Can more education be bad? Some simple analytics on financing better education for development

While the model in this paper remains close to the Heckscher-Ohlin tradition, it is shown that, contrary to the standard results, it is the net effect of prices, taxation, and accumulation of endowments that determines the Rybczynski-type growth effects, which may help explain the lack of consensus in the empirical literature on education and growth. A central feature of the model is that the accumulation of endowments depends on the output of education, while the changes in labour supply, which determine the effective production possibilities frontier, also depend on individuals’ decisions on allocation of time, affected by relative prices and fiscal policy. On the one hand, in the model the composition of the output of education depends on education quality, so the composition of the inflow of entrants to the labour market can be upgraded by suitable policies. On the other hand, the risks of a skill supply-reducing government intervention are discussed. The analysis has implications for policymakers in developing countries where both the economy’s production possibilities and the education sector need to be enhanced, as it reveals the possibility of a ‘bad reform’ where the expected benefits of government’s interventions in education can be contradicted by the general equilibrium effects of the policy. A sufficient condition to avoid this situation is identified in the paper.