Effects of Education on Economic Growth

Ridwan, and Bahler Siregar

Graduate Faculty, Medan State University, Indonesia

Abstract. This study aims to determine the effect of education and economic

growth in North Sumatra from 2004 to 2018 and to identify the effect of

education on economic growth in North Sumatra. The research method used by

researchers is descriptive quantitative. The results of this study indicate that

economic growth in North Sumatra during the study period experienced growth

despite its fluctuating growth, where the highest growth occurred in 2018.

Various theories have shown the importance of education in driving economic

growth. This paper proves that empirically proxied education with literacy rates

significantly influences economic growth proxied by gross regional domestic

product.

Keywords: Economic growth · Literacy rate · Gross regional domestic product

1 Introduction

Life expectancy at birth in North Sumatra reached 68.61. This figure shows the average

baby born in 2018 can survive until the age of 68.61 years. In terms of education, the

average population of 25 years and over in North Sumatra has been educated up to 9.34

years or equivalent to having graduated from junior high school. While children aged

7 years who enter the world of education are expected to be able to attend school up to

13.14 years or reach Diploma I. In economic aspects, the average expenditure reaches

10.39 million rupiah/capita/year. Public purchasing power reflects the ability of society

to spend their money in the form of goods and services [1].

Education contributing significantly to economic development has become

axiomatic truth and its existence is recognized. Education is not always regarded as

consumption or financing because education is an investment in human resource

development, where in the long run its contribution can be felt [2].

Humans are a form of capital or capital like other forms of capital, such as

machinery, technology, land, money, and material. Humans as human capital are

reflected in the form of knowledge, ideas (ideas), creativity, skills, and work

productivity. Unlike other forms of capital that are only treated as tools, human capital

can invest itself through various forms of investment, for example formal / informal

education, work experience, health, or nutrition, and even migration.

Education has an important role in the life of the nation and state in an effort to

create quality human resources. Education is a basic need factor for every human being

so that efforts to educate the nation's life, because through education efforts to improve

people's welfare can be realized. Education affects the full economic growth of a

country (region). This is not only because education will affect productivity, but also

396

Ridwan, . and Siregar, B.

Effects of Education on Economic Growth.

DOI: 10.5220/0010434900002900

In Proceedings of the 20th Malaysia Indonesia International Conference on Economics, Management and Accounting (MIICEMA 2019), pages 396-403

ISBN: 978-989-758-582-1; ISSN: 2655-9064

affect people's fertility. Education can make human resources more quickly understand

and ready to face changes and developments in a country.

Improving the quality of human resources which is done through improving the

quality of education, health status and improving nutrition, is expected to foster

initiatives or initiatives to create new jobs. Thus national and regional productivity can

be increased. Development must be based on internal will and ability in the community

concerned, which is a process of creating jobs, increasing productivity, contributing

and participating, as well as being active and creative in the local community in

development.

In general it can be stated that the main factor that supports the development process

is the level of community education. In the process, it is based on the consideration that

the most efficient way to carry out a country's national development lies in increasing

the capacity of its people - education included.

2 Literature Review

2.1 Education

Education is a conscious and planned effort to create an atmosphere of learning and

learning process so that students actively develop their potential to have spiritual

spiritual strength, self-control, personality, intelligence, noble character and the skills

needed by themselves and the community [3].

Education is a form of investment in human resources that must be prioritized in

line with physical capital investment because education is a long-term investment.

Education has an important role in the life of the nation and state in an effort to create

quality human resources.

The Indonesian education system consists of several levels of education. The

education level is a long-term process that uses systematic and organized procedures,

in which managerial workforce learns conceptual and theoretical knowledge for general

purposes. The basic measure of education level is the ability of residents 15 years and

over to read Latin letters or other letters (literacy). Literacy is a minimum intellectual

ability because most of the information and knowledge is obtained through reading.

2.2 Economic Growth

Economic growth is an effort to increase production capacity to achieve additional

output, which is measured using Gross Domestic Product (GDP) and Gross Regional

Domestic Product (GRDP) in an area [4].

Economic growth is a process, not an economic picture at a time. According to

Sadono Sukirno (2006) economic growth is defined as a quantitative measure that

describes the development of an economy in a certain year when compared to the

previous year. These developments are always expressed as a percentage change in

national income in a given year compared to the previous year. Here we see the dynamic

aspects of an economy, namely how an economy develops or changes over time.

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397

There are several factors that affect economic growth in general, including: (1)

natural resources; (2) number and quality of population education; (3) science and

technology; (4) social system; and (5) market. [5] Then there are several theories that

explain the relationship between various factors of production with economic growth.

The views of the theory include [6].

2.3 Schumpeter's Theory

Schumpeter's theory in Sadono Sukirno [7], emphasizes the importance of the role of

entrepreneurs in creating economic growth. In this theory it is shown that entrepreneurs

are a group of people who organize and combine other factors of production to create

goods that are needed by the community. They are a group of people who create

innovation or renewal in the economy. Updates that can be created by entrepreneurs

can be divided into several forms, namely: a) introducing a new item; b) the use of new

methods of producing goods; c) expanding the goods market to new areas; d)

developing new sources of raw materials; or e) reorganize within a company or

industry.

2.4 Solow-Swan Theory

According to Lincolin Arsyad [8], in order to increase economic growth factors needed

to influence regional economic growth include labor. Labor growth is considered as

one of the positive factors that spur economic growth, so an increase in labor will

encourage increased productivity and will spur economic growth. The education sector

plays a major role in shaping the ability of a developing country to absorb modern

technology and develop production capacity for sustainable growth and development.

2.5 Endogenous Growth Theory

This theory presents a broader theoretical framework in analyzing the factors that

influence the growth process from within (endogenous) the economic system itself.

Technological progress is considered to be endogenous, where economic growth is the

result of decisions of economic actors in investing in science and technology. The

development of technology and science will develop innovation so as to increase

productivity and lead to increased economic growth. So in this case the quality of

human resources is a factor that influences economic growth [9].

According to Paul Michael Romer in Lincolin Arsyad [8] considers science as a

form of capital. Science is the most important input in the production process. Only

thanks to science can people create new methods of production in order to obtain certain

economic benefits. From Paul Michael's opinion it can be concluded that to achieve

progress in development, not only driven by external factors, internal factors also affect

economic growth. The internal factor is science, where science is the main role in the

production wheel. Science as capital to create an innovation that can maintain the

existence of a production and increase profits.

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398

2.6 Human Capital

Human resources are one of the factors of production in addition to natural resources,

capital, entrepreneurs to produce output. Where the higher the quality of human

resources, the more efficiency and productivity of a country also increases. Investment

in the field of human resources is the sacrifice of a number of funds (something that

can be measured by the value of money) spent and the opportunity to earn income

during the investment process. Income obtained in the future is a higher level of income

to be able to achieve a higher level of consumption as well, such investment is called

human capital. Its application can be done in terms of education, where education is

one of the important factors in the development of human resources (HR). Education

not only increases knowledge, but also improves work skills, thereby increasing work

productivity. Education is seen as an investment whose rewards can be obtained several

years later in the form of increased work output [10].

Educational development with humans as its core focus has directly contributed to

the economic growth of a country, through increasing the skills and production

capabilities of the workforce [11].

According to human capital theory, education influences economic growth through

increasing the skills and productivity of the workforce. Rapid economic growth in

Asian countries and progressive changes in production towards high-tech industries and

services have led to increased demands from the business world for the need for skilled

and educated (qualified) human resources. Human Resources as a workforce is very

necessary skills in carrying out tasks, improve organizational quality and support

economic growth [12].

Education improves the quality of human life and wider social benefits for both

individuals and society. Education increases the productivity and creativity of the

workforce as well as increasing entrepreneurship and technological progress. In fact,

education plays an important role in saving social and economic progress and

increasing income distribution.

Education plays a major role in shaping the ability of a developing country to create

new knowledge, absorb modern technology, give birth to experts and develop the

capacity to create sustainable growth and development. Theories relating to education

and economic growth are the Theory of Human Capital. In this theory it states that

education has a positive influence on economic growth. If someone with a higher level

of education, and the length of time in education will have a better job and wage

compared to lower education. If the wages of workers reflect productivity, the more the

population has higher education, the higher the productivity and national economy will

grow well.

2.7 Previous Research

Research conducted by D. Budiarti, [6] with the title "Effect of Education Level on

Economic Growth in Mojokerto in 2000-2011" published in the journal Economic

Education. The results of this study said that the development of the number of

graduates of high school and tertiary level education during the period of research

experienced a significant growth, where the number of graduates was dominated by

high school level education compared to tertiary education.

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399

For economic growth in Mojokerto Regency during the period of research in 2000

to 2011 experienced growth despite fluctuating growth, where the highest growth

occurred in 2011 of 7.14% this is due to the increasing number of industries in

Mojokerto Regency.

Research conducted by Nugroho, S. B. M., [13] with the title "Effects of Education

on Economic Growth" published in the journal Media Economics and Management.

The results of this study said that education measured by literacy rates had a positive

and significant effect on economic growth measured by Gross Domestic Product.

3 Methodology

3.1 Data Sources

In this study, the type of research used by the writer is descriptive quantitative research,

which is to determine the effect of two variables, namely the educational variable with

the variable of economic growth. The research design is used to show how much

influence education (X) has on economic growth (Y). The data used are secondary data

from the North Sumatra Central Statistics Agency from 2004 to 2018. Education is

proxied with literacy rates, while economic growth is proxied with Gross Regional

Domestic Product.

3.2 Analysis Tool

In this study the regression model generated by the estimator is not biased, if it meets

the classical assumptions that are free from autocorrelation and normality. To test the

normality of the data used the Kolmogorov-Smirnov non-parametric statistical test, ie

the residual regression data is normally distributed if the significant value > 0.05. The

Durbin Watson test is used for the autocorrelation test, if  <  < 4–  then the

decision is no autocorrelation. The analytical tool used is simple linear regression, with

the following model:

GRDP = β

+ β

LR + ε (1)

GRDP = Gross Regional Domestic Product

LR = Literacy Rate

, β1 = Regression Coefficient

ε = Error Term

4 Results and Discussion

Education data are proxy with Literacy Rate, and economic growth is proxyed with

Gross Regional Domestic Product as in the Table below.

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Table 1. Literacy Rates and Gross Regional Domestic Product of North Sumatra 2004-2018.

No. Year

Literacy

Numbers

GRDP

(in billion)

1 2004 96,64 117.241,671

2 2005 97,00 138.556,297

3 2006 97,03 159.187,945

4 2007 97,03 180.375,388

5 2008 97,08 212.145,470

6 2009 97,15 234.473,454

7 2010 97,32 272.893,353

8 2011 97,46 312.008,082

9 2012 97,51 348.779,087

10 2013 97,84 401.383,442

11 2014 98,57 521.954,952

12 2015 98,68 571.722,009

13 2016 98,88 626.062,907

14 2017 98,89 684.275,444

15 2018 99,07 741.192,694

Source: North Sumatra Central Statistics Agency

The results of the classical assumption test analysis and the coefficient of

determination (R

) using the Statistical Package for the Social Sciences (SPSS)

program, can be seen in the following table.

Table 2. One-Sample Kolmogorov-Smirnov Test.

Unstandardized Residual

N 15

Normal Parameters

a,b

Mean ,0000000

Std. Deviation 30222,65551767

Most Extreme

Differences

Absolute ,217

Positive ,128

Negative -,217

Kolmogorov-Smirnov Z ,842

Asymp. Sig. (2-tailed) ,478

a. Test distribution is Normal.

b. Calculated from data.

From the results of the normality test in Table 2 it is known that the Kolmogorov-

Smirnov probability (Asymp. Sig.) value is 0.478 > 0.05 so it is stated that the residual

regression data is normally distributed.

Table 3. Model Summary

Model R R Square

Adjusted R

Square

Std. Error of the

Estimate

Durbin-Watson

1 ,990

,979 ,978 31363,532 1,475

a. Predictors: (Constant), LR

b. Dependent Variable: GRDP

Effects of Education on Economic Growth

401

The autocorrelation test results in Table 3 show that the Durbin-Watson value (d) =

1.475 is greater than the upper limit (dU) 1.3605 and less than 4 - du = 2.6395 so it can

be concluded that there is no autocorrelation.

Table 3 shows that the coefficient of determination is 0.979, which means that

97.9% of the ups and downs of Indonesia's Gross Regional Domestic Product (GRDP)

can be explained by Literacy Rates. While 2.1% by other factors such as other variables

and error factors. This shows a pretty good model.

While based on processing with the program (SPSS), the regression coefficient can

be seen in the table below.

Table 4. Coefficients

Model

Unstandardized Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

(Constant) -23948509,269 977773,953 -24,493 ,000

LR 248780,746 10003,142 ,990 24,870 ,000

a. Dependent Variable: GRDP

Table 4 shows that literacy rates significantly influence North Sumatra's GRDP at

a significance level of 5%. This can be seen at the significant level of 0,000 which is

smaller than 0.05. While the standardized regression coefficient shows a figure of 0.990

which means that every 1 point increase in Literacy Rate will increase North Sumatra's

Gross Regional Domestic Product by 0.990 billion rupiah.

5 Conclusion

Based on the results of the analysis and discussion it can be concluded that the

development of the number of literacy rates in North Sumatra over the age of 15 years

during the study period (2004-2018) has increased by an average of 0.17%. While

economic growth during the research period (2004-2018) experienced an increase with

an average of 44,567.93 (in billion rupiahs) where the highest growth occurred in 2018

of 5.12%.

Meanwhile, to find out whether or not there was an influence of education on

economic growth in North Sumatra, after analyzing the data with the help of the SPSS

21.0 for windows program, it was shown that proxied education with literacy rates had

a positive and significant effect on economic growth proxied by gross regional domestic

product.

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