Investing in the Knowledge Economy: implications for Australian economic growth

This paper surveys and summarises theory and evidence from recent studies into the contributions to economic growth of expenditure on education and on research and development. Investment in human capital – in the form of skills and ideas-has fundamentally different economic attributes to physical investment: exhibiting complementarity, positive feedback and non-rivalry. These attributes imply that raising investment in human capital has the potential to enhance economic growth over a long time period. In the case of education, there are debates over whether changes in educational attainment ultimately affect the long-run growth rate of the economy, or only the long-run level of output. The macroeconomic evidence on level effects is consistent with microeconomic estimates of private rates of return to schooling. It appears, however, that there are also significant long-term growth effects – the more educated is the workforce, the better is it able to implement technological advances. There is consistent evidence of high social rates of return on research and development in both commercial areas of research and in more fundamental research, implying that R&D is under-resourced. A number of studies have emphasised the importance of international technology spillovers, particularly for smaller economies such as Australia. Feasible increases in Australian investment in both education and R&D could be expected to boost annual growth rates by around one half of a percentage point. Furthermore, concerns about the economic implications of the ageing of the population are misplaced to the extent that the underlying decline in fertility is driven by parents choosing to invest more in the human capital of fewer children.