead to more growth? Cognitive skills, economic outcomes, and causation. J Econ Growth 17, 267–321 (2012).