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Empirical Study on Education Investment and Economic Growth
MA Fengqin
Jiaozuo Normal College, Jiaozuo, Henan, P.R.China, 454001
Abstract: China is in the process of changing from a populous country to a resources country.
Education will not be ignored in a strategic position. And education investment also has an
immeasurable impact on economic growth. By the empirical research, on the basis of the statistics
published by the State Statistics Bureau in 2001-2009, the article analyzed the relationship between the
education investment and economic growth and proved their causality by Granger causality test, ADF
test and co-integration test. The results showed that education investment and economic growth had a
significant correlation (0.995) and the education investment also had a significant effect in promoting
economic growth. On this basis, proposed that our government should increase the investment in
education and control the education investment by State finances and the diversification of Education
investors.
Keywords: Education investment, Economic growth, Correlation analysis, Granger Causality test, ADF
test, Co-integration test
1 Introduction
In the traditional theory of economic growth, investment in physical capital is more effective than
investment in education for promoting economic development. It said that education was a consumer
business and education investment was a kind of economic consumption, which couldn't make large or
obvious benefits at all. So we should not give too much concern or attention. However, with the
continuous development of society, people began to doubt the traditional economic growth theory and
gradually recognized that education played a very important role in the economic growth. Since Human
Capital theory was put forward in the 20th century by Theodore Schultz, an American economist, the
effect of education investment for economic Growth caused the Western and global academia’s close
attention. Schultz's research showed that the growth of agricultural production after the war in the USA,
only 20% caused by the accumulation of physical capital, and the remaining 80% mainly caused by
education and the related technology. Millington, a famous scholar of the Soviet Union made use of
Labor Simplified Rate, which calculated 30% of national income growth was made by the education.
The U.S. economist Lewis in his "economic growth theory" directly attributed "growth of knowledge
caused by education” to one of the three reasons of economic growth.
Education investment is an investment behavior .It is a country or region in the field of education to
develop different proficiency of the labor force and all kinds of Specialists and thus enhance people's
ability to work. It contains two meanings: First, education investment is put into the field of education,
rather than other areas of human and material resources of the currencies; second, the purpose of
education investment is to cultivate and enhance human capacities.
Since 1960’s countries competed to have an education reform, increased education investment,
improved the quality of education to enable workers to adapt to the needs of economic reform and
development. Rapid economic growth of Post-war Japan and the Asian "tigers" has become a successful
model that showed education investment promoted economic growth. According to the research, nearly
20 years from 1960 to 1978, the average real per capita GDP growth is 4.68% in the implementation of
the strategy of investment in education-intensive countries and regions, compared with 3.86% in the
implementation of the strategy of physical capital
Benefits of education investment has an indirect, long-term, diversity and scalability features. Its
promotion for economic growth has been recognized. With the expansion of education investment, the
contribution to GDP is also growing. "Education investment is the socio-economic growth", "education
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investment is the most beneficial strategic investment" and so on has been recognized by more and more
people with lofty ideals. To further confirmed that education investment affected economic growth, the
subject shows you a series of empirical research about the relationship between education investment
and economic growth, and revealed that the relevant level and influence between them , which fully
shows that education is in a powerful strategic position and have an immeasurable influence in the
process of changing from a Populous country to a resources country, which Provides the objective
numbers and reasonable proposals for our government 's Investment decisions
2 The correlation analysis between education investment and economic growth
China's education investment is multi-channel, multi-faceted, and National financial education fund is
the main body of education investment. In this article, the education investment research only refers to
the national financial education fund .According to the statistics from the state statistics bureau in
2001-2009, there is a related simple analysis. The time variables sequence GDP and E respectively
represent GDP and financial education investment. Form 1 shows that the Pearson Correlation between
them is as high as 0.995.Obviously, there is a very close relations between education investment and
GDP growth
Form 1:
GDP
E
The correlation coefficient between E and GDP
GDP
Pearson correlation coefficient
1
of GDP
Significant level. (Two-tailed
test )
Sample
14
E
Pearson
correlation
0.995(**)
coefficient
Significant level. (Two-tailed
0.000
test)
Sample
14
E
0.995(**)
0.000
14
1
14
Note:"**" is the 0.01 significance level in the next, that mark is a significant correlation coefficient
(two-tailed test)
3 Causality between education investment and GDP growth and co-integration
test
Education Investment can promote economic growth, in turn, economic growth increased education
investment, promoting among them is mutual, in this "double increase", Education investment is
considered the most fundamental reason. In this article, to explain their causality by the Granger
causality test on the basis of the sample data.
3.1 The granger causality test
The basic idea of Granger test is: If Y' changes caused by X'changes, then X should help predict Y,
namely Y Y on past values of the regression, the increase in the value of X in the past as an independent
variable should be significantly increased the explanatory power of regression. Test whether X causes Y
causes changes in the basic process is following:
3.1.1 The original assumption "X is not a reason for the change caused by Y"
3.1. 2 He Y value of Y's and X's lag behind the value of the regression, the establishment of unrestricted
regression model:
yt = a0 + a1yt 1 + a2yt 2 + ...amyt m + bpxt p + ... + bqxt q + residualt 1.1
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3.1.3 The lag Y Y values only regression, the establishment of a regression model with constraints:
yt = a0 + a1yt 1 + a2yt 2 + ... + amyt m + residualt 1.2
3.1.4 With the residual sum of squares regression model and calculated F statistic, testing regression
coefficients. .., is not zero at the same time significantly. If it is to refuse to "X causes Y is not a reason
for the change," the original assumption that X is the reason for the change caused by Y, X and Y that
exists between cause and effect.
Calculated using EVIEWS software, education, investment and GDP, Granger Causality between
causality test results are as follows in Table 2.
Form 2: Granger test of lag 1
Lag: 1
Null hypothesis
Number F statistics
E change is not caused by changes in GDP
Change is not caused by changes in GDP
13
6.80247089
0.46172940
Significant
Level
0.02612338
0.51223816
Change is not caused by changes in GDP causes 0.46172940 0.51223816 E
As can be seen from the table: Gross domestic product (GDP) than investment in education (E) the
reason; however, investment in education (E) is the gross domestic product (GDP) reasons.
Form 3: Granger test of lag 2
lag 2
Null hypothesis
Number F statistics
E change is not caused by changes in GDP
Change is not caused by changes in GDP
12
18.3190231
2.31702586
Significant
Level
0.00165315
0.11896030
Change is not caused by changes in GDP causes 2.31702586 0.11896030 E
Table 3 shows: Gross domestic product (GDP) is investment in education (E) the reason; the same
investment in education (E) is gross domestic product (GDP) reasons.
Form 4: Granger test of lag 3
lag 3
Null hypothesis
Number F statistic
E change is not caused by changes
Change is not caused by changes in GDP
11
8.69787252
3.63774133
The Ratio of
Change
0.03161989
0.09214711
Conclusion: In addition to 1 lag Granger test showed that GDP is not a reason for investment in
education, but investment in education is the reason of gross domestic product, the lag is greater than or
equal to 2, when gross domestic product and education investment are mutually reinforcing. But after
the lag is greater than 2, the causality is more stable. In view of the relationship between the two, we are
on their regression analysis, regression results in Table 5:
Variable
E
C
Form 5: the regression analysis of GDP and E
Regression Standard error Statistic T
Coefficient
33.336500 0.97392709
34.2289484
10711.829 2727.39642
3.92749255
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Significant
level.
2.460e-13
0.002007
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R2 statistic
Adjusted R2 statistic
0.9898616
0.9890167
The standard error of
regression function
Residual sum of squares
Log-likelihood
function
value
DW statistic
4786.7381
explanatory variables mean
standard
deviation
explanatory variables
Akaike statistic
93160.67
of 45674.55
19.91664
274954347 Schwarz statistic
-137.41654 F statistic
20.00794
1171.620
0.4922715
2.460e-13
(significant level Fstatistic)
The results shown in the adjusted R2 (0.989016)> DW (0.4922715) test results, indicating that there is
pseudo-regression equation, it is because the original time series of GDP and non-EDU two stable, there
is autocorrelation, which requires elimination of self- correlation.
3.2 ADF test
The above analysis shows that the data is not stable, which requires us to carry out unit root test to see if
the data is several order of non-stationary series. We use national financial education fund as represent
variables instead of the education investment. The total economic output indicators of testing the effect
of education investment use GDP.
GDP
Form 6: Test results of each variable unit root
5%
ADF test value 1% confidence
confidence
1.3348
-2.7989
-1.9725
N
∆GDP
-0.5622
-4.3261
-3.2195
N
∆∆GDP
-5.3367
-4.7492
-3.5486
Y
E
2.5704
-2.7989
-1.9725
N
Steady
∆E
0.5971
-4.3261
-3.2195
N
∆∆E
-4.2971
-4.6405
-3.335
Y
We can see GDP and E of the original data is no stationary from the form, but the second-order
difference of GDP and E is smooth, so the sequence is the second-order non-stationary sequence, we can
use differential return to eliminate the pseudo-regression and the autocorrelation.
3.3 Cointegration test
To find out whether there is a stable relation between GDP and E; we need to test the data cointegratly
to see whether there is a long-term stable relationship between them, test results is following:
Form 7: Cointegration test results between GDP and education investment
number of assumptions
Cointegrati Maximum eigenvalue Likelihood ratio Threshold of 5% Threshold of 1%
equation cointegration
on variable
GDP
0.8597849733
27.915355123
15.41
20.04
None **
E
0.3035097353
Note:
3.3404175602
3.76
6.65
At most 1 *
① * indicates 5% and 1% level of significance rejected the null hypothesis
② Cointegration lag order as an
According to the value of statistics: 27.9 >15.41, 3.34<3.76, so there is a cointegration relationship
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between the GDP and E. This shows that education investment and economic growth has a long-term
equilibrium. It means that education investment has a certain role in promoting economic growth. They
have a long-term stable relationship and a common stochastic trend.
4 The regression analysis of China's educational investment growth on GDP
growth
Regression analysis is a statistical analysis method reaching influence level of the changes of a variable
or a set of variables (independent variables) on the changes of another variable (dependent variable).In
this article, our purpose is to verify the impact of education investment on GDP, and we do the
regression analysis by using the GDP as the dependent variable, E as the independent variables.
The results show that there is an inherent dependency between the total GDP in China and the education
investment, but some autocorrelation problems. In order to reveal the real inherent dependencies
between them, we must eliminate the sequence autocorrelation problems. Difference method we use to
make the model residuals to maintain sequence independent, self-relevant. Through above tests and
analysis, we know that the second-order difference which caused by the dependent variable and
independent variable is stable, we use the least square method to estimate regression, the regression
results is following:
Form 8: The differential regression analysis about China GDP and education investment
Variable
Regression
Standard error
T statistic
Significance
E
32.080388
1.31681296
24.3621450
8.601e-09
C
15139.429
4227.92174
3.58082064
0.007179
AR(1)
1.0055788
0.29488116
3.41011576
0.009221
AR(2)
-0.4695788
0.23998552
-1.95669675
0.086096
R2 statistic
0.9968855
mean of explanatory variables
103499.3
2
R Adjusted statistic
0.9957176
the standard deviation of explanatory 40571.13
variables
The standard error of regression
2654.9575
Akaike statistic
18.86744
Residual sum of squares
56390397.
Schwarz statistic
19.02908
Log-likelihood function value
-109.20467
F statistic
853.5636
D statistic
2.2244163
significant level (F statistic)
2.312e-10
From the Contrast between form 8 and form 5, we can see the DW rise from 0.4922 to 2.22, the residual
serial autocorrelation has been eliminated successfully. Multiple correlation coefficient has also been
greatly enhanced from the original 0.989 to 0.996, adjusted statistic R2 is 0.9957, it proved that
independent variables can explain about 99.57% changes of the dependent variable, the regression
model statistics F still showed a highly significant gender the regression model, explanatory variables
and AR (1), AR (2) t-statistics in the regression model are consistently passed the test, regression
coefficients were significantly non-zero. Thus, we got a generalized difference regression model
between the total financial investment in education and the total GDP:
GDP = 32.080388 * E +15139.4294 + [AR (1) = 1.005578, AR (2) =- 0.4695788] 4-1
From the regression results we can see that the total financial investment in education increased by 1
unit, total GDP increased by 32 units, financial investment in education changes has an important effect
on growth of GDP.
5 Conclusions and recommendations
On the basis of the statistics published by the State Statistics Bureau in 2001-2009, though some
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analysis about the education investment and economic growth in our country, it showed the correlation
coefficient between them is as high as 0.995.Obviously, there is a very close relation between education
investment and GDP growth. though the regression analysis by building models, it proved there is an
obvious causality between them, the changes of the education investment has an important effect on
growth of GDP .they are Important implications for our country's education investment .
5.1 Increasing national financial education fund
Investment in education is a basic, strategic investment for Country's long-term development. Since the
reform and opening, although the absolute amount of our budget expenditure for education and
scientific research is growing, but the relative amount that the Proportion in GDP is relatively low. And
it has some volatility.
2001
2.79
Form 9: China's GDP, the proportion of education budget in comparison (%)
2002
2003
2004
2005
2006
2007
2008
3.32
2.90
2.84
2.79
2.82
3.01
3.48
2009
3.59
According to related statistics, the average level of Education investment in the proportion of GDP in
the world is 4.9%, 5.1% in the developed countries, and 4.1% in the less developed countries. f form 9,
China's education budget in GDP, is significantly lower, which will seriously restrict the development of
education in China and Finally affect the contribution of education investment on economic growth.
Therefore, we need to continue to increase state education budget input in the future, and strive to
achieve the target that "the Proportion of the education investment in GDP increased to 4% in 2012
"provided in "National long-term educational reform and development programmed guidelines"
(2010-2020).
5.2 State finances macro-control to education investment
Education investment not only has an economic value but also has a social value. It is directly related to
the national economic growth and social progress. National investment in education should be dominant.
The dominant role of the State financial investment in education is reflected in the financial
macro-control, transfer payment functions. Because of the uneven economic development, large
regional differences in education investment, from the regional distribution, the allocation ratio of
China's education funding is 54.4% in east, 27.52% in center, 18.08% in west, showing a decrease from
east to west. According to local realities, the central finance should in a direction conduct education
special transfer payment and the overall macro control step by step so that reduce regional differences
and promote the balanced development of education.
5.3 Diversification of the education investors
Subject to the constraints of lack of financial resources, expanding the non-financial investment in
education is a feasible, quick way. Multi-agent, multi-channel education is not only consistent with
international practice but also fit our country's reality of Lack of financial resources and the numbers of
students in school. For the Institutions and Enterprises, the social organizations and individuals starting
schools, the government should encourage and support and expand the investment scale of
non-government instead of all governmental schools. The Government should also create conditions to
attract foreign investment and start International Cooperative Education under the allow of our low and
rules. Basic education schools should depend on the local government. Higher education mainly
depends on the central, provincial government, at the same time, with the community participation. The
vocational technology school and the adult education mainly rely on the support of the government,
industry, business; institutions establish schools and social aspects' participation. National policies
should reflect the encouragement for the social schools, such as allowing the enterprises and Personal
funds invested in the school construction to list as pre-tax expenditures; allowing Raise funds by Stock
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form, for work-study program, providing social services, fiscal and tax policy, the government should
give due supports to make businesses, schools self-financing.
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