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«Working Paper No. 98 February 2015 b B A M B AMBERG E CONOMIC R ESEARCH GROUP k k* BERG Working Paper Series Bamberg Economic Research Group Bamberg ...»

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Impact of Public Funding of Education

on Economic Growth in Macedonia

Abdylmenaf Bexheti and Besime Mustafi

Working Paper No. 98

February 2015

b

B

A

M

B AMBERG

E CONOMIC

R ESEARCH

GROUP

k

k*

BERG Working Paper Series

Bamberg Economic Research Group

Bamberg University Feldkirchenstraße 21 D-96052 Bamberg Telefax: (0951) 863 5547 Telephone: (0951) 863 2687 felix.stuebben@uni-bamberg.de http://www.uni-bamberg.de/vwl/forschung/berg/ ISBN 978-3-943153-15-6

Redaktion:

Dr. Felix Stübben  felix.stuebben@uni-bamberg.de Impact of Public Funding of Education on Economic Growth In Macedonia Academician Abdylmenaf Bexheti (Corresponding author) Faculty of Business and Economics, South East European University Ilindenska b.b,1200 Tetova, Macedonia Tel: +389 44 356 059 E-mail: a.bexheti@seeu.edu.mk Besime Mustafi, PhD Student Faculty of Business and Economics, South East European University Ilindenska b.b,1200 Tetova, Macedonia Tel: +389 44 356 065 E-mail: b.mustafi @seeu.edu.mk Abstract The main aim of this study is to investigate the relationship between public spending on education after the process of decentralization and economic growth in Macedonia as low income state. This paper do not have intention to make a picture of education system in Macedonia, how it functions or if education is open to all, but has the aim to measure the public spending on education as a determinant that has impact on economic growth even positive or negative. This paper raise the following important question: do all measures of public spending on education promote economic growth? As a lack of data in developing countries like is Macedonia the specification of empirical models to test the causal effect on public spending on education and growth is paradox and this explain why the road through which public education expenditure affects economic growth is not yet well understood. The inter-relationships between government expenditure and education quality should be taken into account when formulating education policy to promote economic growth (Corray, 2000). The channels by which education can promote growth maybe do not lie to quantity of public spending but on quality of the policy that means where youth end after their education.

We investigate the link between public spending on education and economic growth in Macedonia using Logarithmic Multiple Regression Model. We came in conclusion that the model is significant. The result shows negative effect on public spending on education and economic growth in the case of Macedonia. The results also raise another statement what exactly are the highly educated workers doing together (that is so sensitive to their being highly educated) if it does not involve things changing at the margin? (Aghion, et.al 2009). It ends with some key conclusions and recommendations that there has to be founded another channels to produce quality education - skilled labor by which will rise the productivity and economic growth.

Keywords: public expenditures, education, economic growth, real GDP, public investment, skilled labor.

–  –  –

The relationship between economic growth and various macroeconomic factors has attracted the interest of many economists and policymakers since long ago. The history of the issue led back to the era of the classical economist Adam Smith, followed by neoclassical economists such as Alfred Marshal and Henry Schultz (Tilak, 2005). There a lot of questions rising by academicians, economists, researchers and others regarding the factors that affect economic growth. A lot of research papers were done to estimate the factors that affect economic growth dedicated to different countries. Education is seemed to be a crucial factor for a nation that promotes economic growth as (Friedman, 2002) said: “The gain from the education of a child accrues not only to the child or his parents but also to the other members of the society. The education of my child contributes to your welfare by promoting a stable and democratic society. It is not feasible to identify the particular individuals (or families) benefitted and so to charge for the services rendered. There is therefore a significant “neighborhood effect”.

Mitra (2011) Said that population that is better educated has less unemployment, reduce dependence on public assistance program and greater tax revenue. From well educated nation benefit the whole country. The incentive to expand and improve depends on the rate of return expected” For public education, that rate of return, for the general taxpayer, not just the parents, has to be the public benefit they get from it; the increases in productivity, unity, civility, health, etc. of our society ( Becker 1993 ). As Becker says, people and the society have to clarify that education is a public benefit when the whole people in charge benefit.

Education is becoming the most powerful engine of global growth and success. It is also considered an important tool that has a great impact on the level of the country‟s development and growth. Public financing of education as investment is an economic issue well debated nowadays. There are a lot of research papers that estimate the relationship between public funding of education and its impact on economic growth. The results depend from the level of the countries development.





These papers came with different conclusions. Some of them showed that the higher the public funding the higher is the economic growth. Some others authors come in conclusion that the link between these two variables is even negative and some others concluded that even though there is a positive link this is a fade. So we can conclude that the relationship between these two economic indicators vary from the countries development. That means there are developing countries – low income countries with low standard of living and on the other hand developed countries with high income level and the standard of living.

When we take in consideration the results from research papers that are dedicated for developed US countries we see that the results are quite positive. The positive link is also for European Countries but US countries are more developed in this direction. Regarding to EU budget (2007-2013), participation in Research was increased in the part of private participation; each part is 5-6 times higher in USA compared to Europe, (Bexheti 2013). Investing in research can lead in creating more productive workforce and regarding this issue the US Investments in Education are quite high linked with economic growth. There are also some different results even negative when the research for public spending on education and economic growth is dedicated for countries in transition.

The education level and the GDP are very important for the whole social wellbeing. Investing in education means to invest in human recourses that are one of the most important factors of production function that is directly linked with the countries development level and with the standard of living. In this world of globalization the achievement of the competition is another important issue that has impact on economic growth. In theory there are a lot of models that show the positive link between public expenditures on education and the economic growth.

Following the Solow Model ( 1956 ) if the public expenditures on education are productive this may intent to invest in human capital but this affect only the equilibrium factor ratios, not the growth rate at all, but in general there are growth effects. Following the Solow model we also can say that this theory cannot show the same result if we take in consideration the countries level of development taking in the consideration the productivity and quality of public spending on education in Macedonia. A lot of empirical studies show the relationship between public expenditures in education and economic growth. Even though they come out with different conclusions they contribute in highlighting the correlation between public funding of education and economic growth.

The relationship between public spending on education and real GDP is an issue that the transition countries that are candidate for European Integration has to take into account very carefully. Public expenditure of education should 2|P a g e create skilled labor that is linked directly with the lowering the unemployment rate, rising the investment and in the same time improving the social wellbeing at all. One focus of European Policy makers is also to improve the quality of public spending on education. This lead as a responsibility for European economies to prepare skilled labor with the main aim to gain global competition.

Qualified people with the right skills can boost the European Union's economy by leading innovation and improving competitiveness (Funding of Education in Europe 2000-2012 the Impact of the Economic Crisis). In this research paper we will try to estimate the link between public spending on education and economic growth in Macedonia as e low income country, after the process of budget decentralization. We use Logarithmic Regression Models to estimate the variables and come in conclusion that even though there are limitations in this paper as a result of lack of data (The process of decentralization after 2005), the model is significant. The result shows negative effect on public spending on education and economic growth in the case of Macedonia. The results and other data are presented below in the paper.

1.1 Review of related literature

There are e lot of research papers that estimate the relationship between public funding of education and economic growth both in developed and transition countries. Some results of Barro (1999), Hanushek and Kimko (2000), Hanushek and Kim (1995) and Hanushek and Woessmann (2007) showed positive link between education quality and economic growth. Gregorious and Ghosh (2007) made use of the heterogeneous panel data to study the impact of government expenditure on economic growth. Their results suggest that countries with large government expenditure tend to experience higher economic growth.

Adelaide (2008) suggests no relation between total government expenditure on education. Also Cooray, (2009) find that total government expenditure on education has no statistically significant effect on economic growth. Also note that the quality variables increase substantially in size and significance when government expenditure is controlled for.

Abu and Abdullah (2010) investigates the relationship between government expenditure and economic growth in Nigeria from the period ranging from 1970 to 2008.They used disaggregated analysis in an attempt to unravel the impact of government expenditure on economic growth. Their results reveal that government total capital expenditure, total recurrent expenditure and education have negative effect on economic growth. The underline idea is that by investing in education the state will create skilled labor which supposes to be the engine of a country development.

Berger and Fisher (2013) said that States can build a strong foundation for economic success and shared prosperity by investing in education. Providing expanded access to high quality education will not only expand economic opportunity for residents, but also likely do more to strengthen the overall state economy than anything else a state government can do.

In today‟s economy, the trend of exponential growth of the competetiveness doesn‟t require quantity but more quality in education and applied knowledge (Buxheti, 2007).Just as castles provided the source of strength for medieval towns, and factories provided prosperity in the industrial age, universities are the source of strength in the knowledge‐based economy of the twenty‐first century” (Dearing 2002) Public funding of education is a key factor that influences the whole social wellbeing in a country. The government should take care in public financing of education to promote so economic growth. More generally, public spending has virtually no impact on health and education outcomes in poorly governed countries. These findings have important implications for enhancing the development effectiveness of public spending. The lessons are particularly relevant for developing countries, where public spending on education and health is relatively low, and the state of governance is often poor, Rajkumar and Swaroop ( 2007 ).

Gregorious and Ghosh (2007) made use of the heterogeneous panel data to study the impact of government expenditure on economic growth. Their results suggest that countries with large government expenditure tend to experience higher economic growth.

3|P a g e Devarajan and Vinay (1993) used panel data for 14 developed countries for a period ranging from 1970 to 1990 and applied the Ordinary least square method on 5-year moving average. They took various functional types of expenditure (health, education, transport, etc) as explanatory variables and found that health, transport and communication have significant positive effect while education and defense have a negative impact on economic growth.

Woodhall, (2007) answered to the question: Do recent advances in economic thinking contribute to the major challenges faced by education?” must, in this case, receive the answer “Yes”. The paper has shown that recent research on measurement of externalities and the contribution of education to economic growth, through knowledge creation and transmission, have strengthened the notion that HE is a public investment.

Michaelowa (2000) said that Education increases an individual‟s earning potential, but also produces a „ripple effect” throughout the economy by way of series of positive externalities and diagrams the impact of education on

both micro and macro level as follows (refer Figure 1):

Figure 1: Micro and Macro Level effects of Education and Economic Growth

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