From Malthus to Malthus

Underneath a veneer of common structural transformation patterns, countries exhibit vast differences in their growth and allocation of human capital. In the one extreme, countries such as Korea, Taiwan, and, more recently, some segments of China, have transitioned, within two generations, from prototypical agrarian Malthusian economies to fast-growing, high-skill-intensive modern service economies. In the other extreme, quite a few countries in Latin America, Africa and Asia have transitioned from similar initial Malthusian economies to urban, slow-growing, pseudo-Malthusian economies that are intensive in low-skill service jobs. We argue that a key determinant for such divergent paths lies in the direction of education policies of countries. We show that in the data, those countries that prioritize subsidies to university education in detriment of elementary and secondary education are those with large segments of the population with low skills, i.e., what we call the pseudo-Malthusian state. In contrast, countries that emphasize subsidizing high quality elementary and secondary education, possibly in detriment of higher education are the ones that have converged to the group of modern economies, which are mostly populated by high-skilled workers. In our model, we enhance the traditional quantity-quality fertility-vs-education model with households with multiple skill levels and multiple choices for the education of the children. The model replicates quite naturally that countries that emphasize lower levels of education eventually converge to a modern, skill intensive economy, while those which emphasize financing higher education will transition from a Malthusian economy to another.