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Education Quality and
Economic Growth
Education Quality and
Economic Growth

Eric A. Hanushek
Ludger Wößmann


Washington, DC
© 2007 The International Bank for Reconstruction and Development / The World Bank
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Cover photos (left to right): World Bank/Ray Witlin, World Bank/Gennadiy Ratushenko, World Bank/Eric Miller

Foreword vii
About this book ix

Educational quality directly affects individual earnings 2

Early analyses have emphasized the role of quantity of schooling
for economic growth 3
The quality of education matters even more for economic growth 4
Where does the developing world stand today? 12
Improving educational quality requires a focus on institutions and efficient education
spending, not just additional resources 14
The need to alter institutions fundamentally is inescapable 19
Notes 21
References 22

1 Simply increasing educational spending does not ensure improved student outcomes 15

1 The returns to cognitive skills (literacy) are generally strong across countries 3
2 Each year of schooling is associated with a long-run growth increase of 0.58 percentage points 4
3 Performance on international student achievement tests tracks educational quality over time 6
4 Test scores, as opposed to years of schooling, have a powerful impact on growth 7
5 Test scores influence growth in both low- and high-income countries 8
6 GDP increases significantly with moderately strong knowledge improvement (0.5 standard
deviations) 11
7 Low educational attainment is clear in developing countries 12
8 The share of students below 400 (“illiterate”), between 400 and 600, and above 600 varies
noticeably across selected countries 13
9 Ghana, South Africa, and Brazil show varying sources for the lack of education of
15–19-year-olds 13
10 Accountability and autonomy interact to affect student performance across countries 18


Access to education is one of the highest priorities on the development agenda. High-profile
international commitment to progress—such as the second Millennium Development Goal
of achieving universal primary education—has helped galvanize policy-makers into action.
Significant results have already been achieved in school enrollment. Yet care must be taken
that the need for simple, measurable goals does not lead to ignoring the fact that it ulti-
mately is the degree to which schooling fosters cognitive skills and facilitates the acquisition
of professional skills that matters for development.
As shown in this report, differences in learning achievements matter more in explaining
cross-country differences in productivity growth than differences in the average number of
years of schooling or in enrollment rates. A development-effective educational strategy should
thus focus not only on sending more children to school, as the second Millennium Develop-
ment Goal is often interpreted, but also on maintaining or enhancing the quality of schooling.
The task at hand is imposing. As shown by the PISA survey, disparities in secondary education
between developing countries and OECD countries are even larger when one considers not
only access but also learning achievements. Things are not much better at the primary level. In
recent surveys in Ghana and Zambia, it turned out that fewer than 60 percent of young women
who complete six years of primary school could read a sentence in their own language.
Reducing disparities in access to, and in the quality of, education are two goals that must
be pursued simultaneously for any education reform to be successful. Considerable progress
has indeed been made recently in increasing enrollment, but a reversal could occur if par-
ents were to realize that the quality of schooling is not guaranteeing a solid economic return
for their children.
There are many reasons why school quality may be deficient. Countries should investigate
what the precise causes are in their own context and should be encouraged to experiment
in finding the best way to correct weaknesses. Tools such as effective teacher certification,
public disclosure of the educational achievements of schools and teachers, local school con-
trol by parents associations, and, more generally, all measures contributing to the account-
ability of teachers and head teachers, can be useful starting points for reflection. Education
reforms take time to mature and bear fruit. Engaging in such reflection and experimentation
is therefore urgent for development.
The Bank will do its part in making learning outcomes part of the overall educational
goal. It will contribute to ensuring that the measurement of learning achievements is under-
taken in a more systematic way and is properly taken into account in the Bank’s dialogue
with partner countries. It will also invest in developing the appropriate evaluation tools to
monitor this crucial part of educational development.
It is our hope that this report will be a first contribution to this agenda.

François Bourguignon
Senior Vice President and Chief Economist
The World Bank

About this book

This book aims to contribute to the World Bank’s education agenda by communicating research
findings on the impact of education quality on economic growth. Eric Hanushek and Ludger
Wößmann show that indeed the quality of education, rather than mere access to education,
is what impacts economic growth. These world-renowned researchers use data on economic
growth and student cognitive skills to help shift the dialogue to the ever-pressing issue of educa-
tion quality.
The authors have done a great service to the development community. This work will lead
to further research on the issue of learning outcomes in developing countries and to sustained
interest in the quality of education in World Bank education programs. Ruth Kagia, Harry
Patrinos, Tazeen Fasih, and Verónica Grigera commented on the report. The production of this
report was managed by the World Bank Office of the Publisher.

See the full report: Eric A. Hanushek and Ludger Wößmann. 2007. “The Role of Education Quality in Economic
Growth.” Policy Research Working Paper 4122, World Bank, Washington, D.C. http://www-wds.worldbank.org/servlet/
Schooling has not delivered fully on its also agree that families and peers contribute
promise as the driver of economic success. to education. Health and nutrition further
Expanding school attainment, at the cen- impact cognitive skills. Yet, research on the
ter of most development strategies, has not economic impact of schools—largely due
guaranteed better economic conditions. to expedience—almost uniformly ignores
What’s been missing is attention to the qual- these aspects.
ity of education—ensuring that students
actually learn. There is strong evidence that Ignoring quality differences significantly
the cognitive skills of the population, rather distorts the picture of how educational and
than mere school enrollment, are power- economic outcomes are related. The distor-
fully related to individual earnings, to the tion misses important differences between
distribution of income, and to economic education and skills and individual earn-
growth. And the magnitude of the challenge ings. It misses an important underlying
is clear—international comparisons reveal factor that determines the interpersonal dis-
even larger deficits in cognitive skills than tribution of incomes within societies. And
in school enrollment and attainment in it very significantly misses the important
developing countries. element of education in economic growth.
Building on several decades of thought There is credible evidence that educational
about human capital—and centuries of quality has a strong causal impact on indi-
attention to education in the more advanced vidual earnings and economic growth.
countries—it is natural to believe that a pro- Although information on enrollment
ductive development strategy would be to and attainment has been widely available in
raise the schooling levels of the population. developing countries, information on qual-
Indeed, this is exactly the approach of the ity has not. New data presented here on cog-
Education for All initiative and a central ele- nitive skills—our measure of educational
ment of the Millennium Development Goals. quality—show that the education deficits in
But there are four nagging uncertain- developing countries are larger than previ-
ties with these policies. First, developed ously thought.
and developing countries differ in myriad Policies aimed at increasing cognitive
ways other than schooling levels. Second, skills have themselves been disappointing. An
a number of countries—both on their own emphasis on providing more resources while
and with the assistance of others—have retaining the fundamental structure of schools
expanded schooling opportunities without has not had general success. On the other
closing the gap in economic well-being. hand, one consistent finding emerging from
Third, poorly functioning countries may research is that teacher quality strongly influ-
not be able to mount effective education ences student outcomes. Just adding resources
programs. Fourth, even when schooling does not have much effect on teacher quality.
is a focus, many of the approaches do not There is growing evidence that chang-
seem very effective and do not produce the ing the incentives in schools has an impact.
expected student outcomes. Accountability systems based upon tests of
Most people would acknowledge that a student cognitive achievement can change
year of schooling does not produce the same the incentives for both school personnel
cognitive skills everywhere. They would and for students. By focusing attention on

the true policy goal—instead of imper- higher quality, as measured by tests similar to
fect proxies based on inputs to schools— those currently being used in accountability
performance can be improved. These systems around the world, is closely related
systems align rewards with outcomes. More- to individual productivity and earnings.
over, increased local decisionmaking or local Three recent U.S. studies provide direct
autonomy, coupled with accountability, can and consistent estimates of the impact of
facilitate these improvements. There is also test performance on earnings.2 They sug-
suggestive evidence that greater school choice gest that a one standard deviation increase
promotes better performance. in mathematics performance at the end
In sum: of high school translates into 12% higher
annual earnings. Part of the return to school
• Educational quality—measured by what
quality comes from continuing school, per-
people know—has powerful effects on
haps a third to a half of the full return to
individual earnings, on the distribution
higher achievement.3
of income, and on economic growth.
Does the clear impact of quality in the
• The educational quality in developing United States generalize to developing coun-
countries is much worse than educational tries? The literature on returns to cognitive
quantity (school enrollment and attain- skills is restricted: Ghana, Kenya, Morocco,
ment), a picture already quite bleak. Pakistan, South Africa, and Tanzania. But
• Just providing more resources to schools the evidence permits a tentative conclusion
is unlikely to be successful—improving that the returns to quality may be even larger
the quality of education will take major in developing countries than in developed
changes in institutions. countries. This would be consistent with the
range of estimates for returns to quantity of
schooling, which are frequently interpreted
Educational quality directly as indicating diminishing marginal returns
affects individual earnings to schooling.4
Most attention to the value of schooling The overall summary is that the available
focuses on the economic returns to differ- estimates of the impact of cognitive skills on
ent levels of school attainment for individu- outcomes suggest strong economic returns
als. These studies have uniformly shown that within developing countries. The substan-
more schooling is associated with higher indi- tial magnitude of the typical estimates indi-
vidual earnings. The rate of return to school- cates that educational quality concerns are
ing across countries is centered at about very real for developing countries and can-
10%, with returns higher for low-income not be ignored.
countries, for lower levels of schooling, and Evidence also suggests that educational
frequently for women.1 quality is directly related to school attain-
The concentration on school attain- ment. In Brazil, a country plagued by high
ment in the academic literature contrasts rates of grade repetition and school drop-
with much of the policy debates that, even outs, higher cognitive skills in primary
in the poorest areas, involve elements of the school lead to lower repetition rates.5 Lower
“quality” of schooling. These debates, often quality schools, measured by lower value
phrased in terms of teacher salaries or class added to cognitive achievement, lead to
sizes, presume a high rate of return to schools higher dropout rates in Egyptian primary
in general and to quality in particular. schools.6 Thus, as for developed countries,
Researchers can now document that the the full economic impact of higher educa-
earnings advantages to higher achievement tional quality comes in part through greater
on standardized tests are substantial. While school attainment.
these analyses emphasize different aspects of This complementarity of school qual-
individual earnings, they typically find that ity and attainment also means that actions
measured achievement has a clear impact that improve quality of schools will boost
on earnings after allowing for differences attainment goals. Conversely, attempting to
in the quantity of schooling, the experience simply expand access and attainment—say
of workers, and other factors. In other words, through opening a large number of low

quality schools—will be self-defeating to the Figure 1 The returns to cognitive skills (literacy) are generally strong across countries
extent that there is a direct reaction to the Percentage increase in earnings per stnd. dev.
low quality that affects actual attainment. 30

The foregoing analyses for both developed
and developing countries rely largely on 20
panel data that follow individuals from
school into the labor market. The alterna- 15
tive approach is to test a sample of adults
and then to relate the measures to labor 10

market experiences, as in the International

Adult Literacy Survey (IALS). Between
1994 and 1998, 23 countries participated 0
in common testing of adults between age
























16 and 65. For these representative samples,








a number of countries also collected infor-

mation on earnings and other attributes Source: Hanushek and Zhang (2006).
that permit estimating the effect on eco-
nomic outcomes of combined scores in dif- factors as unionization and minimum wages.
ferent kinds of “literacy” (prose, document, He concludes that most of the variation
and quantitative).7 An advantage is that in the dispersion of earnings is explained
it provides information across a broader by the dispersion of skills.8
range of age and labor market experience. Other studies have also concluded that
As in prior analyses, both school attainment skills have an increasing impact on the dis-
and cognitive skills determine individual tribution of income.9 They do not attempt
incomes. Except in Poland, literacy scores to describe the causal structure, and it would
have a consistent positive impact on earn- be inappropriate to attribute the variance
ings (figure 1). The (unweighted) average of in earnings simply to differences in the quan-
the impact of literacy scores is 9.3%, only tity or quality of schooling. But to the extent
slightly less than in the U.S. studies. But that both contribute to variations in cogni-
after adjusting the returns for literacy scores, tive skills, it is fair to conclude that policies
the estimated impact of school attainment improving school quality (and educational
across the 13 countries is just 4.9% (per outcomes) will improve the distribution
added year of schooling). This low esti- of income.
mate partly reflects the joint consideration
of literacy scores and school attainment.
Early analyses have emphasized
The estimated return to years of schooling
without considering literacy scores is 6%, the role of quantity of schooling
still below the more common estimates of for economic growth
10%. The literacy tests in IALS are designed For an economy, education can increase
to measure basic skills only, and yet the dif- the human capital in the labor force, which
ferences are strongly associated with higher increases labor productivity and thus leads
earnings. These results, from a broad age to a higher equilibrium level of output.10
spectrum across a number of countries, It can also increase the innovative capacity
reinforce the importance of quality. of the economy—knowledge of new tech-
One implication of the impact of cogni- nologies, products, and processes promotes
tive skills on individual earnings is that the growth.11 And it can facilitate the diffusion
distribution of those skills in the economy and transmission of knowledge needed to
will have a direct effect on the distribution understand and process new information
of income. Very suggestive evidence comes and to implement new technologies devised
from Nickell (2004), who considers how by others, again promoting growth.12
differences in the distribution of incomes Just as in the literature on microeco-
across countries are affected by the distri- nomic returns to education, the majority of
bution of skills and by such institutional the macroeconomic literature on economic

returns to education employs the quantita- There is a clear association between growth
tive measure of years of schooling, now aver- rates and school attainment.
aged across the labor force. Using average Yet, questions persist about the interpre-
years of schooling as an education measure tation of such relationships. A substantial
implicitly assumes that a year of schooling controversy has emerged in the economics
delivers the same increase in knowledge literature about whether it is the level of
and skills regardless of the education sys- years of schooling (as would be predicted by
tem. This measure also assumes that formal several models of endogenous growth) or
schooling is the primary source of educa- the change in years of schooling (as would
tion and that variations in the quality of be predicted by basic neoclassical models)
nonschool factors affecting learning have that is the more important driver of eco-
a negligible effect on education outcomes. nomic growth. While recent research tends
This neglect of cross-country differences in to find a positive effect of schooling quan-
the quality of education is the major draw- tity on economic growth, it seems beyond
back of such a quantitative measure. the scope of current data to draw strong
The standard method of estimating the conclusions about the relative importance
effect of education on economic growth is of different mechanisms for schooling
to estimate cross-country growth regressions quantity to affect economic growth. Even
where average annual growth in gross domes- so, several recent studies suggest that educa-
tic product (GDP) per capita over several tion is important in facilitating research and
decades is expressed as a function of mea- development and the diffusion of technolo-
sures of schooling and a set of other variables gies, with initial phases of education more
deemed important for economic growth. A important for imitation, and higher educa-
vast early literature of cross-country growth tion more important for innovation.14 So,
regressions tended to find a significant posi- a focus on basic skills seems warranted for
tive association between quantitative mea- developing countries.
sures of schooling and economic growth.13 But reverse causation running from
The research reported here suggests that higher economic growth to additional edu-
each year of schooling boosts long-run cation may be at least as important as the
growth by 0.58 percentage points (figure 2). causal effect of education on growth in
the cross-country association.15 It is also
Figure 2 Each year of schooling is associated with a long-run growth increase important—for economic growth—to get
of 0.58 percentage points other things right as well, particularly the
Conditional growth institutional framework of the economy.16

The quality of education matters

even more for economic growth
The most important caveat for the lit-
2 erature on education and growth is that it
sticks to years of schooling as its measure of
education—to the neglect of qualitative dif-
ferences in knowledge. This misses the core
of what education is all about. The problem
⫺2 seems even more severe in cross-country
comparisons than in analyses within coun-
tries: Who would sensibly assume that the
⫺4 average student in Ghana or Peru would
⫺4 ⫺2 0 2 4 6
Conditional years of schooling
gain the same amount of knowledge in any
year of schooling as the average student in
coef ⫽ .58144999, se ⫽ .09536607, t ⫽ 6.1
Finland or Korea? Still, using the quanti-
Source: Hanushek and Wößmann (2007). tative measure of years of schooling does
Note: This is an added-variable plot of a regression of the average annual rate of growth (in percent) of real GDP per
capita in 1960–2000 on average years of schooling in 1960 and the initial level of real GDP per capita in 1960. exactly that.

Years of schooling has a second major real GDP per capita to the measure of educa-
shortcoming. It implicitly assumes that all tional quality, years of schooling, the initial
skills and human capital come from for- level of income, and several other control
mal schooling. Yet extensive evidence on variables (including, in different specifica-
knowledge development and cognitive skills tions, the population growth rates, politi-
indicates that a variety of factors outside cal measures, openness of the economies,
of school—family, peers, and others—have and the like). Adding educational quality
a direct and powerful influence. Ignoring to a base specification including only initial
these nonschool factors introduces another income and educational quantity boosts
element of measurement error into the the variance in GDP per capita among the
growth analyses in the same way as it did in 31 countries in Hanushek and Kimko’s sam-
the analysis of individual earnings. ple that can be explained by the model from
33% to 73%.17 The effect of years of school-
ing is greatly reduced by including quality,
The leading role of cognitive skills leaving it mostly insignificant. At the same
Since the mid-1960s, international agencies time, adding the other factors leaves the
have conducted many international tests of effects of quality basically unchanged. Sev-
student performance in cognitive skills such eral studies have since found very similar
as mathematics and science. Every developing results.18 In sum, the evidence suggests that
country that participated in one of the tests the quality of education, measured by the
performed dramatically lower than any OECD knowledge that students gain as depicted in
(Organisation for Economic Co-operation tests of cognitive skills, is substantially more
and Development) country (figure 3). The important for economic growth than the
variation in the quality of education that mere quantity of education.
exists among OECD countries is already sub-
stantial. But the difference from developing
countries in the average amount of learning New evidence on the importance
acquired after a given amount of schooling of educational quality for
dwarfs any within-OECD difference. economic growth
Over the past 10 years, growth research New evidence adds international student
demonstrates that considering the quality achievement tests not previously available
of education, measured by the cognitive and uses the most recent data on economic
skills learned, dramatically alters the assess- growth to analyze an even longer period
ment of the role of education in economic (1960–2000).19 It extends the sample of coun-
development. Using the data from the inter- tries with available test-score and growth
national student achievement tests through information to 50 countries. These data are
1991 to build a measure of educational also used to analyze effects of the distribution
quality, Hanushek and Kimko (2000) find of educational quality at the bottom and at
a statistically and economically significant the top on economic growth, as well as inter-
positive effect of the quality of education on actions between educational quality and the
economic growth in 1960–90 that is far larger institutional infrastructure of an economy.
than the association between the quantity of The measure of the quality of educa-
education and growth. So, ignoring qual- tion is a simple average of the mathematics
ity differences very significantly misses the and science scores over international tests,
true importance of education for economic interpreted as a proxy for the average edu-
growth. Their estimates suggest that one cational performance of the whole labor
country-level standard deviation (equivalent force. This measure encompasses overall
to 47 test-score points in PISA 2000 math- cognitive skills, not just those developed in
ematics, the same scale used in figure 3) schools. Thus, whether skills are developed
higher test performance would yield about at home, in schools, or elsewhere, they are
one percentage point higher annual growth. included in the growth analyses.
That estimate stems from a statistical After controlling for the initial level of
model that relates annual growth rates of GDP per capita and for years of schooling,

Figure 3 Performance on international student achievement tests tracks educational quality over time
Test score
550 Taiwan (573)

Korea, Rep.
Korea, Rep.
Israel Taiwan
New Zealand
Singapore Hong Kong
Japan Estonia

Japan Finland
Slovak Rep. Macao-China
Netherlands Canada
Czech Rep. Australia
France Australia Netherlands
Slovenia Ireland
Hong Kong Liechtenstein
Belgium Korea, Rep. Switzerland
Hungary Bulgaria Sweden
Austria New Zealand
Germany Russian Fed.
Australia United Kingdom
Netherlands Belgium
Finland Hungary Austria
United Kingdom Sweden Czech Rep.
Hungary France
500 Sweden
Hong Kong
United Kingdom
Netherlands Belgium
Finland Canada Hungary
France Switzerland United States
Norway United States Iceland
Sweden France Germany
Australia New Zealand Denmark
Italy Poland Germany
Belgium Slovak Rep.
United States Norway Malaysia
United Kingdom Ireland
Singapore Latvia
Italy Poland
Canada Iceland Spain
New Zealand Yugoslavia
Malaysia Italy
Italy Denmark Norway
Israel Latvia Russian Fed.
United States Spain Slovenia
Thailand Greece
Lithuania Romania
Thailand Moldova
Thailand Portugal Luxembourg
Israel Israel
450 Trinidad & Tobago

India Armenia
Nigeria Moldova Turkey

Iran Philippines Iran

Colombia Colombia
Jordan Iran
Nigeria Argentina
Venezuela Palestine
Kuwait Mexico
400 Tunisia
Turkey Chile
Malawi Indonesia Lebanon

Zimbabwe Indonesia

Chile Tunisia
Saudi Arabia
Philippines Botswana

Belize (342)
1960s–70s 1980s 1990s 2000s
Source: Based on Hanushek and Wößmann (forthcoming).

the test-score measure features a statistically Figure 4 Test scores, as opposed to years of schooling, have a powerful impact on growth
significant effect on the growth of real GDP a. Impact of test scores on economic growth
per capita in 1960–2000 (figure 4). Accord- Conditional growth
ing to this simple specification, test scores 4
that are larger by one standard deviation SGP

(measured at the student level across all 3 TWN

OECD countries in PISA) are associated
with an average annual growth rate in GDP 2 HKG

per capita that is two percentage points THA

higher over the whole 40-year period. 1 TUN MYS
Adding educational quality (to a model IDN CHE
that just includes initial income and years 0 NOR AUS SWE NLD IRN
of schooling) increases the share of varia- MEX
tion in economic growth explained from ⫺1 CHL
25% to 73%. The quantity of schooling is ZAF ROM

statistically significantly related to economic ⫺2 GHA

growth in a specification that neglects edu-
cational quality, but the association between ⫺3
years of schooling and growth turns insignif-
icant and is reduced to close to zero once the ⫺4
⫺1.5 ⫺1.0 ⫺0.5 0 0.5 1.0 1.5
quality of education is included in the model
Conditional test score
(see the bottom of figure 4).20 The same pat-
tern of results is preserved when any varia- coef ⫽ 1.9804387, se ⫽ .21707105, t ⫽ 9.12

tion between five world regions is ignored.

b. Impact of years of schooling on economic growth
So even when considering the variation just
Conditional growth
within each region, educational quality is 2
significantly related to economic growth.
Recent literature on the determinants of
economic growth emphasizes the importance CYP
of the institutional framework of the econ- 1 USA BRA
omy. The most common and powerful mea- HKG
sures of the institutional framework used in PRT THA KOR NOR
empirical work are the openness of the econ- DNK CHL
omy to international trade and the security 0 ISL CAN ARG
of property rights. These two institutional EGY SWE
variables are jointly highly significant when FRA
added to the model. But the positive effect of NZL
educational quality on economic growth is ⫺1 GHA
very robust to the inclusion of these controls, ZWE

albeit reduced in magnitude to 1.26.

Other possible determinants of economic JOR
growth often discussed in the literature are ⫺2
fertility and geography. But when the total ⫺4 ⫺3 ⫺2 ⫺1 0 1 2 3 4

fertility rate and common geographical prox- Conditional years of schooling

ies, such as latitude or the fraction of the land coef ⫽ .0264058, se ⫽ .07839797, t ⫽ .34
area located within the geographic tropics, are Source: Hanushek and Wößmann (2007).
added to the model, neither is statistically sig- Note: These are added-variable plots of a regression of the average annual rate of growth (in percent) of real GDP
per capita in 1960–2000 on the initial level of real GDP per capita in 1960, average test scores on international student
nificantly associated with economic growth. achievement tests, and average years of schooling in 1960.
ARG ⫽ Argentina, AUS ⫽ Australia, AUT ⫽ Austria, BEL ⫽ Belgium, BRA ⫽ Brazil, CAN ⫽ Canada, CHE ⫽
An important issue is whether the role Switzerland, CHL ⫽ Chile, CHN ⫽ China, COL ⫽ Colombia, CYP ⫽ Cyprus, DNK ⫽ Denmark, EGY ⫽ Arab Rep. of Egypt,
of educational quality in economic devel- ESP ⫽ Spain, FIN ⫽ Finland, FRA ⫽ France, GBR ⫽ United Kingdom, GHA ⫽ Ghana, GRC ⫽ Greece, HKG ⫽ Hong Kong
(China), IDN ⫽ Indonesia, IND ⫽ India, IRL ⫽ Ireland, IRN ⫽ Islamic Rep. of Iran, ISL ⫽ Iceland, ISR ⫽ Israel, ITA ⫽
opment differs between developing and Italy, JOR ⫽ Jordan, JPN ⫽ Japan, KOR ⫽ Rep. of Korea, MAR ⫽ Morocco, MEX ⫽ Mexico, MYS ⫽ Malaysia, NLD ⫽
developed countries. But results are remark- Netherlands, NOR ⫽ Norway, NZL ⫽ New Zealand, PER ⫽ Peru, PHL ⫽ Philippines, PRT ⫽ Portugal, ROM ⫽ Romania,
SGP ⫽ Singapore, SWE ⫽ Sweden, THA ⫽ Thailand, TUN ⫽ Tunisia, TUR ⫽ Turkey, TWN ⫽ Taiwan, URY ⫽ Uruguay,
ably similar when comparing the sample USA ⫽ United States, ZAF ⫽ South Africa, and ZWE ⫽ Zimbabwe.

of OECD countries to the sample of non- of countries is not statistically significant,

OECD countries, with the point estimate however). The results remain qualitatively
of the effect of educational quality slightly the same when openness and quality of
larger in non-OECD countries. (The differ- institutions are again added as control vari-
ence in the effect of educational quality on ables. When the sample is separated based
economic growth between the two groups on whether a country was below or above
the median of GDP per capita in 1960, the
Figure 5 Test scores influence growth in both low- and high-income countries effect of educational quality is larger in
a. Countries with initial income below mean low-income countries than in high-income
Conditional growth countries (figure 5).
Among the developing countries, the
Singapore returns to increased years of schooling
Taiwan (China) increase with the quality of the education.
Once there is a high-quality school system,
2 Korea, Rep. of
Hong Kong (China) it pays to keep children in school longer—
Thailand Portugal but it does not pay if the school system does
1 Cyprus China
not produce skills.
Indonesia The results are very robust to alternative
0 Morocco Iran
Brazil India specifications of the growth relationships.
First, the impact of cognitive skills remains
Chile Colombia qualitatively the same when measured just
Romania Jordan
Zimbabwe by the tests performed at the level of lower
⫺2 Ghana
secondary education, excluding any test
in primary schooling or in the final year of
secondary education. Given differing school
completion rates, the test for the final year
⫺1.5 ⫺1.0 ⫺0.5 0 0.5 1.0 of secondary schooling may imply cross-
Conditional test score country samples with differential selectivity
coef ⫽ 2.2860685, se ⫽ .32735727, t ⫽ 6.98
of test takers. Yet neither the primary-school
b. Countries with initial income above mean
tests nor the tests in the final secondary year
Conditional growth are crucial for the results.
2 Furthermore, results are qualitatively the
same when using only scores on tests per-
formed since 1995. These recent tests have
not been used in the previous analyses and
1 Iceland are generally viewed as having the highest
Ireland Italy
standard of sampling and quality control. At
Spain Finland
United States Belgium
France the same time, because test performance mea-
Denmark Greece sured since 1995 is related to the economic
Canada Netherlands
0 Switzerland Austria data for 1960–2000, a test score measure that
Mexico Sweden
Japan disregards all tests since the late 1990s was
United Kingdom also used. The results are robust, with a point
Israel New Zealand
estimate on the test score variable that is sig-
⫺1 South Africa Argentina nificantly higher when the tests are restricted
to only those conducted until 1995 (sample
reduced to 34 countries) and until 1984 (22
countries). In sum, the results are not driven
⫺2 by either early or late test scores alone.
⫺1.5 ⫺1.0 ⫺0.5 0 0.5
Conditional test score
The results are also robust to performing
the analyses in two sub-periods, 1960–80
coef ⫽ 1.2869403, se ⫽ .23947381, t ⫽ 5.37
and 1980–2000. The most recent period
Source: Hanushek and Wößmann (2007).
Note: These are added-variable plots of a regression of the average annual rate of growth (in percent) of real GDP includes the Asian currency crisis and other
per capita in 1960–2000 on the initial level of real GDP per capita in 1960, average test scores on international student major economic disruptions which could
achievement tests, and average years of schooling in 1960. Division into low- and high-income countries based on
whether a country’s GDP per capital in 1960 was below or above the sample median. affect the apparent impact of educational

quality on growth—but they do not. Test set of proficiency levels, the threshold of
scores exert a positive effect on growth in 400 points is used as the lowest bound for
both sub-periods, while years of schooling a basic level of science literacy.21 A level of
remain insignificant in both. 400 points means performance at one stan-
Are East Asian countries driving the dard deviation below the OECD mean. The
association between educational quality share of students achieving this level ranges
and economic growth? As is obvious from from 18% in Peru to 97% in the Netherlands
figure 4, several East Asian countries feature and Japan, with an international median
both high educational quality and high eco- of 86% in the sample. The threshold of
nomic growth—these countries dominate 600 points captures the very high perform-
the top right corner of the figure. Still, the ers, those performing at more than one stan-
association between educational quality dard deviation above the OECD mean. The
and growth is not solely due to a difference share of students achieving this level ranges
between the East Asian countries and the from below 0.1% in Colombia and Morocco
rest, or between any other world regions. to 18% in Singapore and the Republic of
Furthermore, when all 10 East Asian coun- Korea and 22% in Taiwan (China) with an
tries are dropped from the sample, the international median of 5% in the sample.
estimate on educational quality remains When the share of students above the
statistically highly significant at a point two thresholds is entered in the growth
estimate of 1.3. The significant effect in the model, both turn out to be separately signif-
sample without East Asian countries is also icantly related to economic growth. That is,
evident in the two separate sub-periods, both education for all and the share of top
with the point estimates larger in the sepa- performers seem to exert separately iden-
rate regressions. tifiable effects on economic growth. These
initial results should be viewed as sugges-
Education for all or rocket tive rather than definite, not least because of
scientists—or both? the high correlation between the two mea-
It is important to know whether different sures of quality (0.73 at the country level).
parts of the distribution of education affect Importantly, the relative size of the effects
growth differently. Loosely speaking, is it a of performance at the bottom and at the top
few “rocket scientists” at the very top who of the distribution depends on the speci-
spur economic growth, or is it “education for fication, and further research is needed to
all” that lays a broad base at the lower parts yield more detailed predictions. Even so, the
of the distribution? Does educational perfor- evidence strongly suggests that both dimen-
mance at different points in the distribution sions of educational performance count
have separate effects on economic growth? for the growth potential of an economy.22
Such effects are estimated by measuring Additional specifications using different
the share of students in each country that points of the distribution of test scores sup-
reaches a certain threshold of basic literacy port this general view.
at the international scale, as well as the The combined test-score measure can
share of students that surpasses an interna- also be divided into one using only the math
tional threshold of top performance. The tests and one using only the science tests.
400 and 600 test-score points are used as Both subject-specific test scores are signifi-
the two thresholds on the transformed inter- cantly associated with growth when entered
national scale. separately or jointly. There is some tendency
The threshold of 400 points is meant to for math performance to dominate science
capture basic literacy. On the PISA 2003 performance in different robustness specifi-
math test, for example, this would corre- cations, but math and science performance
spond to the middle of the level 1 range, carry separate weights for economic growth.
denoting that students can answer ques- In sum, different dimensions of the qual-
tions involving familiar contexts where ity of education seem to have independent
all relevant information is present and positive effects on economic growth. This is
the questions are clearly defined. While the true both for basic and top dimensions of
PISA 2003 science test does not define a full educational performance and for the math

and science dimensions. Because of the thin increases to 2.5 in open economies. The
country samples, however, one should trust reported result is robust to including the
the pattern of results more than the specific measure of protection against expropria-
estimates. tion. When using protection against expro-
priation rather than openness to trade as
the measure of institutional quality, there
The interaction of educational is similarly a positive interaction term with
quality with economic institutions educational quality, although it lacks statis-
The role of economic institutions as the fun- tical significance.
damental cause of differences in economic In sum, both the quality of the insti-
development, emphasized in recent litera- tutional environment and the quality of
ture,23 raises the possibility that the effect education seem important for economic
of educational quality on economic growth development. Furthermore, the effect of
may differ depending on the economic in- educational quality on growth seems sig-
stitutions of a country. The institutional nificantly larger in countries with a produc-
framework affects the relative profitabil- tive institutional framework, so that good
ity of piracy and productive activity. If the institutional quality and good educational
available knowledge and skills are used in quality can reinforce each other. Thus, the
the former activity rather than the latter, the macroeconomic effect of education depends
effect on economic growth may be very dif- on other complementary growth-enhancing
ferent, perhaps even turning negative.24 The policies and institutions. But cognitive skills
allocation of talent between rent-seeking have a significant positive growth effect even
and entrepreneurship matters for growth: in countries with a poor institutional envi-
countries with more engineering students ronment.
grow faster and countries with more law
students grow more slowly.25 Education may
not have much impact in less developed The implications of educational
countries that lack other facilitating factors reform for faster growth
such as functioning institutions for markets It is important to understand the implica-
and legal systems.26 And due to deficiencies tions of policies designed to improve edu-
in the institutional environment, cognitive cational outcomes. The previous estimates
skills might have been applied to socially provide information about the long run
unproductive activities in many develop- economic implications of improvements
ing countries, rendering the average effect in educational quality. To better understand
of education on growth across all countries the impact of improved achievement, it is
negligible.27 Social returns to education may useful to relate policy reforms directly to
be low in countries with perverse institu- the pattern of economic outcomes consis-
tional environments—a point certainly tent with feasible improvements.
worth pursuing. Two aspects of any educational reform
Adding the interaction of educational plan are important: First, what is the size of
quality and one institutional measure— the reform accomplished? Second, how fast
openness to international trade—to the does the reform achieve results? As a bench-
growth specification suggests that both have mark, consider a reform that yields a 0.5
significant individual effects on economic standard deviation improvement in aver-
growth and a significant positive interac- age achievement of school completers. This
tion. The effect of educational quality on metric is hard to understand intuitively, in
economic growth is indeed significantly part because most people have experiences
higher in countries that have been fully within a single country. It is possible, how-
open to international trade than in coun- ever, to put this in the context of the previous
tries that have been fully closed. The effect estimates. Consider, for example, a devel-
of educational quality on economic growth oping country with average performance
is significantly positive, albeit relatively at roughly 400 test-score points, approxi-
low at 0.9, in closed economies—but it mately minimal literacy. On the PISA

2003 examinations, average achievement Figure 6 GDP increases significantly with moderately strong knowledge improvement
(0.5 standard deviations)
in Brazil, Indonesia, Mexico, and Thailand
fell close to this level. An aggressive reform Percent additions to GDP
plan would be to close half the gap with the
average OECD student, an improvement of
half a standard deviation. 20-year reform
As an alternative policy change, con- 30
sider what it would mean if a country cur-
rently performing near the mean of OECD
countries in PISA at 500 test-score points 20
(for example, Norway or the United States
in PISA 2000 or Germany in PISA 2003) 30-year reform
managed to increase its educational qual- 10
ity to the level of top performers in PISA Typical education
at roughly 540 test-score points (for exam- spending
ple, Finland or Korea on either PISA test).
Such an increase amounts to 0.4 standard






















The timing of the reform is also impor- Year

tant in two ways. First, such movement of Source: Hanushek and Wößmann (2007).
Note: The figure simulates the impact on the economy of reform policies taking 20 or 30 years for a 0.5 standard devia-
student performance cannot be achieved tion improvement in student outcomes at the end of upper secondary schooling—labeled as a “moderately strong
knowledge improvement.” For the calibration, policies are assumed to begin in 2005—so that a 20-year reform would
instantaneously but requires changes in be complete in 2025. The actual reform policy is presumed to operate linearly such that, for example, a 20-year reform
schools that will be accomplished over that ultimately yielded ½ standard deviation higher achievement would increase the performance of graduates by
0.025 standard deviations each year. It is also necessary to characterize the impact on the economy, which is assumed
time (say, through systematic replacement to be proportional to the average achievement levels of prime age workers. Finally, for this exercise the growth impact
of teachers through retirement and subse- is projected according to the basic achievement model that also includes the independent impact of economic institu-
tions, where the coefficient estimate on test scores is 1.265. The figure indicates how much larger the level of GDP is
quent hiring). The timeframe of any reform at any point after the reform policy is begun as compared to that with no reform. In other words, the estimates suggest
the increase in GDP expected over and above any growth from other factors.
is difficult to specify, but achieving the
change of 0.5 standard deviations described
above for an entire nation may take 20 to significant change that would permit the
30 years. Second, if the reforms succeed, growth dividend to more than cover all pri-
their impact on the economy will not be mary and secondary school spending. But
immediate—initially the new graduates will even a 30-year reform program (not fully
be a small part of the labor force. It will be accomplished until 2035) would yield more
some time after the reform of the schools than 5% higher real GDP by 2041.
before the impact on the economy is real- Projecting these net gains from school
ized. In other words, the prior estimates are quality further past the reform period shows
best thought of as the long-run, or equilib- vividly the long-run impacts of reform.
rium, outcomes of a labor force with a given Over a 75-year horizon, a 20-year reform
educational quality. yields a real GDP 36% higher than without
Faster reforms will have larger impacts a change in educational quality.
on the economy, simply because the bet- It must nonetheless be clear that these
ter workers become a dominant part of effects represent the result from actual gains
the workforce sooner (figure 6). But even a in educational outcomes. There have been
20- or 30-year reform plan has a powerful many attempts around the world to improve
impact. For example, a 20-year plan would student outcomes, and many of these have
yield a GDP 5% greater in 2037 (compared failed to yield gains in student performance.
with the same economy with no increase in Bad reforms—those without impacts on
educational quality). The figure also plots students—will not have these growth effects.
3.5% of GDP, an aggressive spending level This simulation shows that the previ-
for education in many countries of the ous estimates of the effects of educational
world. Significantly greater than the typical quality on growth have large impacts on
country’s spending on all primary and national economies. At the same time, while
secondary schooling, 5% of GDP is a truly the rewards are large, they also imply that

policies must be considered across long and less than 30% in Central America and
periods, requiring patience—patience not South and East Asia do so. Even in South
always clear in national policymaking. These America, only 43% finish, although only
reforms must also be put in a broader per- 17% of a cohort do not complete grade 5
spective because other kinds of institutional (which often serves as an initial indication of
changes and investments will also take time. basic literacy and numeracy rates). In West
Changing basic economic institutions, for and Central Africa, 59% of each cohort do
example, seldom happens overnight, and not even complete grade 5, and 44% never
the economy needs time to adjust. enroll in school in the first place.
Focusing on this dimension of schooling
quantity, many policy initiatives of national
Where does the developing governments and international develop-
world stand today? ment agencies have tried to increase educa-
Given the importance of cognitive skills for tional attainment. The data in figure 7 show
economic development, it is telling to docu- that there is a long way to go. But even this
ment how developing countries fare in the dire picture may understate the challenge.
quantity of schooling and the quality of
Low quality of education
The description of school completion
Low quantity of schooling ignores the level of cognitive skills acquired.
The disadvantages of less developed coun- Completing 5 or even 9 years of schooling
tries in educational enrollment and attain- in the average developing country does not
ment have been well documented. While mean that the students have become func-
almost all OECD countries have universal tionally literate in basic cognitive skills. As
school attainment to grade 9, all develop- a recent report by the World Bank Indepen-
ing regions are far from that (figure 7). In dent Evaluation Group (2006) documents,
the average African country in the data, high priority was accorded to increasing
only 13% of each cohort finishes grade 9, primary school enrollment in developing
countries over the past 15 years. Whether
Figure 7 Low educational attainment is clear in developing countries children were learning garnered much less
attention. The low performance of stu-
1 0 dents in nearly all the developing countries
Europe & Central Asia 16 83
participating in the international student
achievement tests has already been docu-
South America 15 41 43
mented (figure 3). But mean performance
can hide dispersion within countries, and
East Asia & Pacific 9 17 43 31
the prior analyses of growth show that there
Middle East & North
is separate information at different percen-
18 12 39 31 tiles of the test-score data.
Figure 8 depicts the share of students in
South Asia 28 12 33 27 selected countries that surpasses the thresh-
olds of 400 and 600 test-score points on the
Central America 10 25 40 25 transformed scale of the combined interna-
tional tests—the same measure and thresh-
East & South Africa 17 27 43 13 olds used in the prior growth analyses.
When considering the basic educational
West & Central Africa 44 15 28 13 achievement of students, the share of stu-
dents surpassing the threshold of 400 test-
0 20 40 60 80 100
score points is a rough threshold of basic
literacy in mathematics and science. As is
Never enrolled Dropout between grades 1 and 5 evident from the figure, this share varies
Dropout between grades 5 and 9 Finished grade 9 immensely across countries. In Japan, the
Note: Based on Pritchett (2004). Netherlands, Korea, Taiwan, and Finland,

less than 5% of tested students fall below Figure 8 The share of students below 400 (“illiterate”), between 400 and 600, and above
600 varies noticeably across selected countries
this literacy threshold. By contrast, more
than half the tested students in many devel- Estonia
oping countries do not reach this threshold. Netherlands
The countries with the largest shares of Korea
Taiwan (China)
students who are functionally illiterate are Finland
Peru (82%), Saudi Arabia (67%), Brazil Singapore
(66%), Morocco (66%), South Africa (65%), Sweden
Botswana (63%), and Ghana (60%). In China
United Kingdom
these countries, more than 60% of those in France
school do not reach basic literacy in cogni- United States
tive skills. Note that the group of developing Germany
Russian Federation
countries participating in the international Malaysia
tests is probably already a select sample Thailand
from all developing countries and that the Israel
children enrolled in school at the different Swaziland
testing grades are probably a select group of Iran
the children of a certain age. Nigeria
The size of the task: educational Lebanon
quantity and quality Egypt
It is useful to combine the two separate views Palestine
of the educational challenges for developing Mexico
countries—the quantity and quality of Indonesia
education. For countries with both reliable Tunisia
attainment data from the household sur- Botswana
South Africa
veys and data from international student Morocco
achievement tests, educational attainment Brazil
Saudi Arabia
of 15–19-year-olds from the latest available Peru
year is combined with test scores at the end 0 20 40 60 80 100
of lower secondary education (eighth grade Percent
or 15-year-olds) from an adjacent year close
Below 400 Between 400 and 600 Above 600
by. This allows calculation of rough shares
of recent cohorts of school-leaving age: how Source: Hanushek and Wößmann (in process), based on several international tests.

many were never enrolled in school, how

many dropped out of school by grade 5 and Figure 9 Ghana, South Africa, and Brazil show varying sources for the lack of education
of 15–19-year-olds
by grade 9, how many finished grade 9 with
a test-score performance below 400 (signal-
ing functional illiteracy), and how many Brazil 3 28 46 14 8
finished grade 9 with a test-score perfor-
mance above 400. Only the last group can
be viewed as having basic literacy in cogni- South Africa 1 6 47 39 7
tive skills.28
In 11 of the 14 countries for which the data
are available—Albania, Brazil, Colombia, Ghana 12 10 40 32 5
Egypt, Ghana, Indonesia, Morocco, Peru,
the Philippines, South Africa, and Turkey—
0 20 40 60 80 100
the share of fully literate students in recent
cohorts is less than a third. In Ghana, South
Africa, and Brazil, only 5–8% of each cohort Never enrolled Dropout between grades 1 and 5 Dropout between grades 6 and 9
reaches literacy (figure 9). The remain- Finished grade 9 without being literate Literate at grade 9
der, more than 90% of the population, are Note: Hanushek and Wößmann calculations based on Filmer (2006) and micro data from different international student
illiterate—because they never enrolled in achievement tests.

school, because they dropped out of school of the developing countries of the world
at the primary or early secondary level, or and in international development organiza-
because even after completing lower second- tions. Much of policy over recent decades
ary education their grasp of basic cognitive has been predicated on the view that the
skills was too low to be viewed as literate. primary obstacle to improving schools is
In contrast, 42% of a cohort in Thailand, the lack of resources—a seemingly self-
55% in Armenia, and 63% in Moldova can evident approach given the lack of facili-
be viewed as literate at the end of lower sec- ties and shortages of trained personnel that
ondary schooling. developing countries face.
An example of a basic test question
from one of the international achievement The role of resources and teachers
tests illustrates the scope of the problem in Unfortunately, both simple and sophisti-
developing countries. One question asked to cated analyses produce the same answer:
eighth-graders in TIMSS 2003 was: “Alice ran Pure resource policies that adopt the existing
a race in 49.86 seconds. Betty ran the same structure of school operations are unlikely
race in 52.30 seconds. How much longer did to lead to the necessary improvements in
it take Betty to run the race than Alice? (a) learning. Box 1 provides simple evidence on
2.44 seconds (b) 2.54 seconds (c) 3.56 sec- this point—there is no relationship between
onds (d) 3.76 seconds.” While 88% of eighth- spending and student performance across
grade students in Singapore, 80% in Hungary, the sample of middle- and higher-income
and 74% in the United States got the correct countries with available data. Investigations
answer (a), only 19% in Saudi Arabia, 29% within a wide range of countries, including
in South Africa, and 32% in Ghana got the a variety of developing countries, further
correct answer. Random guessing would support this picture.29
have yielded a 25% average. The research on schools in developing
Combining the data on quantitative edu- countries has been less extensive than that
cational attainment and qualitative achieve- in developed countries. Moreover, the evi-
ment of cognitive skills makes clear the dence is frequently weaker because of data
truly staggering task facing most developing or analytical problems with the underlying
countries. In many developing countries, studies. Nonetheless, as Pritchett (2004)
the share of any cohort that completes lower convincingly argues on the basis of ample
secondary education and passes at least a evidence, just increasing spending within
low benchmark of basic literacy in cogni- current education systems in developing
tive skills is below 1 person in 10. Thus, the countries is unlikely to improve students’
education deficits in developing countries performance substantially.30 Overwhelming
seem even larger than generally appreciated. evidence shows that expansions on the input
Several additional references for examples of side, such as simple physical expansion
extremely low educational performance of of the educational facilities and increased
children even after years of schooling from spending per student, generally do not seem
different developing countries are provided to lead to substantial increases in children’s
in Pritchett (2004). With this dismal state of competencies and learning achievement.
the quantity and quality of education in most The lack of substantial resource effects in
developing countries, the obvious remaining general, and class-size effects in particu-
question is, what can be done? lar, has been found across the developing
world, including countries in Africa, Latin
Improving educational quality America, and Asia.31
Again, it is necessary to understand the
requires a focus on institutions character of the results. In particular, the
and efficient education spending, evidence refers most specifically to overall
not just additional resources infusions of resources. They do not deny that
The question remains, “What can be done some investments are productive. A number
to improve the schools in developing coun- of studies provide convincing evidence that
tries?” It has bedeviled policymakers in each some minimal levels of key resources are

BOX 1. Simply increasing educational spending does not ensure improved student outcomes
The disappointing past results generally reflect Expenditure per student does not drive student performance differences across countries
pursuing policies with little empirical support.
But past outcomes should not be generalized Association between average math performance in PISA 2003 and cumulative expenditure on
to all policies. Many policies involve substantial educational institutions per student between ages 6–15, in US dollars, converted by purchasing
flows of resources—direct spending, changes power parities
in teacher salaries, reductions in class size, and
Math performance in PISA 2003
the like—made within the context of current
550 Finland
school organization. The empirical evidence Korea, Rep. of
Netherlands Japan
documents the difficulties with such policies. Canada
Belgium Switzerland
Simply providing more resources gives lit- Australia Iceland
Czech Rep. France Denmark
tle assurance that student performance will Sweden Austria
Ireland Germany
500 Slovak Rep. Norway
improve significantly. Poland Hungary
The box figure presents the international Spain United States
association between spending levels and math Portugal Italy
performance in the latest international test, the
2003 cycle of PISA conducted by the OECD. The 450 Greece
solid line is the regression line for PISA scores
on cumulative expenditure (age 6–15). Taken
literally, this line indicates that $60,000 per stu-
dent in additional expenditure (a quadrupling 400
of spending in the low spending countries) is Mexico
associated with about a half standard deviation
improvement in scores. But, this relationship is
almost entirely due to the two spending and 350
0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000
performance outliers—Mexico and Greece. It is
impossible to believe that the only difference Cumulative educational expenditure per student
between these two countries and the remain- Source: OECD (2004, pp. 102 and 358); Wößmann (forthcoming-a).
der is their spending on schools. For example,
there are four countries spending less than
Greece but performing better. Omitting Mexico
and Greece, there is no relationship between between the early 1970s and the mid-1990s. Yet, This almost certainly is the case. It is consistent
expenditure and performance (the dashed comparing scores in 1970 and 1994/95 suggests with the few “resource findings” about the avail-
regression line). that no substantial performance improvements ability of textbooks, the importance of basic
On average, the countries with high educa- for students occurred in these countries.a facilities, the impact of having teachers actually
tional expenditure perform at the same level This evidence, while covering a wide range show up for class, and similar minimal aspects
as countries with low educational expenditure. of countries, is again lightly represented in of a school.b
While the sampled countries in the figure are developing countries, because developing At the same time, there is little evidence for
middle- and higher-income countries, as the countries have not participated very frequently any serious notion of resource needs. One might
text points out, other evidence from developing in the various international tests. This nonpartic- suspect that resource effects would appear to
countries is consistent. This picture is only the ipation is itself an important policy issue. It is dif- be nonlinearly related to achievement such that,
most recent demonstration that spending alone ficult to know what improvements are needed below some level, there is a strong relationship
is not associated with student performance. The or whether any policy changes are having an between added resources and student out-
same picture can be found with previous inter- impact without accurately measuring student comes. There is little evidence supporting this
national student tests like TIMSS. Hanushek and performance. kind of relationship.
Kimko (2000) take into account other factors, The general story that emerges from work Part of the difficulty arises from the infer-
including parental education, in their investiga- in developing countries remains very similar ence that teacher quality is the most impor-
tion of earlier test score differences but find no to that for developed countries. Simply provid- tant school element but that teacher quality
relationship with expenditure per pupil, expend- ing generally increased resources, or resources is unrelated to common measures of salary,
iture as a fraction of GDP, or pupil-teacher ratios. along the lines commonly suggested, such education, experience, certification, and the
Similarly, even when numerous family back- as reducing class sizes or across-the-board like.c This implies that resources, at least as
ground and school features are considered in increases in teacher salaries, is unlikely to lead to currently spent, are not effective in improving
cross-country student-level microeconometric substantial changes in student performance. As teacher quality. Rather than a necessary condi-
regressions, these results hold. in developed countries, it appears extraordinar- tion, this is merely an observation about how
Nor does the picture change when changes ily important to get the incentives and institu- the current institutions translate resources
in expenditure over time within individual coun- tional structure right. into results.
tries are examined. A detailed study of changes The general lack of any systematic rela-
over time in educational expenditure and stu- tionship between student achievement and a. Gundlach, Wößmann, and Gmelin (2001); Wößmann
dent performance has shown that educational resources raises the question of whether there (2002, section 3.3).
expenditure per student increased substantially is some minimum required level of resources b. Hanushek (1995, 2003).
in real terms in all considered OECD countries even if impacts are not evident at higher levels. c. Hanushek and Rivkin (2006).

frequently valuable in promoting student This said, some clear general policies
learning. Nonetheless, while there are sugges- are important. Foremost among them, the
tive findings of positive resource effects scat- performance of a system is affected by the
tered across the literature,32 the main message incentives that actors face. If the actors in
is still not one of broad, resource-based policy the education process are rewarded (extrin-
initiatives. The impact of these policies and sically or intrinsically) for producing better
programs, even if we presume that they could student performance, and if they are penal-
be replicated elsewhere, is limited. ized for not producing high performance,
The most consistent finding across a this will improve performance. The incen-
wide range of investigations is that the qual- tives to produce high-quality education,
ity of the teacher in the classroom is one of in turn, are created by the institutions of
the most important attributes of schools.33 the education system—all the rules and
Good teachers, defined in terms of student regulations that (explicitly or implicitly)
learning, are able to move the achieve- set rewards and penalties for the people
ment of their students far ahead of those involved. A significant aspect of such incen-
of poor teachers. Yet the identification of tives involves either getting better perfor-
good teachers has been complicated by the mance out of existing teachers or improving
fact that the simple measures commonly the selection and retention of high-quality
used—such as teacher experience, teacher teachers. So, one might expect that institu-
education, or even meeting the required tional features impact student learning.
standards for certification—are not closely Evidence suggests that three institutional
correlated with actual ability in the class- features may be part of a successful system
room. Much of this evidence comes from for providing students with cognitive skills:
research in developed countries, but there is
strongly consistent work from a number of
• Choice and competition.
developing countries.34 Thus, it is difficult if • Decentralization and autonomy of schools.
not impossible to identify aspects of teach- • Accountability for outcomes.
ers that could form the basis for policies Deeper analyses, particularly of issues of
and regulations encouraging good teachers design and implementation in specific con-
in the classroom. texts, have to be left for more encompassing
This difficulty of regulating the employ- surveys and collections.35
ment of high-quality teachers (or high-
quality administrators) suggests that the Choice and competition
institutional structure of the school system in developing countries
must be designed to provide strong incen- Choice and competition in schools were pro-
tives for improving student achievement. posed a half century ago.36 The simple idea:
parents, interested in the schooling outcomes
It’s the incentives of their children, will seek productive schools.
The analogy with economic institutions is This demand side pressure will create incen-
useful. National economies are dependent tives for each school to produce. These incen-
on the quality of their economic institutions. tives will also pressure schools to ensure
It is hard to have a strongly growing econ- high-quality staff and a good curriculum.
omy without complementary institutions In developed countries, a number of
in the labor and product markets, without privately managed schools (particularly in
openness to trade and investments from the Europe) provide alternatives for students.
outside, and without effective systems of Unfortunately, little thorough evaluation
laws and property rights. Similarly, it is dif- has been done of the choice possibilities,
ficult to have a well-functioning education in large part because there is no obvious
system without a supportive institutional comparison group (choice is instituted for
structure. On this matter, however, there are an entire country and there is no example
more different opinions and perhaps wider of the no-choice alternative). In a cross-
divergence in outcomes. Part of the reason country comparison, students in countries
for the different opinions is simply a lack of with a larger share of privately managed
experience, analysis, and evidence. schools tend to perform better.37

In the United States, there are limited various ways that might not be desirable.47
examples of private school choice, ranging There is a need for greater experimentation
from the publicly funded school vouchers and experience, given the current levels of
in Milwaukee, Cleveland, and Washington, uncertainty.
D.C., to privately financed voucher alter-
natives. The choice schools do at least as School autonomy
well as the regular public schools, if not
Several institutional features of a school
system can be grouped under autonomy or
In England, there are similar positive
decentralization, including local decision-
effects of school competition on the perfor-
making, fiscal decentralization, and parental
mance of schools.39 In Sweden, competition
involvement. Almost any system to improve
from privately operated schools has signifi-
incentives for schools depends on school
cant positive effects on the performance of
personnel being heavily involved in decision-
public schools.40 In the Czech Republic, the
making. It is difficult to compile evidence on
introduction of a voucher-type system led to
the impact of autonomy because the degree
the creation of private schools in areas where
of local decisionmaking is most generally a
public schools are doing badly, and the
decision for a country (or state) as a whole,
public schools facing private competition
leaving no comparison group within coun-
improved their performance in obtaining
tries. Across countries, students tend to per-
university admission for their graduates.41
form better in schools that have autonomy in
The evidence from evaluations in devel-
personnel and day-to-day decisions, particu-
oping countries is also generally consistent
larly when there is accountability.48
with the evidence from developed coun-
There is evidence from a few develop-
tries. For example, Colombia ran a program
ing countries that shows the positive effects
that provided vouchers for attending pri-
of decentralization, school autonomy, and
vate schools. The benefits of this program
community involvement. In the Philippines,
clearly exceed its cost, similar to providing a
local financial contributions increased the
place in public schools.42 While evidence on
productivity of public schools relative to
the extensive voucher system in Chile is less
central financing.49 Enhanced community
uniform, the most elaborate studies sug-
and local involvement improved student
gest that it had positive effects on student
learning in El Salvador.50 Decentralization
performance.43 In Chile, private fee-paying
in the Argentine secondary school system
schools are the most technically efficient,
improved test performance.51 Teacher auton-
followed by private subsidized and public
omy positively affects student outcomes in
schools.44 Similarly, private-school stu-
Chile when decisionmaking authority is
dents perform better in both Colombia and
decentralized.52 Decentralization of decision-
Tanzania.45 And privately managed schools
making to the local level in Mexico positively
in Indonesia are more efficient and effective
affects student outcomes, with accountability
than public schools.46
very important in enhancing local decision-
But experience is still limited. The teach-
making.53 Also in Mexico, the combination
ers unions and administrator groups dislike
of increased school resources and local school
competition—because it puts pressure on
management can produce small but statisti-
them. So, not many examples of operational,
cally significant improvements in learning.54
large-scale attempts at competition have
Nonetheless, given the available evi-
been evaluated. Nonetheless, the benefits of
dence, support for autonomy also rests on
competition are so well documented in other
a simple idea: it is hard to imagine a system
spheres of activity that it is inconceivable that
with strong incentives that does not capital-
more competition would not be beneficial.
ize on local decisionmaking.
Choice and competition are very broad
terms that can encompass many different
programs. The specific design of any choice School accountability
program will be important, particularly in Many countries have been moving toward
distributional outcomes, because programs increased accountability of schools for stu-
might segregate the school population in dent performance. The United Kingdom

has developed an elaborate system of clearly suggests that school autonomy, in

“league tables” designed to give parents particular local autonomy over teacher sala-
full information about performance. The ries and course content, is only effective in
United States has a federal law that all states school systems with external exams.62 One
develop an accountability system that meets example of this evidence is depicted in fig-
certain guidelines. It also establishes series ure 10, which plots relative student perfor-
of actions required when a school fails to mance under the four conditions resulting
bring sufficient numbers of students to pro- from the presence and absence of central
ficiency in core subjects. exams and school autonomy over teacher
Evidence on the impacts of these systems salaries, after controlling for dozens of stu-
has begun to accumulate. While there is dent, family, and school background fac-
some uncertainty given the newness of the tors. School autonomy regarding teacher
overall accountability system (introduced in salaries is negatively associated with stu-
2002), the best U.S. evidence indicates that dent performance in systems without cen-
strong accountability systems lead to better tral exams. In systems with central exams,
student performance.55 student performance is generally higher
One institutional setup that combines than in systems without central exams,
accountability with parental choice is a reflecting the increased accountability. In
system that gives students in schools that addition, the effect of school autonomy
repeatedly do badly on the accountability is reversed in systems with central exams:
test a voucher to attend private schools.56 Salary autonomy of schools has positive
In Florida, the threat of subjecting schools effects on student performance in central-
to private-school choice if they fail the test exam systems. This pattern has been found
has increased performance, particularly for in TIMSS, TIMSS-Repeat, and PISA. Simi-
disadvantaged students.57 lar cases where external exams turn a nega-
Curriculum-based external exit exams tive autonomy effect around into a positive
are another means of accountability. They effect have been found for other decision-
provide performance information that can making areas, such as school autonomy in
hold both students and schools account- determining course content and teacher
able. Students in countries with external influence on funding.
exit exam systems tend to systematically
outperform students in countries without
such systems.58 In the two national educa-
tion systems where the existence of external Figure 10 Accountability and autonomy interact to
affect student performance across countries
exams varies within the country, Canada
and Germany (some regions have them and Math performance in PISA test scores
(relative to lowest category)
others do not), students perform better in
regions with external exams.59 36.4
40 32.5
Little evidence is currently available
about accountability systems in developing 35
countries. This reflects the generally weak 30
accountability in these countries and a gen- 25 20.8
eral lack of systematic measurement and
reporting of student achievement. However,
there is a strong impact of accountability 15

and local decisionmaking in Mexico, and 10

this remains even considering the relative 5 Yes

impact of teachers unions.60


No No
It is difficult to imagine choice or auton-

School au

tonomy o Yes
omy working well without a good system

ve r teacher
salarie s
of student testing and accountability. Thus,
the ideas about institutional structure are Source: Wößmann (2005a).
Note: Performance differences estimated after controlling for
closely linked.61 The international evidence student, family, and school factors.

Given the importance of high teacher schools and their leaders will take actions
quality, aiming incentives directly at teachers to promote student achievement; and an
is promising. While convincing evidence on accountability system that identifies good
the effects of performance-related teacher school performance and leads to rewards
pay is scarce, the more rigorous studies in based on this.
empirical identification find a positive rela- The three separate parts of improved
tionship between financial teacher incen- incentives form a package. Local autonomy
tives and student outcomes.63 Monetary without strong accountability may be worse
incentives for teachers based on their stu- than doing nothing. Accountability with-
dents’ performance have improved student out choice is likely to be watered down and
learning in Israel immensely.64 Similarly, the made impotent by schools that would pre-
introduction of performance-related pay fer no accountability. Choice without good
had a substantial positive impact on student information about performance has uncer-
achievement in England.65 tain outcomes attached to it. In other words,
Summarizing the evidence on how poli- these should not be thought of as isolated
cies can produce better outcomes, a simple policies that can be independently intro-
picture emerges. First, the evidence shows duced while retaining their advantages.
that “pure resource policies”—policies that
simply provide more resources within the
current incentive structure of schools—are The need to alter institutions
unlikely to produce substantial system- fundamentally is inescapable
atic gains in student outcomes (box 1). A simple but powerful picture emerges.
There are caveats, of course. Some schools First, what people know matters. Second,
will use added resources effectively. And developing countries are much worse off
some systems that fail to provide minimal than commonly perceived from common
resources such as basic textbooks could data about enrollments and school attain-
improve if resources were applied to the ment. Third, the road to improvement
key shortage areas. Yet both developed will involve major structural changes and
and developing countries demonstrate will not follow from simple additions to
an improbable—but tangible—disconnect resources.
between simple resource solutions and stu- Much of the discussion of development
dent achievement. policy today simplifies and distorts these
Second, the evidence about what counts messages. It recognizes that education mat-
in schools is limited. The best candidate is ters but focuses most attention on ensuring
teacher quality. Unfortunately, the char- that everybody is in school—regardless of the
acteristics of good teachers are not well learning that goes on. Relatedly, it assumes
understood, making regulatory solutions that the prime constraint is resources—those
difficult and supporting rewards for high- needed to provide broad access to basic
quality teaching. But most countries—both schooling. Because of these distortions, the
developed and developing—have implicit results in terms of measurable economic cir-
policies built into teacher salaries and con- cumstances have been disappointing.
tracts that resist significant change and that The accumulated evidence from analyses
are not aligned with teacher quality. of economic outcomes is that the quality of
Third, the key to improvement appears education—measured on an outcome basis
to lie in better incentives—incentives that of cognitive skills—has powerful effects.
will lead to management keyed to student Individual earnings are systematically
performance and that will promote strong related to cognitive skills. The distribution
schools with high-quality teachers. Here, of skills in society appears closely related
three interrelated policies come to the to the distribution of income. And, per-
forefront: promoting more competition, haps most importantly, economic growth is
so that parental demand will create strong strongly affected by the skills of workers.
incentives to individual schools; autonomy Other factors also enter into growth
in local decisionmaking, so that individual and may well have stronger effects. For

example, having well-functioning economic “quality” frequently rely upon various input
institutions—such as established property measures that unfortunately are not system-
rights, open labor and product markets, and atically related to student learning. More-
participation in international markets— over, the existing international tests—such
have clear importance for economic devel- as the PISA tests of the OECD—may not be
opment and may also magnify the benefits best suited to provide accurate assessments
of quality education. Nonetheless, existing of student performance in developing coun-
evidence suggests that quality of education tries. The evolving capacity for adaptive
independently affects economic outcomes, testing that can adjust test content to the
even after allowing for these other factors. student’s ability level seems particularly
Moreover, the existing research provides important, offering the possibility of mean-
strong reasons to believe that quality of edu- ingful within-country variation in scores,
cation is causally related to economic out- along with the ability to link overall perfor-
comes. To be sure, quality may come from mance with global standards.
formal schools, from parents, or from other Even though attempts to improve quality
influences on students. It may result from have frustrated many policymakers around
policies that maintain and enhance health the world, extensive research now reaches
and nutrition, allowing students to learn some clear conclusions. Research has delved
effectively. But a more skilled population— deeply into the impact of adding resources
almost certainly including both a broadly within the current institutional structure (of
educated population and a cadre of top both developed and developing countries).
performers—results in stronger economic The overall finding is that simple resource
performance for nations. policies—reducing class sizes, increasing
Available measures of school attainment teacher salaries, spending more on schools,
uniformly indicate that developing coun- and so forth—have little consistent impact
tries lag dramatically behind developed on student performance when the institu-
countries. This fact has driven a variety of tional structure is not changed.
efforts to expand schooling in developing This does not say that spending never
countries, including the Education for All has an impact. In fact, there is reason to
initiative. Yet much of the discussion and believe that some basic resources in the least
much of the policymaking has tended to developed schools, such as textbooks for all
downplay the issues of quality. students, have a reliable impact. But these
International testing indicates that, even situations have been documented just in the
among those attaining lower secondary poorest schools and, even there, just in lim-
schooling, literacy rates (by international ited areas. There is also evidence that some
standards) are very low in many developing schools use added resources better than oth-
countries. By reasonable calculations, many ers, although research does not characterize
countries have fewer than 10% of their these different situations well enough to
youth currently reaching minimal literacy build them into overall resource policies.
and numeracy levels, even when school There is mounting evidence that the
attainment data look considerably better. quality of teachers is the key ingredient to
Because of the previous findings—that student performance. But the characteris-
knowledge rather than just time in school is tics of good teachers are not described well,
what counts, policies must pay more atten- making it impossible to legislate or regulate
tion to quality of schools. good teachers.
For developing countries, the sporadic or Nor does evidence say that resources can
nonexistent assessment of student knowl- never have an impact. In fact, the kinds of
edge is an especially important issue— institutional changes identified here are
correcting this shortcoming should have the designed precisely to ensure that added
highest priority. It is impossible to develop resources are effective.
effective policies without having a good The largest problem in current school
understanding of which work and which do policy is the lack of incentives for improved
not. Currently available measures of program student performance. Neither students nor

school personnel in most countries of the acute in developing countries, largely due
world are significantly rewarded for high to lack of relevant experience. For this
performance. Without such incentives, it is reason, it is especially important to imple-
no surprise to find that added resources do ment a program of experimentation and
not consistently go toward improvement of evaluation—a key missing aspect of poli-
student outcomes. cymaking in most developing countries.
Three sets of policies head the list for Education policy must be viewed as evolu-
improving the overall incentives in schools: tionary, where ongoing evaluation permits
strong accountability systems that accu- discarding policies that are ineffective while
rately measure student performance; local expanding those that are productive.
autonomy that allows schools to make How can education policies in develop-
appropriate educational choices; and choice ing countries create the competencies and
and competition in schools so that parents learning achievements required for their
can enter into determining the incentives citizens to prosper in the future? The bind-
that schools face. ing constraint seems to be institutional
Many if not most developing countries reform—not resource expansions within
currently lack performance measurement the current institutional systems. For educa-
that would allow them to know which tional investments to translate into student
policies were working and which were not learning, all people involved in the educa-
or where performance was most in need tion process have to face the right incentives
of change. Lack of measurement of stu- that make them act in ways that advance
dent outcomes clearly makes any system student performance.
of direct rewards for success difficult if not
impossible. An early step in any reform pro- Notes
gram should be instituting reliable school 1. Mincer (1974); Psacharopoulos and Patrinos
accountability systems. (2004); Card (1999); Heckman, Lochner,
If schools are held responsible for and Todd (2006).
results, they must have the ability to make 2. Mulligan (1999); Murnane, Willett, Duhal-
decisions that will lead to better outcomes. deborde, and Tyler (2000); Lazear (2003).
Highly centralized regulatory systems sim- 3. Murnane, Willett, Duhaldeborde, and
ply cannot work effectively without broad Tyler (2000) separate the direct returns to
knowledge of what programs are effective measured skill from the indirect returns of
in different situations. Such knowledge more schooling.
4. For example, Psacharopoulos (1994) and
is currently lacking, leading to centralized
Psacharopoulos and Patrinos (2004).
decisionmaking that does not produce
5. Harbison and Hanushek (1992).
strong results. (The lack of results from 6. Hanushek, Lavy, and Hitomi (2006).
centralized decision making can be readily 7. Hanushek and Zhang (2006) show that the
seen in the data provided, particularly for measure of quantitative literarcy in IALS is
developing countries.) highly correlated with scores on the Third
Finally, in terms of overall changes, more International Mathematics and Science
choice and competition among schools leads Study (TIMSS).
parents to be directly involved in evaluating 8. De Gregorio and Lee (2002) find a (some-
the performance of schools. While experi- what weaker) positive association between
ments in various choice plans have been inequality in years of schooling and income
limited, the existing evidence suggests that inequality.
9. Juhn, Murphy, and Pierce (1993).
they do tend to lead to better student out-
10. Mankiw, Romer, and Weil (1992).
comes. The best way to introduce choice in
11. Lucas (1988); Romer 1990; Aghion and
rural systems within resource-constrained Howitt (1998).
developing countries is not fully known 12. Nelson and Phelps 1966; Benhabib and
now, but it appears clear that the existing Spiegel (2005).
system is not working. 13. For extensive reviews of the literature, see Topel
Uncertainty about the best design of (1999); Temple (2001); Krueger and Lindahl
incentive programs for schools is most (2001); Sianesi and van Reenen (2003).

14. Vandenbussche, Aghion, and Meghir (2006). 42. Angrist et al. (2002); King, Orazem, and
15. Bils and Klenow (2000). Wohlgemuth (1999).
16. Pritchett (2001, 2006). 43. Mizala and Romaguera (2000); Sapelli and
17. Hanushek and Kimko (2000). Vial (2002); Vegas (1999); Hsieh and Urquiola
18. Barro (2001); Wößmann (2002, 2003b); (2006). A less positive interpretation of
Bosworth and Collins (2003); Coulombe, vouchers in Chile is found in McEwan and
Tremblay, and Marchand (2004); Coulombe Carnoy (2000) and of vouchers in general in
and Tremblay (2006); Jamison, Jamison and McEwan (2000).
Hanushek (forthcoming). 44. Mizala, Romaguera, and Farren (2002).
19. Hanushek and Wößmann (2007). 45. Cox and Jimenez (1991).
20. In either specification, there is evidence for 46. James, King, and Suryadi (1996); Bedi and
conditional convergence in the sense that Garg (2000).
countries with higher initial income tend 47. McEwan (2000).
to grow more slowly over the subsequent 48. Wößmann (2003a, forthcoming-b).
period (Hanushek and Wößmann 2007). 49. Jimenez and Paqueo (1996).
21. OECD (2004). 50. Jimenez and Sawada (2001).
22. See Hanushek and Wößmann (2007) for 51. Galiani and Schargrodsky (2002).
greater detail. 52. Vegas (1999).
23. Acemoglu, Johnson, and Robinson (2001, 53. Gertler, Rubio-Codina, and Patrinos (2006);
2002, 2005). Álvarez, Moreno, and Patrinos (2006).
24. North (1990). 54. Skoufias and Shapiro (2006).
25. Murphy, Shleifer, and Vishny (1991). 55. Carnoy and Loeb (2002); Hanushek and
26. Easterly (2002). Raymond (2005); Jacob (2005).
27. Pritchett (2001, 2006). 56. The legality of this system has been chal-
28. Pritchett (2004); Wößmann (2004). lenged in the Florida courts, so the future of
29. Hanushek (1995, 2003), Hanushek and the program is in doubt.
Luque (2003), Wößmann and West (2006). 57. West and Peterson (2006); Figlio and Rouse
30. See Hanushek (1995), Glewwe (2002), (2006).
Pritchett (2004), and Glewwe and Kremer 58. Bishop (1997); Bishop (2006); Wößmann
(2006) for reviews of research on the deter- (2001, 2003a, forthcoming-b).
minants of educational quality in develop- 59. Bishop (1997); Jürges, Schneider, and Büchel
ing countries. (2005).
31. For evidence from African countries, see, 60. Álvarez, Moreno, and Patrinos (2006).
for example, Kremer (2003) and Michaelowa 61. World Bank (2004).
(2001); for Latin American countries, see, for 62. Wößmann (2005a, forthcoming-b); Fuchs
example, Mizala and Romaguera (2002) and and Wößmann (forthcoming).
Wößmann and Fuchs (2005); for East Asian 63. See the survey in Atkinson et al. (2004)
countries, see, for example, Gundlach and along with the discussions in Vegas (2005)
Wößmann (2001) and Wößmann (2005c). and Vegas and Umansky (2005).
64. Lavy (2002, 2004).
32. See, for example, Lockheed and Hanushek
65. Atkinson et al. (2004).
33. Hanushek and Rivkin (2006).
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