The Effect of Investment in Education on China’s Economic Growth: The Role of Financial Development

Abstract Earlier studies have focused on how education investment affects economic growth in different countries, namely developed and developing countries. The conclusions have been ambiguous and one of the dominant factors leading to such variation is the omission of financial development indicators. The present paper makes use of panel date from 2005 to 2019 on 31 provinces of China to examine how financial development can influence the relationship between education investment and economic growth. The findings show that financial development does not facilitate the impact of education investment on economic growth in wealthier regions. However, for poorer provinces with GDP per capita below the average, financial development as proxied by the ratio of total loans and total deposits in the financial system to GDP, respectively, can indeed enhance the effect of education investment on economic growth. Such enhancement is valid even when the proxies for education investment and financial development respectively pose negative effect on economic growth. Credit expansion and savings increase may facilitate government expenditure in education, which in turn promotes economic growth in relatively poor provinces to a greater degree than does the relatively wealthy provinces. Financial development strategy should be targeted to poorer provinces with below-average economic growth to facilitate growth-promoting educational financing.