Education , Technical Change , and Openness ∗ Krishna

In this paper, we develop a simple open economy growth model that allows for the possibility that productivity growth and education affect each other and use it to empirically address issues of causality between the two. Technology adoption fostered by economic openness is modeled as the primary determinant of productivity growth. Thus, this framework also allows us to evaluate whether the much-documented effect of openness on growth carries over to a simultaneous system that features human capital accumulation. The model implies that an increase in openness will stimulate technical change, but, for empirically plausible values of the intertemporal elasticity of substitution, it will cause a decrease in the level of education. The increase in the rate of costly technology adoption caused by the increased openness, induces an even greater increase in the equilibrium local interest rate, thereby increasing the discount factor that applies to the education decision. The theory motivates the speciÞcation of a simultaneous equation regression system in which technical change, captured by total factor productivity growth rates, and educational attainment are endogenous variables. The evidence is broadly consistent with the theory — openness and the level of education stimulate productivity growth and there is a negative effect of this growth on schooling. ∗Department of Finance and Business Economics, Marshall School of Business, University of Southern California, Los Angeles, CA 90089-1427. e-mail address: [email protected]. I am grateful to Ayse Imrohoroglu, Peter Klenow, Robert Lucas, Hans Mikkelsen, Thomas Sargent, and Nancy Stokey, for comments, criticisms, and suggestions.