Is the State University System in Sri Lanka a "White Elephant"?
Sri Lanka allocates considerable resources to maintaining universities each year; however, there has not been any empirical investigation of the impact of university education on national output. The paper covers the period 1959-2008, a period that includes substantial changes in economic policies, the ethnic war and civil insurgencies. We generalize Lau and Sin (1997 a and b) common methodological framework for both neoclassical and endogenous growth models and use an ARDL framework to estimate the econometric model. We found that there have been positive returns to investments in human capital (measured by a quality adjusted stock of university graduates); however, the returns are signicantly lower than those found for other developing economies. The returns to physical capital are higher. However, we find that higher returns from investment in physical capital cannot produce any sizable positive externalities under current conditions as it would be the case in a more developed economy. Civil unrest has had the expected negative effect on aggregate output.
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