EDUCATIONAL OUTCOMES IN OECD COUNTRIES
24
impact on growth rates is not assumed to be permanent but in fact falls over time
according to the estimated convergence parameter until growth rates return to the current
level).
The value of improvement in economic outcomes from added growth depends, of
course, also on the path of economies that would be obtained without educational
improvement. The analysis here takes the annual growth of OECD economies in the
absence of education reform to be 1.5 percent. This is simply the average annual growth
rate of potential GDP per worker of the OECD area over the past two decades: 1.5
percent in 1987-1996 and 1.4 percent in 1997-2006 (Organisation for Economic Co-
operation and Development (2009b)).
Finally, because economic benefits accrue at varying times into the future, it is
important to recognize that more immediate benefits are both more valuable and more
certain than those far in the future. In order to incorporate this, the entire stream is
converted into a present discounted value. In simplest terms, the present discounted
value is the current dollar amount that would be equivalent to the future stream of
returns calculated from the growth model. If we had that amount of funds and invested
it today, it would be possible to reproduce the future stream of economic benefits from
the principal amount and the investment returns. Thus, this calculation of present
discount value allows a relevant comparison for any other current policy actions.
In doing so, the discount rate at which to adjust future benefits becomes an important
parameter. A standard value of the social discount rate used in long-term projections on
the sustainability of pension systems and public finance is 3 percent (e.g., Borsch-Supan
(2000), Hagist, Klusen, Plate, and Raffelhüschen (2005)), a precedent that is followed
here.17 By contrast, the influential Stern Review report that estimates the cost of climate
change uses a discount rate of only 1.4 percent, thereby giving a much higher value to
future costs and benefits (Stern (2007)). In our robustness analyses, we will also
consider such alternative discount rates.
A number of additional assumptions go into the projections. First, they assume that
skills play the same role in the future as they have in the past, so that the evidence of past
results provides a direct way to project the future. Second, while the statistical analysis
did not look at how economies adjust to improved skills, the calculations assume that the
experience of other countries with greater cognitive skills provide the relevant insight
into how the new skills will be absorbed into the economy. Third, the projection of
simultaneous improvement across countries presumes that all countries can grow faster
without detracting from (or benefiting) growth in other countries.
17 As a practical value for the social discount rate in cost-benefit analysis (derived from an optimal growth rate model), Moore
et al. (2004) suggest using a time-declining scale of discount rates for intergenerational projects that do not crowd out private
investment, starting with 3.5 percent for years 0-50, 2.5 percent for years 50-100, 1.5 percent for years 100-200, 0.5 percent for
years 200-300, and 0 percent years over 300. (The proper starting value is actually 3.3 percent based on the parameter values
they assume for the growth rate in per capita consumption (2.3 percent), the social marginal utility of consumption with respect
to per capita consumption (1), and the utility discount rate (1 percent)).