This paper analyzes the effect of different levels of education on economic growth in Bosnia and Herzegovina over the period of 2003-2011. A traditional production function is being refined by adding the indicator of education measured by the total number of graduates at different educational levels. Findings reveal that highs school graduates and doctoral degree holders have a positive and significant effect on growth, but the university and master graduates appear not to be significant determinants of economic output for the tested period. The results are being analyzed and discussed in the light of the recent education system policies and activities, the complex and long lasting process of implementation of the Bologna system in particular. Finally, it is suggested that policy makers should work on the better coordination and harmonization of real labor market needs with the cadres being produced by the educational institutions in order to overcome the inconsistency and mismatch existing in the recent years.
Keywords: economic growth, human capital, educational system, Bosnia and Herzegovina
Introduction
Nations plan their budgets and assign funds to education development with a direct goal of increasing nation's educational and literacy level, but also with an aim of creating a capital of knowledgeable and skillful people that would in a long term contribute to that country's production, growth and development. The extensive literature on micro-level benefits of education implies that higher educational degree results in an individual's higher earnings and income, but whether or not the same applies for countries and leads to a higher economic growth still remains disputable. In other words, it still remains a question if country with more educated people is better off in terms of the economic growth and development, or the growth is a result of other factors and policies. It is doubtless that many other policies and specific country conditions and development levels affect economic growth, it is necessary to clarify if increasing education levels of people was among those factors.
This study seeks to examine the effect of education and increasing number of graduates on economic growth of Bosnia and Herzegovina (BiH) during the time frame of 2003-2011. The most widely used approach to this problem is the restructuring of traditional Cobb-Douglas production function by, besides the original labor and capital factors, incorporating the factor of education as an additional input. We are to test a hypothesis of the contribution of specific educational levels to economic growth of BiH by relating the total numbers of secondary and higher education graduates to economic development. The purpose of this paper is to contribute to overall understanding of the link between educational level and economic growth in both theoretical and empirical terms. This in turn allows us to analyze, justify and suggest the investment into educational type that results in macroeconomic and social returns to education and benefits the whole country.
The rest of this paper is organized as follows. Section 2 presents the review of previous theoretical and empirical work on relationship between education and economic growth. This is preceded by the brief overview of BiH's economic and education development in the previous decade. Section 3 describes the methodologies, data measurement and model to be estimated. The empirical analysis and results of the estimation are presented in Section 4. Finally, Section 5 represents conclusions and discussion on the obtained results and proposes things to be taken into consideration in the future studies. SECT 6?
literature review
Work and literature explaining the impact of education on different spheres of economy and life is extensive. Generally speaking, education has been in the research area of labor, development, and growth economists, each of them having different primary focus. Labor economists are focused on individuals and analyze the effect of education on a person's labor market outcome; development economists primarily focus on the impact of education in less developed countries; while growth economists search for relations between investment in education and income growth on the country level (Judson, 1998). We will focus on Bosnia and Herzegovina, a developing country, and analyze the impact (if any) different levels of education had on its growth in the recent decade. To do this, it is necessary to understand the growth level, educational attainment and general policies surrounding the educational system in BiH.
A brief overview of BiH's economic and educational development
More than fifteen years after the war, Bosnia and Herzegovina is still struggling to ensure political stability, foster a national identity, and create a single economic space. (USAID, 2012). In line with the World Bank 2013 Doing Business report, Bosnia and Herzegovina falls into the category of upper middle income countries, with $8,100 GDP (Gross Domestic Product) per capita according to 2011 estimations (World Bank, 2013; CIA, 2012). GDP has been positive and rising for the last decade with average real growth rate of 5%. As a consequence of global economic crisis, BiH has gone through a period of financial and economic slowdown with more than 3% decline of its GDP. Since 2010, country started recovering and is expected to continue the slow but sustainable growth. (FIPA, 2012) According to Agency for Statistics of BiH's figures from 2011, BiH has labor force of around 2.6 million and unemployment rate of 27.6% (Unemployment rate calculated according to Eurostat, the statistical office of the European Union, measurements which defines unemployed as those persons age 15 to 74 who are not working, have looked for work in the last four weeks, and ready to start work within two weeks) (Eurostat, 2012). High unemployment rate on the one hand makes BiH labor force cheap and represents an opportunity for foreign investors, but on the other hand increases poverty, erodes living standard, and represents one of the major problems of this country.
When it comes to education system in BiH, it is a very complex, decentralized, often uncomplimentary, with absence of adequate vertical and horizontal accountability and coordination. This statement is supported by the fact that in Federation of Bosnia and Herzegovina (FBiH), each of the 10 cantons has its own law on pre-school, primary and secondary education, and the cantons that have universities have laws on higher education. In Republika Srpska (RS), all levels of education are regulated by the entity legislation. Lastly, Brcko district, as a separate organizational unit in BiH, has its laws that govern each of the four levels of education. BiH, therefore, has more than thirty laws of various levels pertaining to this matter. (Branković & Arapović, 2010) This consequently makes analysis on education and total government activities and spending tracking very difficult. According to Agency for Statistics of BiH's analysis of the working age population by the highest level of education attained, 48% of active population finished secondary school, 43.8% has primary school or less, while only 8.8% has college, university, master, or doctoral degree (BHAS, 2011). An analysis of the qualification structure of the unemployed persons in BiH shows that 93% of the unemployed have secondary, primary school or less (LFS, 2009). Having in mind that there is a general trend of increase in workplace participation of requiring higher education compared to jobs requiring low skills, it is s fact that the labor market in BiH still has no adequate policy responses for solving this problem. BiH does not have adequate mechanisms by which the information about the real labor market demand and supply would be shared with the educational policy makers. As a result, the education system in BiH every year automatically "produces" work cadres that register with the Employment Service and have difficulties in finding jobs.
Previous Work on Education and Economic Growth Relationship
According to Adams (2001), formal studies and research that link education and national development grew rapidly in the 1960s with increase in human capital and modernization theories. For example, Peasle (1969) associated different educational stages with economic development of economically developed countries by analyzing the historical trends in enrollment ratios and economic growth.
By introducing human capital in the aggregate production function, Lin (2003) examined the effectiveness of education on economic growth in Taiwan during the period 1965-2000 and found that average education provides a positive and significant effect on output growth. Specifically, he found that one additional year of average education was estimated to increase real output by approximately 0.15%. Impact of education on economic growth of Taiwan in the period 1976-1986 was analyzed by Liu & Armer (1993) as well. They also refined the traditional production function and found that only primary and junior high education had strong and positive effects on economic growth in Taiwan over the studied period, while the expansion of the senior high and college education had neither positive nor negative effects on growth in economic output of Taiwan. However, after analyzing the overall policy measures that were employed in that period, and understanding that education expansion was state, not market driven, they concluded that the ultimate effect of education expansion is conditioned by the interaction between state, educational and economic systems.
As for the different educational levels and their real impact on economic growth, according to McClelland (1966), primary school enrollments and graduations are less likely to be significant for economic due to low correlations between the two and due to the fact primary school education is by itself not enough to make a person knowledgeable and skillful enough to be able to perform ordinary jobs demanded by the market. For these reasons, it is much more rational to take only the post-primary education into account.
Although some of the empirical evidences that relate economic growth to education expansion are somewhat ambiguous and do not provide clear results (Peasle, 1969 & Loening, 2002), having in mind that theory suggests positive effect of all education levels on economic growth, we also expect to find the positive relation between education and economic growth in Bosnia and Herzegovina. However, it is a fact that education system and general living conditions in BiH are highly influenced by the political and economic situation, we have to approach the analysis with caution, and analyze the results through the lens of last decade's political and economic policies and measures.
When it comes to techniques used to identify the effect of education on economic growth, the analysis of previous literature shows that authors mainly take traditional production Cobb-Douglass function as the basis and starting point of their analysis and by adding the factor of human capital as a separate variable (called labor-augmenting), they refine it in accordance with the data and hypotheses to be tested.
DATA AND METHODOLOGY
As the literature review showed, researchers and economists in general argue that there are two primary determinants of economic output: capital and labor inputs, but they also claim that the total productivity of a country is a result of other factors besides the two above mentioned. (Liu & Armer, 1993) One of the factors that are assumed to make contribution is education and, as previously stated, the relationship between education and economic growth is analyzed by employing the augmented production function.
This study, using the secondary data compiled mainly from the Agency for Statistics of BiH and Labor and Employment Agency of BiH yearly reports, analyzes the effects of various educational levels on economic output of BiH in the last decade. The data used for model testing is available and explained in Table 8.1.
The production function is expressed as:
Y = ALtβ1Ktβ2Et-3β3et, (1)
where:
Y = Economic output, defined as real GDP estimates under the production approach [1] published by the Agency for Statistics of BiH. The index of this variable is reported in millions of BiH convertible marks (KM) at previous year's prices.
L = Labor input, or human capital stock measured as the number of employed people in the economically active population. Based on the definition from the Statistical Agency of BiH, employed individuals represents all persons of 15 years of age or older who, worked for at least one hour for a salary or fee, regardless of their formal status, or did not work, but had a job to return to during the reference week each year.
K - Real capital stock which is measured as a total of gross fixed capital formation and increases in stocks (e.g., buildings, equipment, and other construction) in the BiH economy at 2003 constant prices (See notes to Table 8.1). The index of this variable is reported in millions of BiH convertible marks (KM) at 2003 prices.
E - Educational input, measured as the total number of graduates. Although this variable is in usually measured as the average number of years of formal education per person of employed people, literacy rates, expenditures on education, or by enrollment figures at various levels of instruction (Liu & Armer, 1993, Lin, 2003, & McClelland, 1966), due to scarcity of data and for practical purposes, we use figures on total graduate rates per different education levels. As suggested by McClelland (1966), educational inputs should be compared to economic growth by taking into consideration the lag-time for which an individual that graduates in year t had the real effect on economic growth in t+5 or t+10 years. Due to unavailability of previous years' graduate figures, we use data on high school and university graduates from the t-3 year, while the data on Master and PhD graduates is from year t (as those people are most often already employed and actively participate in the labor force, there is no rationale for time lag).
Taking the natural logarithms of both sides of the Eq. 1, the production function becomes linear:
lnYt = lnA + β1lnLt + β2lnKt + β3lnEt-3 + et, (2)
and the parameters are to be estimated using the ordinary least square (OLS) regression method. The parameters to be estimated are: A (technological factor intercept), β1, β2, and β3, and t is time.
RESULTS
As stated before, the main objective of this study is to determine whether increase in number of graduates at different levels of education in the population contributed significantly to the economic growth of BiH. As there is a high degree of interdependency between the educational stock measures the effects of each level of educational on economic growth is analyzed by testing one educational variable at a time.
Table 4.1 below presents the estimates of the effects of increase in high school, university, master, and PhD graduates. Estimation 1 represents the traditional production function and, as expected, the coefficients of both labor and capital have significant positive effects on economic growth. Estimation 2 adds education data on high school graduates for the period of t-3, which indicates a significant positive effect together with capital and labor inputs. As the problem of serial error correlation is common in time-series data analyses, we have conducted Durbin-Watson tests for all the estimates to test for the autocorrelation (Liu & Armer, 1993). Durbin-Watson test on estimate 2 indicated error autocorrelation and the Cochrane-Orcutt method was used to adjust for this error.
Estimations 3 and 4 indicated that educational inputs of university and master graduates had no significant effect on the economic growth of BiH, despite the fact that their coefficients are positive, along with capital and labor inputs. Some of the possible reasons for this are represented in the next section. Finally, estimation 5 that analyzed effect of PhD graduates on economic growth indicates positive and significant effect, along with the capital and labor. As it was the case with high school graduates, Cochrane-Orcutt method was employed in this case as well to adjust for the correlation error.
To summarize the results, we found that out of the four educational levels that were estimated, high school and PhD graduates had strong and positive effects on economic growth in Bosnia and Herzegovina over the studied period, while, on the other side, university and master degree graduates showed no significant effect on the economic expansion and growth.
DISCUSSION
In this section, we will interpret and analyze our findings in the light of the overall conditions that were and are surrounding the economic and educational system of Bosnia and Herzegovina.
BiH is a developing country going through the transition period in almost every segment. Moreover, one of the key goals of the county as a whole is the accession towards the European Union (EU). In regards to this, BiH policy makers are continuously working on harmonizing the domestic laws, regulations and policies with the EU standards. Educational system is no exception. As of September 2003, Bosnia and Herzegovina joined the Bologna Process that was supposed to be an incentive to activities of higher education reform on the state level. Universities have embraced new system and gradually shifted their organization and academic work towards the full implementation. However, as a result of continuous political disputes, passing the framework law on Higher Education in BiH was an extremely complex and time consuming process. (CPU, 2011) The unsuccessful and slow implementation of Bologna process made it extremely difficult for Universities to assure high quality study programs that would be in line with both local and world education standards. In addition to this, the fact that universities and other educational institutions do not harmonize their study programs and enrollment quotas with the real needs of the market, result in certain occupations being scarce while for some other professions there is constantly increasing number of people completing the process of education and are registered as unemployed.
Having in mind this lack of harmonization between the real needs of the market and types of professions "produced", the results of our analysis make much more sense. The period since 2003 was marked by universities shifting to Bologna process, changing their organization, and lack of policy - makers' control and supervision of the educational institutions. It is then not a surprise that the university and master graduates in the last decade have not made a significant effect on economic growth of BiH. Having a university or master degree was not a guarantee of finding a permanent job, and the statistics' show that the number of those being registered with the Employment Service (thus being unemployed) for more than two years has been growing in the last years (BHAS, 2011).
The positive effect of number of high school graduates on economic growth can be explained by the fact that, According to the Agency for Statistics of BiH, the highest number of working age population in the BiH labor market has secondary school (vocational or high school) as the highest degree of education. This, along with the fact that classification of the economic activity sections shows that the vast number of people is employed in agriculture, low-skilled production or services jobs, makes the positive effect of secondary school graduates on economic growth logical and justified. (BHAS, 2011)
conclusion
We have aimed to analyze the impact of different levels of education, measured by the number of graduate on the overall economic growth in Bosnia and Herzegovina. Our analysis in short has shown that high school graduates and people obtaining doctoral degrees have strong and positive effect on the economic output, while the university and master degree holders do not show significant effect on the economic growth of BiH in the last decade.
In the light of these results, it can be concluded that the educational system of Bosnia and Herzegovina needs some urgent policy measures and changes that would make the coordination between the labor supply and demand more effective and more harmonized. Currently, universities, as the important and key players in the educational system, are producing cadres that have a higher possibility of ending up registered with the Employment Service than finding a job. That is why it is highly suggested that measures of enrollment limitations on some of the excessive professions should be made, while students should be stimulated and encouraged to enroll for some of the professions that are scarce for years. Having in mind that high school graduates account for the highest share of labor market, policy makers should work on enriching the vocational and other secondary schools' programs, and contribute to higher "production" of scarce professions. This, along with improvement of the quality of both university and high school education should be considered as the priority for assuring the positive effects of education on economic growth and development of Bosnia and Herzegovina.
