Kiichio Fukasaku: This paper presents first estimates of the external returns to higher education (i.e., human-capital externalities) based on the panel data covering nine Chinese provinces and spanning the period 1991–2009. The main contribution of the paper is to estimate a fixed-effects instrumental variable model to circumvent the potential endogeneity problem that may arise from the use of “provincial shares of college graduates” as an explanatory variable. The authors instrument the share of college graduates with the number of “Project 211” universities located in each province.1
The empirical work of this paper has important policy implications for the future of the Chinese economy. The country is now embracing slower economic growth as the population growth is expected to further decelerate in the coming decades, so that China's future growth critically depends on “inspiration” (adoption of new ideas and technologies leading to higher productivity growth) rather than “perspiration” (accumulation of...