Few economists would dispute the argument that improving the educational level of the population is necessary for developing countries. But it is clearly not sufficient. Simply raising the supply of educated labour in a stagnating economy with poor prospects for growth and employment is likely to lead to mass emigration as potential workers seek better opportunities abroad. One could argue that a higher level of human capital improves the likelihood that individuals will have the skills to start companies and employ capital and labour in production. But in the absence of established banks or financial markets from which to raise the credit needed to finance such investment, this is not likely to work, unless the individuals concerned are already wealthy or have access to more informal sources of borrowing. Furthermore, without demand for their output in the form of consumption spending, they will fail to realise the profits needed to fund expansion through investment.
In an economy which has already made the transition to capitalism and has the institutions which encourage and sustain investment to fuel growth over many years, a policy of improving the human capital of the population may be more likely to show positive results and improve productivity growth. But in a poor country lacking effective capitalist institutions, the aforementioned emigration is likely to occur.
Different levels of education for the mass of a population become necessary as development progresses. As an example, China already had a high proportion of its workforce educated to secondary level when it began its transition to capitalism in 1978. This was one positive legacy of its formerly communist society. As it tries to evolve from a middle-income to an advanced country in the decades to come, the government is hugely raising spending on university-level education. By contrast, India has for some time had a significant university-educated elite, but at a basic and secondary level, its record on mass education has been poor, which has constrained productivity growth. In addition, China’s industrial policy has been more effective to date than India’s in raising the proportion of output spent as investment and generating employment, although this model has arguably now run its course. Without China’s rapid growth in the last three decades, education alone would have been insufficient to fuel development.
Education is therefore not enough for development in the form of making the transition to industrial capitalism or even continuing expansion in richer countries. The demand for a more educated population from growing firms is just as important as the supply. In the recent Eurozone crisis, countries with high levels of unemployment, particularly among the young, experienced emigration to neighbours offering better job prospects. If unemployment continues to fall in countries like Spain, this may eventually reverse to some degree. But the dynamic remains. Governments need to encourage business growth through investment to create the demand for educated workers. In the absence of such investment, education will not by itself generate a more productive economy.