Are Educational Reforms Necessarily Growth-Enhancing? Weak Institutions as the Cause of Policy Failures

We study a developing economy in which the representative firm's production function exhibits complementarities between human capital and the available level of technology. The firm invests in the acquisition of new technology, while employees decide how much human capital to acquire. The speed of human capital accumulation positively affects the growth rate of the economy, and as a result a reform that improves the educational system can lead to faster growth. Importantly though, if property rights are weakly enforced, firms have limited incentives to invest in the acquisition of new technologies. This might constrain the demand for human capital, making an educational reform potentially unsuccessful. If property rights are weakly protected, an educational reform results in the choice of a higher level of education only if individuals can transfer their human capital to a different economy, where the demand for their skills is higher. We thus conclude that only if an improvement in the school system is combined with better property rights enforcement will an educational reform unambiguously lead to faster growth