diaconu, popescu - the impact of formal education, as a qualitative side of human capital, on the...

8/2/2019 Diaconu, Popescu - The Impact of Formal Education, As a Qualitative Side of Human Capital, On the Romania's Eco

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THE IMPACT OF FORMAL EDUCATION, AS A QUALITATIVE

SIDE OF HUMAN CAPITAL, ON THE ROMANIAS ECONOMIC

GROWTH

Laura DiaconuAlexandru Ioan Cuza University, Iai

Faculty of Economics and Business AdministrationCarol I Avenue, no. 22, Iai, 700505

Email: [email protected].: 0723.30.27.28

Cristian C. PopescuAlexandru Ioan Cuza University, Iai

Faculty of Economics and Business AdministrationCarol I Avenue, no. 22, Iai, 700505

Email: [email protected].: 0232.20.13.99

Abstract: The present paper presents the relationship that exists between the formal education, as aqualitative side of human capital, and the economic growth, and analyzes the sources of

inefficiencies of the Romanian educational system. One of these is given by the fact that the formal

education is free of charge at almost all the levels, aspect also reflected in the high rates of school

abandonment. Moreover, the resource allocation is made according to principles hard to identify.

The primary and the secondary education have been neglected for a long time because it waswrongly considered that a greater importance given to the tertiary education would increase the

human capital stock. So, the educational system has continued producing university graduates that

the economy could not absorb, thus causing the so-called brain drain. In the end of the paper wepresent some solutions that could be used in order to surpass these problems and to improve the

educational level and, consequently, the economic growth of Romania.

Keywords: formal education, learning system, human capital, economic growth rate

1. Introduction

Human capital is considered to be that sum of knowledge, abilities and skills,acquired by the individuals through education, experience and trainings, which can be usedin order to increase the level of economic growth and development [1]. As shown in thedefinition, the one who has this type of capital is the human being, a complex and socialcreature, whose evolution is marked by endogenous and exogenous factors, it is difficult toidentify all the influences that lead to the accumulation and capitalization of his knowledgeand abilities. Yet, the economic theory mentions two factors that seem to be very important


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in this direction education and health -, which are considered by the analysts to be thequalitative sides of human capital.

The new theory of the economic growth underlines the fact that the education has astrong impact on the economic development from two points of view. First of all, thehuman capital is an input in the production function, thus explaining the options for the

investment in education and, secondly, the factors that involve the endogenous growth especially the technological progress are correlated to the human capital stock becauseeither it is supposed that it directly determines new technologies or new knowledge, or it isan essential aspect for the research field that generates technology and knowledge.

Education has two main forms: formal and non-formal, the last one including theinformal education. While the formal education is acquired especially through the learningsystem, in the primary, secondary and tertiary level, the informal one is correlated to theprofessional experience at the workplace.

In the present paper we analyze only the formal education from the point of view ofthe relationship that exists between it and the Romanias economic growth. For reaching upthis purpose, we will firstly analyze the education as a qualitative side of human capital and

its contribution to the economic growth of a country and in the last part of the paper wewill point out the way in which the formal education is encouraged and financial sustainedby the Romanian state.

2. Education, as a Qualitative Side of Human Capital, and the Economic

Growth

At the beginning of the XXI century, the importance of education is revealed by thehuge differences in living standards that exist among countries: it is assumed that thesegaps are mainly influenced by this qualitative aspect of human capital. The problem ofconvergence was largely debated, analysts trying to establish if the poor countries are ableto surpass the gaps and to catch up the developed economies, or, whether, in the future,these differences will widen. Some authors such as Dowrick and Nguyen [1989] noted thatthe convergence seems to hold among the richest countries alone, especially among thosefrom the Organization for Economic Cooperation and Development. Considering that theeducation is a sign of productivity [2], which means that the level of development of aneconomy is correlated to the level of peoples education, Baumol, Nelson and Wolf [1994]suggest that there may be a convergence club which includes a subset of countries forwhich convergence applies. The members of this club are only the countries with anadequate initial level of human capital endowments that can take advantages of moderntechnology and enjoy the possibility of convergent growth. This idea is argued by Harmon,Oosterbeek and Walker [2000] who consider that more educated countries grow faster because the education gives the opportunity to create new technologies and adapt theexisting ones to local production. Consequently, the opportunities to grow may be greaterfor economies that are inside the technological frontiers [3]. This is why the growth in theregional capacity of generating and using the human capital may be one of the mostimportant policies of regional development in order to ensure the success of the futurehigh-tech economy. As Gilmore [1999] noted, the human capital is the result of the


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learning institutions that, in their turn, represent the educational support of the regionaleconomies [4].

Moreover, the human capital of an individual is more productive when the othermembers of the society are more skilled [5], resulting some spill-over effects fromtechnical progress/knowledge accumulation. This aspect was argued early before, in 1890,

when Marshall noted that the social interaction among individuals that work in the sameindustry and in the same place develops new opportunities to learn, fact that increases theproductivity.

In the context of globalization, it is considered that a higher level of education leadsto a better participation in the global economy. This is a consequence of the fact that, in anenvironment with frequent changes/developments, the highly skilled individuals may betterevaluate the new opportunities because they can easily distinguish between random andsystematic elements of the economic changes [6]. Therefore, the global workers from theknowledge economy need to be self-motivated, flexible, problem solving, adaptable,creative and reflective. The positive effects of the high education will soon come over: thehigh-skilled persons will have the chance to earn higher wages, to have a lower

unemployment rate, a higher mobility and a better employment opportunity during theiractive lives. So, it is obvious that the level of education is influencing not only the growthbut also the economic productivity of a country: the states with a rapid growth in thenumber of persons that enroll the school have experienced a raising productivity and animprovement in the quality of the labor force [7]. This idea is argued by Gilmore [1999]who considers that the education is preparing the labor force for the productiveparticipation inside an economy, also offering other national benefits: an educated citizen ismore able to take part in the local or regional decisions. The influence that education hason the productivity was also analyzed on different periods of time. Lange and Topel [2005]consider that on a long period of time (15-20 years) the estimated impact of education onthe productivity is much greater than on a short time (5 years).

Education has not only direct effects on economic growth and development, but italso may foster the welfare state through some indirect externalities such as: improvementsin health and nutrition level, offering opportunities for personal fulfillment and developingsome individual abilities [8]. Next to these consequences, Sianesi and Van Reenen [2000]note the fact that a higher level of education may be correlated to a friendly environment,with a better political and community implication, with a higher social cohesion and alower criminality rate, all these influencing the economic growth.

3. Formal Education in Romania and its Impact on the Economic Growth

As argued above, the educational outcomes have a significant impact on thecompetitiveness of a country. The skills achieved by individuals via education and theirability to learn and become good-quality professionals are reflected in productivity andultimately in the quality of production. Furthermore, the social interaction of such personsprovides incentives for performance at work and in daily life. It was noticed that theeducated persons are interacting easily and efficiently not only inside the groups but also infront of the law, norms and social conventions. Such a behavior creates a harmoniousenvironment in which the negotiating costs are very low. Understanding the democratic


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value, for example recognizing the liberties and the limits of the interference between thepolitic and the public sector, the acceptance of the arbitrage of the democratic institutions,knowing the laws and the consequences of breaking them, the respect for the property, allthese are attitudes that develop in time. They are influenced by the educational factors,formal and non-formal ones, being specific especially for the developed states members.

The formal education, acquired especially through the learning system, it is free ofcharge in Romania at almost all the levels. Unfortunately, this fact has its disadvantagesbecause it diminishes the marginal utility and the value that a person gives to eachadditional school year. This is one of the sources of inefficiency of the Romanian educationsystem, also reflected in the high rates of school abandonment. The rates of high schooldrop-out went on a downward slope starting with 2000, but the pace is slow (2.7% in 2006as compared to 3.5% in 2000). The boys are more inclined to abandon upper secondaryeducation than girls. Therefore, girls are more likely to attend superior education andbecome better skilled human resources. The main causes of abandonment might have adouble origin. On one side, the social and economic status of the family dictates theavailability towards supporting the children in the schooling process. And on the other side,

pupils aged around 18 may very well change their educational options for emigration orillicit activities, in order to earn income in a short time.The structure of the budget reflects the importance given to formal education. In

2007 the Romanian government allocated 5.2% of GDP for educational purposes, reachingthe highest level since 2000 (when public expenditure represented just around 3% of GDP).During 2002-2004 Romania had the lowest levels of public spending on education in theEuropean area, being 2% below the EU-25 average (5% of GDP) and showing less interestfor the development of this sector than other East European countries like Slovakia,Bulgaria and Czech Republic1.

Regarding the private sector, it has to be mentioned that it brings a weakcontribution to all forms of education, but especially to the formal one. In 2002 (last data

available) Romanian private sources dedicated to education (spent on fees, textbooks,teaching material or school transport) were up to 0.16 percents of GDP, less than those ofits neighbors (Hungary- 0.55% and Bulgaria-0,69%) and below the estimated EU-25average of the time (0.58%)2. The low level of private investment suggests that schools anduniversities are strongly dependent on public financing and do not develop public-privatepartnerships that involve the community. Still there is good news. In university year2006/2007, 33.8% of the total number of students enrolled in private academic institutions.Yet, the credibility of such universities is still low among the population, althoughconsidering it an alternative to public schooling.

The educational system has been long neglected not only from the financial point ofview, but also from the institutional reform point of view. The major changes necessary topass from a general theoretical system to a more specialized one, focused on the marketdemands, are waited for a long time. Consequently, the resource allocation was madeaccording to principles hard to identify. The primary and the secondary education has beenneglected long time due to the fact that it was wrongly considered that a greater importancegiven to the tertiary education would increase the human capital stock.

1***, Education in Romania, Ministry of Education, Research and Youth, Bucharest, 2007, p. 10

2***,Eurostat Yearbook 2006-2007, http://epp.eurostat.ec.europa.eu/portal


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Only the human capital accumulation is not always a determinant factor of theeconomic performance. The contribution of human capital depends on the efficiency of itsaccumulation: those countries that have inefficiently allocated their resources have littlebenefits from their investments in human capital, in terms of economic growth [9]. Theefficiency of resource allocation is defined by Judson [1998] as a ratio between the level of

the obtained results and the maximum level possible to be attained in a country,considering the actual global budget and the actual costs for each educational level. Thisefficiency could be obtained only if the budget is correctly distributed between theeducational levels. Due to the fact that emerging countries do not have the financial andtechnological capacity in order to sustain innovative fields with highly skilled workers,they need medium skilled labor force, able to use and reproduce the technology created inthe developed states. Romania is in this last situation. Yet, the educational system hascontinued producing university graduates that the economy could not absorb.Consequently, a large part of them have emigrated, looking for a proper compensation oftheir contribution to the production system, thus causing the brain drain. The effects ofsuch a trend were very important and diverse: the resources spent by the state for the school

years, that could have been used for an additional allocation in the primary education, werelost; it has narrowed the medium qualified labor supply through the encouragement of theeasy access at the superior levels of education that are considered to be a passport toemigration; it was lost the potential national income that could have been created by thosewho had emigrated; the population started getting older, due to the fact that those who aremore tempted to emigrate are the young people, etc. The migratory process explain why theforeign companies which entered the Romanian markets, demanding highly skilled laborforce in engineering, computer science and technical support, found only a few specialists.Next to the emigration process, which involves the young persons that have finished theuniversity after 2000, there is another explanation for this situation, which can be identifiedback in the early 90s. The technical education was neglected and considered useless once

the mammoth state-owned enterprises activating in most industries collapsed. Therefore thehigh school graduates chose to specialize themselves in professions related to Economics,Medicine and Law. The massive orientation towards these fields resulted in inflation ofstudents as compared to potential jobs and unemployment for those left behind in the hiringcompetition.

The student performance is also low compared to other EU and OECD countries.The international tests and evaluations are, sometimes, discouraging. The PISA test (thatevaluated the knowledge of 15 years old people and their ability to put it in practice)conducted in 2006 put Romania on a dishonorable place 47 from 57 participant countries.The situation of Romania is considered stagnant, although the results are closed to theOECD average. This reflects a gap in students performance, especially in the secondaryeducation - the level considered responsible for the most part of the economic growth.

Considering the combined schooling rate calculated by World Bank, Romania wason the 70thplace in 2007, immediately after South Africa and Egypt. These classificationscome to certify something that is easily noticeable into the Romanian labor market, wherethe specialized workers become more and more rare, in the context that the laborproductivity is up to forth time lower than the European average.

The performance is also influenced by the rate of enrolment. Data provided by theNational Institute of Statistics show that the gross rate of enrolment in upper secondary


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education (high school) increased by 5% in the school year 2006/2007, compared to theprevious year. Although, over the last seven years, the distribution of pupils at this levelincreased in both rural and urban areas, the rate of enrolment differs. While 92.5% of thepupils of appropriate age, resident in urban areas, attend high schools and professionalschools, only 63.9% of the young people from the rural areas are enrolled in such

education. Therefore, we can note that almost 26.1% of pupils living in rural sides of thecountry do not accede to this form of education. The shortcoming is translated in a low-quality human capital originating in these areas, whereas Romania has a high demand forspecialists in fields like agriculture in order to increase productivity and improve the livingstandard on medium and long term.

Around 74% of the Romanian population aged between 25 and 64 years hascompleted at least upper secondary education in 2006. The situation is comparable to thatof Bulgaria (75.5%), United Kingdom (72.6%) and Netherlands (72.4%), but far from the performance of the Czech Republic (90.3%), Lithuania, Germany or Slovakia (wherearound 88% of the population completed the studies in secondary education)3. The statisticsindicate that the active population has relatively low qualifications, required for an active

integration in the social and economic life. The lack of qualification imposes limitations inprofessional achievements and personal development, fostering mediocrity and modestsocial networks.

A positive outcome for 2006/2007 was the high rate of enrolment in the tertiaryeducation - 47.2% (with 2 percents higher that the previous university year), marking a20% increase over the period 2000-2006. Again, the female population enrolled inuniversities (54.1%) overcomes the males (40.6%), but the difference is not very big. Thedistribution of students on fields of science shows an oscillatory orientation towardstechnical education. The ratio of the Romanian students enrolled in 2003 to studyMathematics, Science and Technology in the total number of students did not exceed 27%,although we had a better position than several other European countries, like Slovenia,

Estonia or Poland

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4. Conclusions

Education plays a very important role in the construction of the modern societiesand in having efficient economies. The way in which the educational system is conceived,the investments made in it, the quality of the teachers and the continuous adaptation of thelearning curriculum to the reality of a changing labor market are the elements that make thedifference, on medium and long term, between the welfare state and the lack of it. Romaniahas tried, for several times, to shape, at a formal level, a modern trend for education. Thelack of consistency and the insufficiency of the resources allocated made the reform lookmore like experiments or attempts that were unsuccessful and damaging for many younggenerations. This also results from the statistics, which show that the education sector inRomania is less competitive than in other European countries. The discrepancies occur inthe ratio of public versus private expenditure and their effects upon the quality of the

3 Idem 24 Idem 1, p. 94


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educational process. For the moment, private tertiary education is not associated to qualityand performance. Further more, the gap in technical education lags the development ofcertain industries with a high productive potential (in electronics, civil engineering andcomputer hardware and software).

There are various ways to prevent the problems mentioned above, starting with

matching the specializations to the market demand and finishing with a substantialreduction of the public financing of the tertiary education. Actually, we consider that thislast solution would solve a great part of the emigration problem. First of all, the private costof an additional year of study would determine a person to make a correct judgment interms of opportunity costs, rationally analyzing if the additional time and money allocatedto education would be repaid by the extra future incomes in the context of an internalmarket that does not need a great number of highly qualified specialists. Secondly, givingup the tertiary education it will diminish the tendency to emigration and will keep insidethe country the human capital at an optimal level. It is easy to understand that, instead ofcreating highly qualified labor force that would be lately unused or lost through emigration,it is better to extend and intensify the medium education, which could be easily assimilated

by the internal market. In this way it could be also stopped the emigration. Thirdly, areduction of the spending with the tertiary education would allow the reallocation of theresources in the benefit of the first two levels, primary and secondary, and, in the sametime, would increase the quality of education.

BIBLIOGRAPHY

[1] Coleman, S.J., Social Capital in the Creation of Human Capital, The AmericanJournal of Sociology, Vol. 94, Supplement: Organizations and Institutions: Sociologicaland Economic Approaches to the Analysis of Social Structure, 1988, p. S99

[2] Harmon, Colm; Oosterbeek, Hessel; Walker, Ian, The Returns to Education. A Reviewof Evidence, Issues and Deficiencies in the Literature, Centre for the Economics ofEducation, LSE, 2000, p. 13[3] Barro, Robert; Sala-i-Martin, Xavier, Economic Growth, McGraw Hill, New York,1995, p. 37[4] Gilmore, W., Education and Human Capital in the New Economy, T, R &P Seminar,

1999.

[5] Lange, Fabian; Topel, Robert, The Social Value of Education and Human Capital,Handbook of Education Economics, Amsterdam, 2005, p. 43[6] Sturm, Roland, How Do Education and Training Affect a Countrys EconomicPerformance? A Literature Survey, RAND, Institute on Education and Training, p. 18

[7] Lange, F.; Topel, R., The Social Value of Education and Human Capital, Amsterdam:Handbook of Education Economics, 2005[8] Haveman, R.; Wolfe, B., Schooling and economic well-being: The role of non-marketseffects, Journal of Human Resources, no 19(3), 1984, p. 379[9] Sianesi, Barbara; Van Reenen, John, The Returns to Education: A Review of Macro-Economic Literature, Centre for the Economics and Education, LSE, 2000[10] Baumol, William J.; Nelson, Richard R.; Wolf, Edward N., Convergence ofProductivity, Oxford University Press, Oxford, 1994


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[11] Dowrick, Steve; Nguyen, Duc-Tho, OECD Comparative Economic Growth 1950-1985: Catch-up and Convergence, American Economic Review, 1989[12] ***, Education in Romania, Ministry of Education, Research and Youth, Bucharest,2007[13] ***,Eurostat Yearbook 2006-2007,http://epp.eurostat.ec.europa.eu/portal

[14] ***,Romania.Education Policy Note, The World Bank, 2007[15] Neagu, Gabriela, Cheltuielile cu educaia. Analiz comparativ, Calitatea Vieii,XVI, no. 3-4, 2005[16] Zak, Paul J.; Knack, Stephen, Trust and Growth, The Economic Journal, 111 (470),2001
http://epp.eurostat.ec.europa.eu/portalhttp://epp.eurostat.ec.europa.eu/portalhttp://epp.eurostat.ec.europa.eu/portal

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