ROLE OF EDUCATION IN FINANCIAL GROWTH

 ROLE OF EDUCATION IN FINANCIAL GROWTH

Responsible Financial Behaviors

Financial education not only imparts knowledge but also aims to cultivate responsible financial behaviors. It emphasizes the importance of disciplined saving, wise spending, and avoiding excessive debt. By teaching individuals about the consequences of impulsive purchases and the benefits of long-term financial planning, financial education encourages responsible financial habits.

With adequate financial literacy, individuals are more likely to develop a savings mindset, effectively manage debt, and resist the allure of unnecessary spending. By instilling these behaviors early on, financial education helps individuals build a solid financial foundation and make informed choices throughout their lives.

Impact on Society

The benefits of financial education extend beyond individual empowerment and have a positive impact on society as a whole. A financially literate population is more likely to make informed choices, avoid financial pitfalls, and contribute to economic stability. As individuals become better equipped to manage their finances, they are less vulnerable to predatory lending, fraud, and other financial scams.

Furthermore, financial education can help bridge the wealth gap by promoting financial inclusion. By providing underserved communities with the necessary knowledge and tools, financial education enables individuals to overcome barriers to financial access and build a better future for themselves and their families.

New Economic Growth Theory

New  economic  growth  theory  emphasizes  the  importance  of  knowledge  and  technological advancement for long-term economic growth. Traditional economic growth models often overlook the  endogenous  nature  of  technological  progress,  whereas  new  economic  growth  theory  views technological advancement as a core component of economic growth. This theory asserts that the accumulation  of  knowledge  and  technology  can  be  self-reinforcing  through  positive  feedback mechanisms,  where  the  creation  and  dissemination  of  knowledge  further  promote  additional innovation and  knowledge accumulation. Education  plays a crucial  role in this  process as it is  a primary means of acquiring and disseminating knowledge. Higher education institutions, in particular, play a significant role  in advancing  research and development (R&D)  activities, generating  new scientific discoveries and technological breakthroughs, and serving as key platforms for technological innovation  and  commercialization. Therefore,  new  economic  growth  theory  highlights  the importance of education in fostering knowledge and technological progress, which is essential for achieving long-term economic growth.

Invest in basic education Improving enrollment and completion rates is crucial to ensuring that everyone has access to high-quality basic education. Governments should increase investment in basic education, particularly in impoverished and remote areas, to ensure that every child receives complete nine-year compulsory education. This includes building more schools, providing necessary educational resources such as textbooks, computers, and technical support, and hiring and training sufficient teachers. Additionally, measures  should  be  taken  to  improve  education  quality,  such  as  enhancing  teaching  methods, adopting modern educational technologies, and regularly assessing educational outcomes to make timely policy adjustments. 

Encourage lifelong learning With  rapid  technological  advancements, lifelong  learning has  become increasingly  important. Governments should  encourage and support adult  education and  personal development to  enable workers to continually update their knowledge and skills. This can be achieved by providing flexible learning  options,  online  learning  resources,  and  training  subsidies  for  working  individuals. Furthermore, governments can collaborate with businesses to promote in-service training programs that help employees adapt to evolving job requirements. Establishing a culture of lifelong learning will make the labor market more flexible and enhance societal adaptability. In  summary,  by  implementing  these  policy  recommendations-investing  in  basic  education, strengthening  higher  education  and  vocational  training,  promoting  educational  equity,  and encouraging a culture of lifelong learning-governments can enhance the overall education level of society, foster technological innovation and improve labor quality, and ultimately drive economic growth and social progress. These policies will not only help develop competitive talents but also promote social inclusiveness and fairness, laying a solid foundation for sustainable development in the future. 

Job Training Influences the Economy

A successful economy has a workforce capable of operating industries at a level where it holds a competitive advantage over the economies of other countries. Nations may try incentivizing training through tax breaks, providing facilities to train workers, or a variety of other means designed to create a more skilled workforce. While it’s unlikely that an economy will hold a competitive advantage in all industries, it can focus on several industries in which skilled professionals are more readily trained.

Differences in training levels are a significant factor that separates developed and developing countries. Although other factors are certainly in play, such as geography and available resources, having better-trained workers creates spillovers throughout the economy and positive externalities.

An externality can have a positive effect on an economy due to a well-trained workforce. In other words, all companies benefit from the external factor of having a skilled labor pool from which to hire employees. In some cases, the highly skilled labor force might be concentrated in a specific geographic region. As a result, similar businesses may cluster in the same geographic region because of those skilled workers—an example being Silicon Valley.

1. Primary education

A considerable amount of evidence on the positive economic effects of a completed primary education, especially for those working in agriculture, has been generated over the past 40 years. A study which modelled the impact of attainment in fifty countries between 1960 and 2000 found that an additional year of schooling can increase a person’s earnings by 10% and average GDP by 0.37% annually . A different cross-country study claimed that each additional year of education increases income by 10%. Generally, economic rates of return to individuals’ and societies’ investment in primary education have been reported to be higher in low income countries than in high income countries and to be higher for primary education than for secondary or tertiary education. The Commission on Growth and Development, concluded that social returns probably exceed private returns through the broader contribution to society of educated individuals.

2. Secondary education

Investment in secondary education provides a clear boost to economic development, much more than can be achieved by universal primary education alone. Hence, the focus of the United

Nations Millennium Development Goals on universal primary education was important but insufficient. Universal primary education must be complemented with the goal of giving broad segments of the population at least a completed junior secondary education The advantages of this dataset compared to others arise from its detail (four educational categories for five-year age groups of men and women), its consideration of differential mortality, and its strict consistency of the definition of educational categories over time. This level of detail allows researchers to perform more detailed statistical analyses of the relation between education and economic growth than had previously been possible.

3.Tertiary education

HEART produced a Higher Education Topic Guide which looks at the contribution of higher education to economic growth. It states that traditionally the contribution of education to economic development was analysed in terms of the relationship between the level of education and earnings and also in the form of rates of return (A summary statistic of the relationship between lifetime earnings and the costs of education). Available estimates on the social and private rates of return to investment in primary education are the highest, followed by secondary education. Returns to higher education (HE) are the least. Such evidence was extensively used to discourage public investment in HE and to concentrate almost exclusively on primary education in the 1980s and 1990s. The complex relationships in economic development with a focus on the context in which universities operate , the internal structure and dynamics of the universities themselves, and the interaction between national and institutional contexts have recently been studied. Initially a review of the international literature on the relationship between HE and economic development was conducted by Pillay . This was followed by the study of three successful systems – Finland, South Korea and the North Carolina state in the US – that have harnessed HE in their economic development initiatives to distil implications for African countries . Common to the success of all these systems is, amongst others, the link between economic and educational planning; quality public schooling; high tertiary participation rates with institutional differentiation; labour market demand; cooperation and networks; and consensus about the importance of HE for education and development. 

Education is a foundational infrastructure for job creation, and good jobs are the surest way out of poverty. A powerful driver of development, education is one of the strongest instruments for reducing poverty and improving health, gender equality, peace, and stability. It delivers large, consistent returns in terms of income, and is the most important factor to ensure equity and inclusion.

Making smart and effective investments in people’s education is critical for developing the human capital that will equip young people with skills to help them find jobs. At the core of this strategy is the need to tackle the learning crisis, and help youth acquire the advanced cognitive, socioemotional, technical and digital skills they need to succeed in today’s world. 

High-quality early childhood development investments in basic numeracy and literacy, and socio-emotional skills provide the best possible start in life. These skills are critical, helping today’s children become tomorrow’s productive workers. These skills will also enable workers to reskill or upskill later in life. If a child cannot read with comprehension by age 10, they are unlikely to become fluent readers. They will fail to thrive later in school and will be unable to power their careers and economies once they leave school.

The institutional environment is also a widely recognised contributor to economic growth. Nevertheless, the comparative importance of education versus institutions remains debated. Some researchers assign a key role to institutions, arguing that they create incentives, including those for investment in human capital. Others prioritise human capital, viewing its development as the foundation for institutional improvements. It is probable, though, that these two perspectives describe a broader picture where institutions and education evolve while influencing each other: strong institutions support demand for better education, while a higher level of education creates demand for more efficient institutions.

Relationship between institutions and education

Studies show that institutions can determine both the nature of accumulated human capital and the way it is utilised. For example, Douglass North, an influential representative of New Institutional Economics, noted that institutions create incentives for the accumulation of human capital that is in demand in a specific institutional environment. Knowledge and skills are essential for both a successful pirate and a skilled chemist, although the former applies them to ‘redistribute wealth’, while the latter uses them for productive economic activity.

In 1991, University of Chicago professor Kevin Murphy, his colleague Robert Vishny, and Harvard professor Andrei Shleifer proposed a model demonstrating that the occupational choice depends on the returns in the productive and the rent-seeking sectors of the economy. To estimate the rent-seeking sector size, they used the proportion of law students and the productive sector size was calculated on the base of engineering students share. The authors of the study demonstrated that a higher proportion of law majors is associated with lower economic growth rates, whereas a higher proportion of engineering graduates is correlated with higher economic growth. A similar study conducted by Leonid Polishchuk and Timur Natkhov in 2019 confirmed that the quality of institutions remains the primary factor determining the choice between the productive and the rent-seeking activity.

Education and financial development are key determinants of economic growth. This research makes an effort to highlight the role of education and financial development with urbanization in the economic growth of selected Asian countries. Economic growth is used as a dependent variable, and secondary school enrolment, financial development, life expectancy, and urban pulation are used as independent variables. Panel data set for the time 2002 to 2019 is used for the analysis. The random effect technique is used. The study results demonstrate that secondary school enrolment, financial development, life expectancy, and urban population increase economic growth in selected Asian countries. It is recommended that government should provide free of cost education facilities in selected economies. Moreover, the public should be provided with more financial debt facilities to increase per capita income, high living standards, and economic growth in these selected economies. The plan must be placed on education and health high on the agenda in these economies.

A lot of work on this topic has suggested how financial development, labor force participation rate, trade openness, remittances, and unemployment influences economic growth in some countries. However, this research highlights the role of education and financial development with urbanization in determining the economic growth of selected Asian countries. This research will ensure new ideas for policymakers to make significant policy variables for high economic growth. Earlier the COVID-19 pandemic, sustainable developmental objectives were not obtained. Shortage of production, poverty, and poor living standards have been experienced by the population. Financial and societal crisis were also the great hurdle in achieving developmental goals. People were involved in low-standard and risky employment in different sectors of developing economies and were faced with new risks and threats.

Financial literacy affects society:

Personal Financial Stability: When individuals possess financial literacy skills, they are better equipped to manage their money effectively. They can create budgets, save, invest wisely, and avoid excessive debt. This leads to greater personal financial stability and reduces the likelihood of financial problems.

Economic Growth: A financially literate society can contribute to overall economic growth. As people make informed financial decisions, they are more likely to invest in productive assets leading to the expansion of businesses and job creation. This, in turn, can boost the economy at the local, regional, and national levels.

Reduction in Financial Stress: Financial stress can have a negative impact on mental health and overall well-being. Financially literate individuals are better equipped to handle financial challenges and are less likely to suffer from stress related to money matters. This leads to improved mental health outcomes and a happier society.

Retirement Preparedness: Financial literacy is critical for retirement planning. When people are knowledgeable about saving and investing for retirement, they are more likely to build sufficient retirement corpus and avoid facing financial difficulties during their retirement years. This reduces the burden on social welfare systems and ensures a better quality of life for retirees.

Consumer Protection: A financially literate population is less vulnerable to financial scams and predatory practices. They can make informed choices when it comes to financial products and services, reducing the likelihood of falling victim to fraudulent schemes.

Responsible Citizenship: Financially literate citizens are more likely to understand the implications of public policies related to taxation, government spending, and economic issues. This leads to a more informed and engaged citizenry, contributing to better decision-making in governance and public affairs.

Enhanced Financial Stability: The spillover effect contributes to an overall increase in financial stability within the community. As more individuals exhibit responsible financial behavior, the risk of financial hardships and defaults decreases, resulting in a more stable and prosperous society.

Inter-generational Impact: When parents are financially literate, they can pass down these skills and knowledge to their children. This creates a positive cycle of financial literacy across generations, promoting long-term financial security and resilience within families and communities.

Overall, the impact of financial literacy on society is multifaceted, ranging from individual well-being to economic growth and stability. Encouraging and promoting financial education at various levels can lead to a stronger, more prosperous, and financially secured society.

Conclusion 

The quality of education plays a crucial role in economic growth. A high-quality education system not only cultivates a workforce with specialized knowledge and skills but also stimulates innovative thinking,  drives  technological  progress,  and  fosters  social  change. Education  provides  a  strong impetus  for  economic growth  through various channels,  including  enhancing workforce  quality, promoting technological innovation  and diffusion,  improving health conditions and  demographic structure, and strengthening social capital. Given the importance of education quality for economic growth, continuous improvement of the education system is essential. Governments should increase investment  in  primary  education,  strengthen  higher  education  and  vocational  training,  promote educational equity, and encourage a culture of lifelong learning. These policies will not only help cultivate competitive talent but also promote social inclusivity and fairness. Looking ahead, further exploration  of  the  deeper  connections  between  education  and  economic  growth  is  necessary, especially in the context of globalization and rapid technological development. Issues such as how to better measure education quality and its actual impact on economic growth, how to build a more flexible and adaptive education system, and how to utilize digital technologies to enhance educational efficiency and coverage are all valuable areas for in-depth research. Such studies can provide a better understanding  of  how  education  drives  economic  development  and  offer  stronger  support  for policymakers. 

In a world where financial decisions have far-reaching consequences, financial education is a crucial tool for promoting financial literacy. By equipping individuals with essential knowledge, cultivating responsible financial behaviors, and fostering confidence and empowerment, financial education enables individuals to make informed decisions, navigate complex financial landscapes, and build a secure financial future. Ultimately, the widespread promotion of financial education is vital for the overall well-being of individuals, communities, and society as a whole.