Transaction Costs, Higher Education Preferences and Economic Development

Abstract

There seems to be recent evidence of a relation between economic development and the college graduates profile. Some majors such as engineering apparently are more growth inductive than others. However, economic theory does not give us a strong support to this relation. Human capital theory tells us only that the more years of schooling the population of a country has, the more developed this country is likely to be. NIE and the Developmental State, an alternative institutional approach, on the other hand can both cast some light on this connection. Two hypotheses, on the NIE side, put this relation forward. The first, from North (1990) states that institutions alongside with technology determine production and transaction costs. The second hypothesis links undergraduate majors with production and transaction costs. Therefore, some jobs (and thus college majors) such as lawyers would be mainly linked to transaction costs while others like engineers would be related to production costs. According to this hypothesis, countries with proportionately large transaction costs will tend to have a larger share of transaction-cost related jobs. From the Developmental State point of view, these majors are more growth inductive since they allow a faster learning and innovation process, which is the key determinant to long-run economic development. Using data sets from UNESCO and collected directed from the ministries of education from Brazil and Korea, this paper searches for an empirical support to these hypotheses.