Education in Latin America

Education in Latin America

© 2023 Ejiro U. Osiobe

© 2021 Ane Osiobe International Foundation.

All Rights Reserved.

All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the copyright holder, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright laws. For permission requests, write to the publisher, addressed Attention: Permissions Coordinator, at the address below.

Paperback: ISBN: 978-1-64318-118-9

Hardback: ISBN: 978-1-64318-119-6

Ebook: ISBN: 978-1-64318-120-2

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PREFACE

This book’s primary contribution to the existing literature on education in many Latin American countries is that it delves into each nation's education policies and compares relevant economic indicators with the aggregate trends of Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Honduras, Mexico, Nicaragua, Panama, Peru, El Salvador, Uruguay, and Venezuela. The book is among a few studies that have examined Latin American educational policies and compared them to the stated countries, making this book unique and of great value to economists, educationalists, and the economic development departments in each nation and globe.

CONTENTS

Education and Human Capital

Understanding Human Capital

United Mexican States

El Salvador

Honduras

Nicaragua

Costa Rica

Panama

Columbia

Venezuela

Brazil

Peru

Bolivia

Chile

Argentina

Uruguay

Cointegration

Causality

EDUCATION AND HUMAN CAPITAL

INTRODUCTION

The book examines the relationship between human capital and economic growth within the selected countries and the aggregate of the nations. Each chapter analyzes datasets from previous works, reviews previous literature, and draws some conclusions on human capital and economic growth. The book summarizes books and academic articles on human capital in terms of:

(i) The theoretical framework of economic growth theory.

(ii) The neo-classical growth model.

(iii) The Solow growth production function.

(iv) The new endogenous theory.

(v) Empirical evidence on the relationship and causal link between human capital and economic growth.

Assessing the literature on human capital and economic growth will serve as a comprehensive guide to policy formulation and implementation in the short and long run, creating developmental goals for any region not limited to Latin American nations.

Latin American countries have evolved over the years. Still, after years of military reign, socioeconomic-instability, and civil wars, the region has been known for its anti-hegemonic economic growth (educational-policies) strategies. Researchers have long investigated Central and South America's educational system theoretically and empirically. The transition of its education system through the introduction of centralized, liberalized, and populist ideology has sparked many researchers' interest. The book and its chapters aim to understand and compare 14 Latin American countries' education orientations. The investigation uses a matrix table to visualize the qualitative finding.

Human capital can be described as human abilities and skill sets. The United Nations (2009) expands on the definition of productive wealth embodied in labor, skills, and knowledge. Integrated with humans, this expertise is acquired partly through formal and informal education. The human capital theory focuses on education and the individual's health as an input to economic production. In contrast, human capital development (expenditure on education or training as a proxy) refers to the acquisition and increase in the number of person's skills, knowledge, and work experience critical for a country's economic growth (Adelakun, 2011). The book and its chapters' primary contribution to the literature on economic growth, development, and stability focuses on providing a comprehensive summary of the literature on the topic.

A sustainable economic growth path incorporating environmentally sound development is a more critical macroeconomic objective (United Nations, 2015) because it ensures the continuity of renewable resources and the optimal use of non-renewable resources. The continuity and optimal use of these resources build on Arrow et al. (2004) definition of development as meeting the needs of the present without compromising the ability of the future generation to meet their own needs; [after all], our resources are not gifts to our children, they are loans from them. For this to occur, human capital is an essential ingredient. Both theoretical and empirical economic literature has provided evidence that education is significant to economic growth. Klenow and Rodriguez-Claire (1997), Hall and Jone (1997), and Easterly and Levine (2001) built on the ideas of Adam Smith and other 18th-century philosophers and economists who advocated that labor productivity helps create a surplus of wealth. They asserted that technological change is the primary source of growth and that differences in the rate of technological change are the principal causes of income disparity among countries. Nelson and Phelps (1996), Romer, P. (1989, 1990), and Abramovitz (1986) posited that to achieve technological change, a country must engage in innovation or imitation activities that use mainly human capital as their input of interest.

The endogenous growth theories primarily emphasize the role of human capital (e.g., Mankiw, Romer, and Weil (1992) and Lucas (1988)). Common recommendations from these models are for an economy to invest in its educational system; fight poverty; create more labor market participation and economic growth opportunities, and facilitate socioeconomic development. The logic is that if a national economy spends more on education, the country will experience long-term economic growth. Thus, investment in education would have a positive effect on both the individual human capital and the overall economy: it will fight poverty; reduce the number of children that go to school hungry; address government-sponsored job fears, training, and open networking sections; create more interdisciplinary opportunities in the economy; and promote socio-economic growth.

Hanushek and Woessmann’s (2008) theoretical contributions emphasized two main mechanisms through which education affects economic growth. The first, based on Uzawa (1965) and Lucas (1988), is human capital, an input in the production process, implying that there is a relationship between human capital and economic growth. The second is the assumption that human capital is the primary source of productivity growth (Nelson & Phelps, 1966). This implies that improving education quality at all levels is imperative for regional development.

Interdisciplinary opportunities and trade liberalization are essential for increasing global economic growth. Increased imports and exports from countries have diversified their economies, encouraging capitalism to grow and resulting in rapid economic growth. Although the relationship between trade liberalization and economic growth has been analyzed extensively, it remains a controversial topic among policymakers and economists because of the diversity in the empirical findings noted by Chaudry and Rahman (2009). However, there is a greater consensus that trade policies promoting openness, surplus trade balance, and high trade volume to Gross Domestic Product (GDP) have positively affected economic growth (United Nations, 2009, 2015). Trade openness can increase the level and efficiency of investment and the market size in countries with liberal trade policies; hence, developing countries liberalize their economies to attract more foreign capital.

Human capital determines the ability of an economy to manage its other factors of production, and it is necessary for innovation. Adopting existing technologies, technological advancement, and catch-up processes contribute to an economy's growth rate. Amaghionyeodiwe (2009), Chaudry and Rahman (2009), Liap, Du, Bing, and Yu (2019), Khembo and Tchereni (2013), and Akpolate (2014) have supported the notion that the growth of any economy is influenced by its level of physical and human capital. Hence, no country can achieve a sustained economic development path without a substantial investment in human capital (Kanayo, 2013).

Some economists argue that higher formal educational attainment leads to more economic growth. Lucas (1988) suggests that human capital accumulation translates into sustained economic growth and that education is the primary driving force through knowledge accumulation. Romer P. (1989, 1990, 1994) showed that human capital stimulates economic growth and can drive innovation. As documented in the econometric literature, Romer, P. (1989) and Rostow (1960) show that education also provides spillover effects, improves the adaptation speed of entrepreneurs to disequilibrium, and boosts research productivity.

However, there is mixed evidence in the empirical literature regarding the relationship between human capital and economic growth. Temple (1999) and Bills and Klenow (2000) reported a weak correlation between the two, while Levine and Renelt (1992) showed that education (human capital) has no significant statistical impact on economic growth, and Dessus (1999) argued that Temple’s (1999) findings might have been caused by specification bias. Dessus’s (1999) results suggested that as the education enrollment level increases, the standard of education decreases. As a result, educational investment in developing countries fails to generate higher growth.

While most developing countries in Africa and Asia have achieved a noticeable improvement in terms of physical and human capital, which is empirically supported by Macham (2015) and De Gregorio and Lee (2003), most Latin American countries still need more development programs to facilitate their human capital and capital stock growth. These Latin American nations can benefit from increased human capital (OECD, 2017; OECD/ECLAC/CAF, 2016). Rostow (1960) argued that necessary investment must be made in three key economic sectors—technology, infrastructure, and transportation systems—for rapid economic growth. The importance of physical capital in enabling an environment for growth and development cannot be overemphasized, and the impact of human capital and infrastructure on economic growth is a well-established issue (Rahman, 2011; Holden and Biddle, 2017; Sharma and Sahni, 2015; Mehrara and Musai, 2013). For instance, a positive influence exists from human capital to economic growth, meaning economies with high-skill populations, such as Estonia, Switzerland, and the United States of America, have led the world in state-of-the-art human ingenuity. Infrastructure also contributes to the development of a country in various ways, connecting states and countries by building broadband, seaports, airports, intercountry and interstate roads to facilitate the exchange of goods, services, and information faster (Diaz, 2013).

CHRONICLES

Most people believe that individuals with a higher level of education and more working experience earn more money than those with less (Weiss, 1995). In most developing countries, the net marginal social returns of expenditure on primary education are higher than tertiary education. Statistics have shown that people with higher education generally earn more, have higher earning potential, and are more capable of improving the quality of their lives and better able to improve the quality of their lives than those with less education (UNESCO, 1997).

Human capital, or skilled labor, was first incorporated into economic analyses in the 1960s and 1970s. Goode (1959), Mincer (1958), and Becker (1975, 1962) expressed different views on human capital, likely since a broad spectrum of factors can directly or indirectly influence the formation and exploitation of human capital. These factors include positive or negative intensive or extensive effects on the economy at the macroeconomic or microeconomic level. The exogenous or endogenous influencers are sometimes grouped into demographic, social, socio-demographic, economic, and ecological categories. The interest in human capital grew as the endogenous growth theory developed. Mankiw, ROnner, and Weil (1992), Romer, P. (1989, 1990), Uzawa (1965), and Lucas (1988) each created models where the output level is defined as human capital. They argue that the quality of education may lead to an economy's long-lasting and continued growth.

Theories of Economic Growth

The framework of the economic growth theory is appropriate for analyzing the effect of human capital on economies. Education directly impacts human capital, measured by the Human Development Index (HDI), and influences income distribution (Gini Index). According to Solow (1956), the physical capital stock will increase per capita income. Still, based on his neo-classical growth theory, long-term growth will not be sustainable from inputs in education due to the assumption of the law of diminishing marginal returns, which is associated with excess spending on education. Therefore, an increase in the expenditure on education will increase education enrollment and the quality of education to a certain point; then, as enrollment continues to grow, the quality of knowledge begins to decrease.

Education generally impacts economic growth by increasing innovation and technological/knowledge spillover. According to Romer, P. (1994), improved technology and knowledge skills will translate into increased productivity, leading to short and long-term economic growth. A discussion of educational expenditures broadens the topic to include two significant theories of economic growth: the neo-classical growth theory and the new endogenous growth theory.

Neo-classical Growth Model

In 1950, Robert Solow and Trevor Swan developed the exogenous neo-classical growth model (Dimand & Spencer, 2011). The Solow growth model states that long-run growth is achieved through capital accumulation, skilled labor, population growth, and technological progress (Solow, 1956). The model is based on four variables that are used to determine long-term growth, including output (Y), capital (K), labor (L), investment (I), or savings (S). In Solow’s growth theory, the output is a capital, labor, investment, and technology function. Solow had four critical assumptions in his model: the first and second, he assumed that labor force growth and technology are exogenous factors, which means that labor force growth is constant; third, the Solow growth model assumes capital and labor to have a constant return to scale; fourth, the model assumes a diminishing return of its variable factor GDPper capita.

The Solow Growth Production-Function

With the constant return-to-scale assumption, the Solow growth production-function becomes equation (1) and equation (2), where y is output per labor and k is capital per labor. Based on equation (2), as capital per labor increases, output per labor will also increase. Hence, as the capital-labor ratio grows, output peaks and diminishes; thus, the law of diminishing marginal returns initiates. Therefore, balance can be achieved when savings and investment are at equilibrium with the capital-labor ratio, which will result in a steady-state of the economy:

Where: s is the savings rate, k is capital per labor, δ is depreciation, and n is the population growth rate.

The New Endogenous Theory

The neo-classical growth model assumes that the accumulation of capital (savings) in an economy and how people utilize this capital is vital for economic growth. This model shows the relationship between capital and labor and how capital and labor translate to output. The model has some weaknesses, such as the exogenous determination of technology. It assumes that all countries will converge at the same steady-state. Romer, P. (1994) and Stonier and Hague (1972) agree with Solow’s assumptions, arguing that technology should be an endogenous determinant rather than exogenous because investment, research and development, knowledge, and capital accumulation translate to long-term economic growth. An investment that concentrates on physical and human capital encourages more economic growth, reinforcing the idea that at the steady-state, growth is a direct result of the level of human capital (Romer P., 1990, 1994).

This stated shortcoming led to the creation of the new endogenous growth theory. This model is founded on three main assumptions:

1) Technological change results from the animal spirit optimism and pessimism of the market, which determines long-run economic growth.

2) Technological change causes labor to be efficient, improving output per capita, and 3) the cost of production of new inventions is incurred once as a fixed-sunk cost. The endogenous growth theory makes technology endogenous and, as a result, addresses the flaws associated with the neoclassical growth model.

Liew (2004) provides a guideline for using the Lag Selection Criteria (LSC) to determine the autoregressive lag length. The study provided the following information: first, Akaike’s Information Criterion (AIC) and Final Prediction Error (FPE) are superior to the other criteria when studying data sets that are between 0-60 observation because the AIC and FPE minimize the chance of underestimating while maximizing the possibility of recovering the actual lag length; second, these criteria managed to pick up the correct lag length at least half of the time in a small sample; third, the performance increases substantially as the sample size increases; fourth, with relatively large sample size, the HQC is a better estimator of the autoregressive lag length.

Empirical Evidence of the Relationship and Causal Link Between Human Capital and Economic Growth

According to Weiss (1995), those with a higher level of education and more working experience earn more money than those with less. In most developing countries, the net marginal social returns of expenditure on primary education are higher than tertiary education. The relationship between education and poverty is defined: people with a higher degree of education earn more or have higher earning potential and are better able to improve the quality of their lives than those with a lesser educational background (UNESCO, 1997).

Human capital, or skilled labor, was first used in the 1960s and 1970s. Goode (1959), Mncer (1958), and Becker (1962, 1975) had differing views on human capital because many factors, directly and indirectly, influence