The Political Economy of Education and Development in an Open Economy François Bourguignon and Thierry Verdier* Abstract If the price effect of opening up a developing economy may be expected to act as a disincentive for invest- ment in human capital, the opposite is likely to be true of the income effect, especially in the presence of credit market imperfections among the poor. It is shown in this paper that this may no longer be the case in a society initially dominated by an oligarchic capitalist elite that is afraid of losing its political control in favor of an educated middle class. Although it may sometimes be in its interest to democratize by subsidiz- ing education when the economy is closed, incentives to do so disappear when the economy is open to trade or factor flows. 1. Introduction Globalization increasingly seems an unavoidable fact. It affects countries through various channels: international trade, financial liberalization, foreign direct investment, migrations, and technology transfers.While generating potentially important economic gains for the world economy, globalization has been questioned in terms of its distributional effects. A growing literature is now seeking to identify the various mechanisms through which deeper international integration may affect distribution and generate domestic redistributive conflicts. In particular, an important stream of the recent trade and labor literature has tried to identify the respective roles of skill-biased technological changes and foreign trade in explaining the increase in wage inequality or unemployment observed in several developed and developing economies in the last decades. A discussion has also started on the role of domestic institutions in shelter- ing open economies from the hazards of globalization and in making external liberalization socially acceptable (Rodrick, 1999, 2000a,b). A channel which has received less attention—although it may well explain much of the diversity of countries’ experiences with respect to globalization—is education, or more exactly the response of human capital investments to the opening of national economies. This channel may actually be quite important. First, human capital accu- mulation is certainly a crucial determinant of growth and poverty reduction. Secondly, as education has a direct effect on distribution, the educational response may mitigate or, on the contrary, reinforce the distributive consequences of openness. Finally, a third potentially important characteristic of human capital accumulation is the strong link between education and political participation emphasized by political scientists and Review of International Economics, 13(3), 529–548, 2005 © Blackwell Publishing Ltd 2005, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA *Bourguignon: World Bank, 1818 H Street NW, Washington, DC 20433, USA. Tel: (202) 4733774; Fax: (202) 5220906; E-mail: Fbourguignon@worldbank.org. Verdier: PSE, Paris-jourdan Sciences Economiques, 48 Boulevard Jourdan, 75014 Paris, France. Tel: 33-1-43 13 63 08; Fax: 33-1-43 13 63 10; E-mail: verdier@pse.ens.fr.An earlier version of this paper was presented at the workshop on “Poverty and Income Inequality in Developing Countries,” organized by CEDERS and the OECD Development Center, Mar- seille, 27–28 November 2000. Later versions were presented at seminars in the World Bank, IGIER, and the Royal Economic Society Conference in Durham. We thank two anonymous referees for useful comments and suggestions.