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When governments have more revenue, they spend more on human capital, and spending is more effective in well-governed countries. Here, we use an equilibrium correction model to empirically investigate the relationship between government revenue per capita, six indicators of quality of governance, and school attendance, using an unbalanced panel dataset that includes nearly all countries. The results suggest a strong effect over time: as government revenue increases, school attendance rates increase, and the magnitude of this influence is mediated significantly by a country's quality of governance. Interestingly, the impact of governance is more pronounced in primary education than it is in lower or upper secondary education. This model offers the ability to demonstrate the impact of increases and decreases in government revenue in an individual country while accounting for the impact of revenue on governance and the impact of both revenue and governance on school attendance.
Hall et al. (Sat,) studied this question.