High Income and Upper Middle Income Economies Analysis

3.0 Statistical Analysis

In this section, an analysis and comparison is carried out on high income and upper middle income economies in terms of growth, innovation and the tertiary education sector. In section 3.1, the tertiary education sector will be analyzed through gross enrollment ratio in both high income and upper middle income economies along with the implications associated to these figures. In section 3.2, a comparison is done using GDP per capita at current US$ to analyze and compare the economic growth level figures in both set of countries. Since the research is grounded on tertiary education and economic growth, an analysis of the two variables is made to see if any relationship exists in section 3.3. Further to this, high technology exports is used as a proxy for innovation in section 3.4 to analyze the level of innovation in high and upper middle income economies and the impact it has on the economies.

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3.1 Tertiary education sector in High Income and Upper middle income economies

The tertiary education enrollment figures are illustrated in a line chart in figure 3.1 below which shows the gross enrollment ratio during the past 16 years between 1997 and 2012 from High Income and Upper-middle Income economies. The graph shows a massive gap between the gross enrollment ratio from the tertiary education sector between high income and upper-middle income economies. One point to be noted is that the gap is ever increasing at a sluggish rate having a gap of around 42% in 2011. The average % of gross enrollment ratio for the high income and upper-middle income are 64.395 and 22.423 respectively, which further confirms the hypothesis that there is a massive gap between these two set of economies.

Figure 3.1-Gross enrollment ratios in Tertiary education, 1997-2012

Source: Authors` computation

Before taking any conclusions from the line chart, an analysis of the data would be helpful. The most obvious observation is the impressive figures of the high income economies with a maximum value of 75.10277% in 2012 which signals a higher proportion of students finishing upper secondary school are pursuing higher education. On the other hand, the low enrollment figures in the upper –middle income economies with a maximum value of 33.90526% indicate that students finishing their secondary education do not pursue further studies.

Since Barro (1991) emphasizes school enrollment as a proxy for human capital, having a high tertiary education enrollment rate for an economy means a highly skilled human capital in the labor force, vice-versa. The very high tertiary education enrollment rate in high income economies which indicates a highly skilled human capital in the labor force leads to a vast amount of benefits which extend from individuals to society and from economic to social benefits.

There is much evidence on the economic benefits of tertiary education on a micro level. Higher school graduates have higher average earnings, have more chance to be employed and are eventually less likely to experience poverty than individuals without higher education. Taking this hypothesis to a macro level, countries having highly educated human capital as in higher income economies are likely to be suffering less from poverty than upper-middle income economies. In terms of economic benefits to society, countries with a large proportion of the labor force with higher education tend to have higher productivity. This is often explained by the fact that having a highly skilled workforce would eventually lead to a blurring of boundaries caused by technological knowledge (Vandenbussche et al,2006), and that technological progress, either it is domestically or imported is likely to be dependent on tertiary education instead of primary and secondary education (Hall and Jones, 1999). Therefore it tends to be easier for high income economies to boost economic growth through technological progress or innovation with a high proportion of the labor force consisting of highly skilled human capital. On the other hand, it might be more difficult for countries having a low skilled labor force to boost their growth rate through technological progress.

Then again, tertiary education also provides a lot of social benefits and as Grandstein and Justman (2002) implied that the impact of education is rather through its role as a socializing force than a tool for technological progress. Higher education institutions are good settings whereby people can socialize with their peers while it also helps to transcends ethnic boundaries since higher education usually takes place at a national level. Secondly, highly educated people tends to be more healthy since they are likely to be more careful given their knowledge leading an improvement in health, which in itself is a major determinant of growth.

As mentioned above, the tertiary enrollment rate gap between higher income and upper-middle income economies is quite big which leads to several implications in terms of poverty, growth and society.

3.2 Economic development and growth in high and upper-middle income economies

In this section, an analysis and comparison is carried out on the economic growth rate of both high income and upper-middle income economies. Economic growth is fundamental for economic development since when national income grows, more people benefit from it. To measure economic growth of the countries, GDP per capita at current US $ will be used. In figure 3.2 below, a line graph is used to illustrate the GDP per capita at current US $ for the past 15 years from 1997-2012. The line graph shows us that GDP per capita for high income economies increasing constantly at an increasing rate since the year 2001 reaching an all-time high in the year 2008 just before the global financial crisis in 2009 which eventually caused a fall for the first time in 15 years. However, the high income countries have been able to recover from that economic setback as GDP per capita has been on the increase since the year 2010 and is expected to follow that trend in the following years. On the other hand, GDP per capita for upper-middle income countries has been increasing at a sluggish rate since the year 2005.Moreover, it can be found on the graph that upper-middle income economies did not suffer from the global financial crisis in 2009 as much as high income economies.

Figure 3.2-GDP per capita (Current US$), 1997-2012

Source: Authors` computation

To better understand the gap between high income and upper middle income economies in terms of GDP per capita at current US $, a column chart would be useful. Figure 3.2.1 below shows clearly the difficulty of upper-middle income economies in increasing their GDP per capita in a significant way whereas high income economies are doing it at an increasing rate. The difficulty to increase the growth and income level is often known as a middle-income trap which can be shown by the constant low level of GDP per capita for upper-middle economies during the past 15 years. The highest GDP per capita for upper-middle income countries has been US $ 7313.7 which was in 2012 while the average GDP per capita for the past 15 years is US$ 3587.8 compared to US$ 29115.8 for higher income countries. The middle-income trap is often explained by the challenge of countries in moving from resource-driven growth that is heavily dependent on low skilled labor and cheap capital to growth based on high productivity and innovation. In order to match the GDP per capita figures being recorded by high income countries, upper-middle income countries requires heavy investment on education and infrastructure. Taking for example the Republic of Korea, building a high quality education system which promotes creativity and supports breakthrough in science and technology is key in moving from a middle-income trap.

Figure 3.2.1- GDP per capita (Current US$), 1997-2012

Source: Authors` computation

3.3 Tertiary education sector and economic growth in high and upper-middle income countries.

In this section, gross enrollment rates in tertiary education sector and GDP per capita growth (annual %) will be used to analyze the relationship and the trend between the two variables from high and upper-middle income economies. The starting point of the analysis is to analyze to the correlation between tertiary enrollment rates for high and upper-middle income economies. In table 3.3, the correlation between the two variables is analyzed for high income countries for the last 16 years (1997-2012).

Table 3.3-Correlation between Tertiary enrollment and GDP per capita growth for high income countries

In the table above, a positive correlation (+0.483) between tertiary enrollment and GDP per capita growth can be found. This implies a positive relationship between tertiary enrollment and economic growth in high income countries. The relationship is better illustrated below in figure 3.3.1 by a scatter plot.

Figure 3.3.1-Tertiary education enrollment & growth; High income economies

Source: Authors` computation

In the diagram above, tertiary enrollment has been increasing at an increasing rate while GDP per capita growth has been on the same trend until the 2009 financial crisis. However, it can be noted that the tertiary enrollment rates were not affected by the crisis since the trend has been ever increasing after the crisis.

Table 3.3.2-Correlation coefficient between tertiary education and growth in upper-middle income countries

In the table above, a negative correlation coefficient (-0.426) can be found between tertiary education enrollment and economic growth. This implies a positive relationship between tertiary education and economic growth in upper-middle income countries, which can be better illustrated by the scatter plot in figure 3.3.3.

Figure 3.3.3-Tertiary education enrollment & growth; Upper-middle income economies

Source: Authors` computation

Based on figure 3.3.3, a consistently negative relationship can be found between tertiary education enrollment and economic growth in upper-middle income economies. It should be noted that the 2009 financial crisis did not had any impact on tertiary enrollment.

Conclusions that can be taken out of these two diagrams are that tertiary education may have an important contribution to economic growth in high income economies since there is a positive relationship between the two variables. On the other hand, the negative relationship between tertiary education enrollment and economic growth gives an indication that formal education (primary and secondary) may be more important to economic growth than tertiary education.

3.3 Innovation in high and upper-middle income economies

In this section, high-technology exports is used as a proxy for innovation as Furman et al.(2002) implied that high-technology exports volume is known as one of the final products for commercialization of national innovation capability. An analysis will be done between high and upper middle income economies about how high-technological exports differs in numbers and the implications that it might have on their respective economies when considered as innovation. High-technology exports include products with high R&D intensity, such as in aerospace, computers, pharmaceuticals, scientific instruments, and electrical machinery. Innovation is one of the key components to achieve high productivity which would eventually lead to high national income levels.

Figure 3.3-Innovation in high & upper-middle income counties

Source: Authors` computation

In the diagram above, the figures for high-technology exports are illustrated in a line graph to show the trend of the innovation variable in high and upper-middle income economies. The graph shows the large scale difference of high-technology exports between the two set of economies with the average value of US$ 293.7 billion for upper-middle income and US$ 990.8 billion for high income.

Both set of economies volume of high-technology exports are increasing at an increasing rate, however from 2009, the high income economies seem to have suffered from the financial crisis while the upper-middle income economies have done significantly well in that period.

Highly skilled human capital may be one of the reasons why there is such an impressive gap between the two set of economies as the United Nations Development Programme’s (UNDP) work has shown that the level of achievement in technology critically depends upon the level of higher education in a given economy. The impressive gap between the two set of countries in the amount of highly skilled human capital can be found in section 3.2. To have a better view of the quality of these high-technology exports, an analysis of high-technology exports as a % of manufactured exports is required.

Figure 3.3.1-High Technology exports, (% of manufactured exports), 1997-2012

Source: Author`s computation

In figure 4 above, high-technology exports expressed as a percentage of manufactured exports for high and upper-middle income economies are illustrated in a line graph for the past 15 years from 1997 and 2012. The most obvious observation that can be seen from the line graph is that high-technology exports from upper-middle income countries have an upward trend while it is a downward trend for higher income economies. In 2001, high income economies seemed to suffer from strong downturn in information and communication technology (ICT) trade and have been difficult to recover while upper-middle income economies have not suffered that much.

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The notable increase in high-technology exports for upper-middle income countries are mainly due to the increase in the commodity prices for oil products and metals used to manufacture the ICT goods while recent studies have shown that the location of export production is changing from industrialized to developing countries and exports by the latter have grown rapidly and diversified away from traditional resource and labor-intensive products to high technology manufacture (Lall, S, 1998).

The final conclusion and analysis that can be taken is that the technological capabilities of upper-middle income economies are ever increasing at an impressive rate compared to higher income economies. However, it may be the case that the quality involve in these innovative products are not much to the standard set by higher income countries with low level of Research and Development (R&D).In other words, it is more of a case of quantity over quality in upper-middle income countries. One of the main reasons which could explain the low level of R&D capability of upper-middle income countries is their high skill human capital compared to high income countries.

3.4 Comparative analysis between tertiary education, economic growth and innovation in higher and upper-middle income economies.

In this section, a comparative analysis is carried out using figures in the above sections to analyze tertiary education, economic growth and innovation in higher and upper-middle income economies over the past 15 years from 1997 and 2012. In table 2 below, tertiary education enrollment on average are far higher in higher income economies with a total average of 64.4% compared to upper-middle income economies with a total average of 22.4%. The same can be said for economic growth which is measured by GDP per capita at current US$ with higher income economies having an average of 29115.8$ compared to 3587.8$ for upper-middle income economies. Innovation which is measured by high-technology exports shows a massive gap between high and upper-middle income economies. The average high-technology exports between years 1997-2005 is US$ 185.8 billion for upper-middle income economies and US$ 857.2 billion for high income economies with a difference of US$ 671.4 billion. The gap further increased between 2005-2010 to US$ 742 billion.

Table 3.4-Average; Tertiary education enrollment, GDP per capita (Current US$) & High-technology exports; 1997-2012

Based on the table above, a massive gap can be found in tertiary school enrollment, economic growth and innovation between the two set of countries. The point to be noted is that these three variables moves in the same direction the gap between high and upper-middle income economies is continuously increasing.

The conclusion and analysis that can taken is that Higher income economies have a high proportion of highly skill human capital in their labor force which has enabled them to invest more in Research and development(R&D) which has resulted in more qualitative innovation products. Eventually, this may be one of the reasons why higher income countries have a higher GDP per capita when compared to upper-middle income countries.