~ Pergamon Economies of Education Review, Vol. 14, No. 4, pp. 351-361, 1995 Copyright © 1995 ElsevierScienceLtd Printed in Great Britain. All rights reserved 0272-7757/95 $9.50+0.00 0272-7757(95)00015-1 A Causality Analysis of the Link Between Higher Education and Economic Development JEAN-LUC DE MEULEMEESTER*t and DENIS ROCHAT~: * CEPED, Institute of Sociology, CP 124, Free University of Brussels, Avenue Jeanne, 44, B 1050 Brussels, Belgium ~:HEC, Department of Management Studies, University of Geneva, 102, Boulevard Carl Vogt, 1211 Geneva 4, Switzerland Abstract--The aim of this article is to shed light on the relationship between higher education and economic development by means of econometric tools designed to evaluate the existence and direction of causality: cointegration and Granger-causality tests. The results show a significant causality from national higher educational effort (proxied by the number of students per capita, i.e. not engaged in productive activities) to economic development for four countries: Sweden ( 1910--1986), United Kingdom (1919-1987), Japan (1885-1975) and France (1899-1986). However, such a causality link has not been found for Italy (1885-1986) or Australia (1906-1986). This suggests that this relationship is indeed not mechanistic as already pointed out by some social scientists. [JEL 047, I21] I. INTRODUCTION THIs RESEARCH pertains to the relationship between higher education and economic development, i.e. the level of economic development (Gross Domestic Pro- duct, i.e. GDP per capita) and economic growth (growth rate of GDP per capita). This issue has not been extensively considered by economists so far. However, the relationship between education in gen- eral and growth has been investigated by human capi- tal theorists (Schultz, 1961; Denison, 1962; Becker, 1964). They assert that education, by increasing the human capital stock of individuals, improves their productivity' and therefore contributes to growth. This element enabled economists to build an empiri- cal methodology known as growth accounting in order to evaluate the contribution of education to growth, besides the increase in the stocks of labour and physical capital. This approach has been refined up to the nineties and has contributed to confirming the significant impact of an increasingly educated lab- our force on growth (Denison, 1967; Jorgenson and Griliches, 1967; Jorgenson, 1984; Jorgenson and Fraumeni, 1992). For instance, Jorgenson and Frau- meni (1992) highlighted that "educational investment will continue to predominate in the investment requirements for more rapid growth". However, some scepticism had already appeared in the seventies. On the one hand, another approach deeply rooted in human capital theory, the rate of return approach, showed that the private rate of return to education is consistently higher than the social one (Psacharopoulos, 1980, 1981, 1985). On the other hand, the extraordinary development of educational systems both in developed and developing countries did not impede the worldwide slowdown of economic growth during the second half of the seventies (Denison, 1979, 1983). New reflections were conse- quently developed: first on the complementarity between education and other economic mechanisms (such as R&D; Dean, 1984), later on the externalities generated by a higher average level of human capital [Manuscript received 1 September 1994; revision accepted for publication 10 March 1995.] ~ To whom correspondence should be addressed. 351