GEP Research Paper 09/02
Optimal Educational Policies and Comparative Advantage
Spiros Bougheas, Richard Kneller and Raymond Riezman
Summary
We consider the optimal education policies of a small economy with a limited government budget. Sometimes it is optimal to choose the new policy so that it reverses comparative advantage.
Abstract
We consider the optimal education policies of a small economy whose government has a limited budget. Initially, the economy is closed and the government chooses its education policy to maximize welfare under autarky. Then the economy trades with the rest of the world. Lastly, the government chooses a new education policy that maximizes welfare under trade. Is it ever optimal for the government to choose its new policy so that it reverses the economy's comparative advantage? We find that if the budget stays fixed when it is optimal to `move up the skills chain' it is not feasible. In such a case a foreign loan is welfare imroving. A move in the opposite direction can be optimal and when it is optimal it is also feasible.
JEL: classification: F11, O15
Keywords: Patterns of Trade, Education Policy, Welfare
Issued in January 2009
The paper is available in PDF format