Economic Issues in theEducation Sector

Harry Anthony PatrinosHuman Development Network

Education as an IndustryEducation as an Industry

• Employment of teachers: 5% of labor force

• Millions of pupils• Spending = $2 trillion worldwide

– 1/3 of global market in USA; 15% in LDCs

• Education spending as investment• Human Capital

Enrolment (millions) in Enrolment (millions) in Education, 1997Education, 1997

Pre-primary Primary Secondary TertiaryWORLD TOTAL 95.6 668.5 398.1 88.2More developed regions 22.0 62.9 75.8 34.2Countries in transition 13.2 27.4 41.1 11.0Less developed regions 47.5 578.2 281.3 43.0Least developed countries 60.4 68.7 16.4 1.9

UNESCO: World Education Report 2000

Education ExpendituresEducation Expenditures(% of GNP)(% of GNP)

China 2.3India 3.2Brazil 5.1United States 5.4Denmark 8.1France 6.0World 4.8Sub-Saharan Africa 4.1

Wages Relative to WagesWages Relative to Wageswith No Schoolingwith No Schooling

0

1

2

3

4

5

6

IndonesiaThailand

PeruCote d’Ivoire

USASlovenia

Primary Secondary Post-secondary

Education Originally All Education Originally All PrivatePrivate

– Supply and Finance• Private tutors• Religious institutions• Ancient universities (e.g., Oxford)• No government (e.g., Somalia)• No public schools (e.g. Mali communities)

And Why Not?And Why Not?

• Families and individuals demand education

• Tutors and institutions provide it

• The market works, or does it?

• Why should the government intervene?

Because….Market Failure

• Equity

• Externalities

• Capital market imperfections

• Information asymmetries

Market Failure: EquityMarket Failure: Equity

• The Middle Class and the Poor

• Girls

• Notion of education as human right

• Notion of compulsory education

Market Failure: ExternalitiesMarket Failure: Externalities

• Minimum levels of literacy for growth

• Science and technology?

• Health and fertility effects

• Spillover effects

Child Mortality by Education Child Mortality by Education of Motherof Mother

Mali 1995-96

Bolivia 1994

Uganda 1995

Philippines 1993

Nepal 1996

Yemen 1991-92

Morocco 1992

Deaths per 1,000 live births

No Education Primary Only Secondary or higher

Market Failure: Capital Market Failure: Capital Market ImperfectionsMarket Imperfections

• Education is long-term business, financial institutions unwilling to take risk

• Difficult for suppliers to borrow against future revenue stream

• Difficult for students to borrow against future income stream

Market Failure: Information Market Failure: Information AsymmetriesAsymmetries

• Suppliers of education have more information than purchasers (students)

• Result: students may end up in institutions other than those they would have selected with better information

But…Government FailureBut…Government Failure

• Equity

• External Efficiency

• Internal Efficiency

• Sustainable finance

Disparities between Girls’ Disparities between Girls’ and Boys’ Enrollmentand Boys’ Enrollment

• 1990, avg 6-year-old girl in low, mid-income country: 7.7 yrs of school; up from 6.7 yrs, 1980

• Gap between boys and girls widest in S. Asia: 1990, girl could expect 6 yrs of school; boy, 8.9

• Middle East: girl 8.6 years, boy 10.7

Distribution of Expenditures by Income Quintile

0

10

20

30

40

50

Armenia 1996

Côte d’Ivoire 1995

Nepal 1996

Nicaragua 1993

Romania 1994

Vietnam 1991

Poorest 20% 2 3 4 Richest 20%

Poor get less education

Government Failure: Government Failure: External EfficiencyExternal Efficiency

• Over-subsidized higher education– In Africa, spending per student in higher

education is 44x that per primary student

• Continuing high proportion of secondary education that is supply-driven vocational education

• Tertiary more costly than primary

Government Failure: Government Failure: Sustainable FinanceSustainable Finance

• Increasingly difficult to meet demand for education, especially where little economic growth (e.g. Africa)

• Aid can help, but not sustainable

Service DeliveryService Delivery

• Public schools lack spur for efficiency• Why?• Operated by Government• No competition• Teachers paid according to experience

and education, not performance• Schools closed or opened depending on

demographics, not how well they perform

So What is the Answer?So What is the Answer?

• Market has strengths and weaknesses (“failure”)

• Government has strengths and weaknesses (“failure”)

• Draw on strengths of both market and government

• Minimize weaknesses of both

• Context-specific

Emerging Role of Emerging Role of GovernmentGovernment

Draw on Market Strengths• Matching of Demand and Supply• Competition• Willingness to pay

Draw on Government Strengths

• Broad National Vision• Capacity to redistribute and

promote equity• Information

Avoid Market Failure• Promote Equity• Achieve Externalities• Overcome Capital Market

Imperfections• Overcome Information

Asymmetries

Avoid Government Failure• Promote Equity• Avoid Inefficiency• Achieve Sustainable Finance

Provision

Financing Private Public Private

Private schools Home schooling

User fees

Public

Vouchers Charter schools Contracting out

Traditional public schools

Financing and Provision of Financing and Provision of EducationEducation

Input

Water

School furniture

School facilities

Hardware

Textbook usage

Writing materials

Software

Teacher salary

Training

Logos II

4 year primary

3 years secondary

Cost (US$)

1.81

5.45

8.80

16.06

1.65

1.76

3.41

0.39

2.50

1.84

2.21

5.55

Achievement change by input (coefficients)

3.513

-5.650

7.228

8.969

6.403

4.703

4.864

0.055

-0.160*

3.594

3.177

2.383

Achievement gains per US$ spent

1.94

-

0.82

0.56

3.88

2.67

1.43

0.14

-

1.95

1.44

0.43

Cost-Effectiveness AnalysisCost-Effectiveness Analysisof Inputs for Portuguese Achievement, Brazilof Inputs for Portuguese Achievement, Brazil

Education Expenditure and Education Expenditure and AchievementAchievement

0 2,000 4,000 6,000 8,000

United StatesSwitzerlandAustriaCanadaNorwayDenmarkJapanNetherlandsNew ZealandSpainCzech Rep.KoreaHungary

TIMSS RankingMaths Science

28 17 8 2512 818 1826 2027 34 3 3 9 624 2231 27 6 2 2 414 9

Expenditure/student

Urban Rural

Mother’s Education + + + +Father’s Education + + + + +Age + + + + +Gender (Male) + + + + +Household Size -Recent Migration - -Language (Spanish + + + +

Household Income + +speaking only)

UrbanUrban RuralRural

Basico Intermedio

Primary Secondary

Determinants of School Determinants of School Enrollment, BoliviaEnrollment, Bolivia

Figure 6.4. Affordability of Two Enrollment Scenarios

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Fiscal Year

VN

D t

rill

ion

Projected Budget

Plan Scenario

Baseline Scenario

Sources: VEFSS Projections.

Vietnam: Expenditure ScenariosVietnam: Expenditure Scenarios

RecommendationsRecommendations

• Target subsidies to basic and to poor

• Cost recovery in tertiary

• Go slow with vocational

• Reduce dropout and repetition

• Quality enhancement– monitor learning– increase instructional

hours– teacher upgrading and

regular in-service trng– increase govt spending

on textbooks and learning materials

Ethiopia: Sector Investment Ethiopia: Sector Investment ProgramProgram

•GER: 25%

•Target: 50% (from 3.1 to 7 million students)

•Distance: Build new schools close to students, especially in remote, rural areas

•2,500 primary schools will be built

•5,000 will be upgraded

•5,000 will be renovated

School BuildingsSchool Buildings

Technological Alternatives:

• Mutually exclusive alternatives

• Lower present value

• Opportunity cost of capital

Analysis of AlternativesAnalysis of Alternatives

Material Advantages Disadvantages Maintenance Chika (mud and thatch)

Cool in dry and hot weather

Cheap initial investment

Does not resist termites Washes away in rain Depletes forest Not popular with

community, students

High

Concrete element Resist termites and rain

Costly initial investment Low

Stone Resist fire, termites, rain

Costly initial investment Low

Hollow Concrete Block (HCB)

Resists fire termites, rain

Better insulation

Need stable foundation, supervision

Low

Brick Comfortable and cool Many trees cut to burn brick Weak in rainy season

High

Corrugated iron sheets

Cheap initial investment

Susceptible to corrosion Not heat resistant Not popular with community, teachers

High

Analysis of AlternativesAnalysis of Alternatives

Cost comparison of school buildings, 1992 Birr* Capital Recurrent Life time* Cost/year

Material (Investment) (Maintenance) (years) lifetime Concrete element 213,000 2,130 40 7,455 Stone 189,284 1,893 40 6,625 Brick 170,400 5,000 30 10,680 Hollow Concrete Block 127,800 1,278 30 5,538 Chika 85,200 6,000 10 14,520 Corrugated Iron Sheet 31,950 5,000 10 8,195 Source: Participatory Evaluation of EICMA (Educational Institutes Construction and Maintenance Agency). A report to Ministry of Education and SIDA. 1992. * With full maintenance

Summary Cost-Benefit Analysis of School Buildings, Ethiopia Transportation Difficulties:

Cost Escalation

Material Full Maintenance Half Maintenance 10% 20% 30% Concrete element 6% 9% 7% 5% 2% Stone 8% 11% 9% 6% 3% Brick 5% 11% 9% 6% 2% Hollow Concrete Block 17% 23% 19% 13% 8% Chika (base case) (base case) (base ) (base) (base) * Rate of return calculation based on savings due to selection of material versus chika

Graphic Derivation of Crossover Discount Rate, Choice Between Chika and Hollow Concrete Block Alternatives in

Ethiopia

100,000

150,000

200,000

250,000

10 15 20 25

Discount rate(percent)

Pre

sen

t valu

e

(birr)

Chika

HCBCrossover discount rate

MessagesMessages

• Investigate the market for education– Demand and supply

• Separate finance and provision– Role of private, NGO sector

• New roles for:– government, students, families,

communities