So here is the puzzle: while theory suggests a strong causal link from education to growth, the empirical evidence is neither unanimous nor conclusive.

# Three Potential Explanations

One common explanation for the puzzle is that measures of human capital often neglect the quality of education, usually because of data limitations. Much has been written lately about the importance of quality. For example, Hanushek and Kim (1995) find that test scores are positively related to growth rates of real per capita GDP in cross-country regressions. Barro and Lee (1997) show that family inputs and school resources are closely related to student performance as measured by internationally comparable test scores, repetition rates, and dropout rates. Hanushek (1995), Duraisamy et al (1998), and others, have also examined the importance of quality, so this explanation is well studied and is not the focus of our study.

Rather, it focuses on two other explanations. First, who gets educated matters a great deal. The distribution of education is a complex but little explored issue. Based on development experience in the past 30 years, we know that broad access to education is necessary for economic growth. We also sense that, given broad access, the deepening of education is also significantly related to technological progress and industrial upgrading. In Thailand, for example, the shortage of skilled labor is a constraint of growth. Using an asset allocation model to examine this issue, we found that the distribution of education is important in the process of economic development.

Second, the impact of education on growth is greatly affected by the macroeconomic policy environment of a country. The policy environment determines what people can do with their education. Policy reforms to open up trade and investment and reduce distorted prices can greatly increase the returns from formal education and enhance the impact of education on growth. Using a model incorporating the interaction of education, its distribution, and policy reforms we found strong evidence supporting the hypothesis that the interaction of education and policy reform matters.

# **II. Where Education Worked or Did Not Work**

Many developing countries have made significant progress in providing better access to eclucation, as evidenced by improved literacy and enrollment rates and higher quality and more equitable distribution of educational services. But the returns from investment in education vary a great deal. In this section, we compare countries where education has worked to boost growth with those where it has not. Most striking in these comparisons across countries are the differences in equality of education, the policy environment for education, and the impact on growth (table I).2 This section highlights cases where the distribution of education was key to development, and cases where the interaction of policy reform and education promoted economic growth.

- 2 In this paper, we employ a panel data set of 12 countries from 1970 to 1994 consisting of variables on GDP per capita measured by purchasing power parity (PPP) and by constant dollars, physical capital stock, labor, level of education of the labor force, and the distribution of education in the labor force, terms of trade, and a few dummy variables. (See appendix I for data and methods).

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