Effect of Quality Education Public Expenditure on Economic Growth and Inequality in Costa Rica: country-level evidence

Abstract:

We determined the impact of public expenditure on quality education on economic (GDP) growth and inequality measured by the Gini coefficient. We used an econometric specification built on a modification to the overlapping generations model of Blankenau et al. (2007). In our case, the production function of human capital depends on the quality of education. The empirical specification estimates a growth equation and an inequality equation both conditioned by the government budget constraint and institutional factors. A panel of 70 countries was used, with 10 time periods of 5 years each from 1970 to 2020. The probability of quality education was approximated with the global database of quality of education developed by Altinok et al. (2018) and estimates from logit models. Robustness checks with the PISA test scores are also performed.

We found that investment in quality education has returns as strong as investment in infrastructure. The probability of quality education in Costa Rica is around 53%. Furthermore, if Costa Rica's public spending on education were immediately transformed to 100% quality in a particular year, the country would automatically increase its spending on quality education by 3.05% as a percentage of GDP. This would translate into an additional growth near 0.6 pp. five years later. Additionally, the Gini coefficient would fall by about 8.1 points; it would go from 48 to 39.9, which means that the gap between Costa Rica’s Gini and the Gini of the less unequal countries of the OECD would be reduced by almost 48% in only five years.

Among policy recommendations to improve the quality of education, increasing the attainment rate in primary education to be equal to that of developed countries stands out. This boost in education will increase economic growth and attack the inequality problem.

Key words: Government Expenditures, Education, Inequality, Economic Growth, Development.

JEL. Classification: H52, I24, I25, I26.