Education policies and development with threshold human capital externalities

Historiacally, all countries have experienced economic stagnation without schooling until compulsory schooling was instituted. This study argues that a stable poverty trap exists at a low initial average human capital owing to a coordination failure to benefit from potential human capital externalities and empirically plausible decreasing returns to scale in education. When the average human capital exceeds a threshold, balanced growth can arise from empirically established human capital externalities for increasing returns to scale in production. Compulsory public education or education subsidization can reach the threshold human capital and escape the poverty trap. Appropriate subsidies on schooling time and education spending financed by labor income taxes can fully internalize the externalities.