The Economics of Higher Education

Presentation by Robin Sherbourne to the Polytechnic of Namibia

22 January 2003

First some definitions…

• Higher education, tertiary education

• Organisation for Economic Cooperation and Development (OECD)

• Gross Domestic Product (GDP)

Presentation outline

• Economic theory and evidence

Use this to address the following questions:

• How much should we spend?• What should we spend it on?• Who should pay?• What improvements can we make?

Economic theory

• Economists’ views of higher education: “screening” or “human capital”?

• The cost-benefit calculation to individuals and firms

Two contrasting theories of higher education

• Screening - Is higher education simply a way of identifying the brightest future employees?

• Human capital - Is higher education an investment which makes individuals more productive?

Screening

• Job advertisements specify “graduate wanted”

• Companies trawl campuses to recruit best and brightest

• Academic requirements for particular professions

Screening

Helps explain two striking facts in OECD countries:

• Everywhere graduates earn more than non-graduates

• Everywhere graduates are less likely to be unemployed

Human capital• If sieving were all higher education achieved there would be little

reason for government to subsidise it• Surely cheaper ways to sieve than through universities and

polytechnics• Some evidence that graduate pay premiums declined following

expansion of higher education in OECD• However, even in OECD countries with high proportions of

university graduates, graduates earn more and are less likely to be unemployed

• Likely that graduates learn something useful which makes them better workers

The Cost-Benefit Calculation

• Individuals weigh up the private costs of education (fees and forgone earnings) with the benefits (higher future earnings)

• Firms weigh up the private costs of training (fees and forgone production) with the benefits (higher future production)

Why government intervention?

• Broader social as well as private benefits (externalities)• Consumers may undervalue education (merit good)• Consumers may unduly lower value of future benefits

(myopia)• Consumers may be uncertain of future benefits (risk

aversion)• Consumers may not be able to borrow to fund

investment (credit constraints)• Employers may be worried about other firms pinching

their newly trained workers (free riders)• Society may want to finance education for poor using

taxes from rich (redistribution)

Economic evidence

• Does education lead to economic growth?

• Does education foster entrepreneurship?

• What are the private returns?

• What are the social returns?

• How much do countries spend?

• Who pays and who benefits?

Education and economic growth

• Economic research supports the existence of a link between education and economic growth (vast literature)

• Harder to pin down the relationship between investment in higher education and economic growth

Education and entrepreneurship

Global Entrepreneurship Monitor finds that:• problems with education and training were most

important factors inhibiting entrepreneurial activity in South Africa (lack of basic skills, creative thinking, and business skills)

• In South Africa tertiary education increases the probability that a person will exploit a new business opportunity and create a successful new firm

Private returns to education (OECD)

Private returns to education (OECD)

“University education is the best investment most people can make. The OECD’s new estimates of the annual returns to successful students range from 6.5% in Italy to 17.3% in Britain. The calculation treats the costs of study, including earnings forgone, as the investment; and the gains in post-tax earnings above those of school-leavers as the pay-off. Shorter university courses are one reason why returns are so high in Britain.”

The Economist 31st October 2002

Total returns to education

Social PrivatePrimary Secondary Higher Primary Secondary Higher

Asia 16.2 11.1 11.0 20.0 15.8 18.2Europe/Middle East/ North Africa 15.6 9.7 9.9 13.8 13.6 18.8Latin America/Caribbean 17.4 12.9 12.3 26.6 17.0 19.5OECD 8.5 9.4 8.5 13.4 11.3 11.6Sub-Saharan Africa 25.4 18.4 11.3 37.6 24.6 27.8World 18.9 13.1 10.8 26.6 17.0 19.0Source: Psacharopoulos and Patrinos, World Bank 2002

Private returns to education (Namibia)

Education and incomeAverage household income by educational level of head of household in N$

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

No formal education Primary education Secondary education Tertiary education

Source: Namibia Household Income and Expenditure Survey 1993/94, Central Bureau of Statistics

Private returns to education (Namibia)

Unemployment rates by educational attainment

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

None

Primary

Junior

Senior

Standard 10

Teacher training

University

Post graduate

2000 Broad

1997 Broad

Source: 1997 and 2000 Namibia Labour Force Surveys

Public expenditure on higher education

Government subsidies to higher educationannual subsidy per enrolled student to UNAM and the Polytechnic in N$

0

5,000

10,000

15,000

20,000

25,000

1996 '97 '98 '99 2000 '01

GDP per capitaUNAM subsidy per studentPolytechnic subsidy per student

Source: National Accounts 1993-2001, UNAM and Polytechnic of Namibia annual reports 1996-2001

Public expenditure on higher education (Namibia)

Subsidies to higher education as % of GDP

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

1996 '97 '98 '99 2000 '01

Polytechnic subsidy

University subsidy

Source: 1993-2001 National Accounts, CBS and UNAM and Polytechnic annual reports

Tertiary enrolment in Namibia

Gross enrolment ratio in tertiary education in %

0 10 20 30 40 50 60 70

SSA

SADC

Namibia

Lower Middle Income

South Africa

Upper Middle Income

Higher Income

OECD

Source: EdStats, World Bank

How expensive is tertiary education?

Spending per tertiary student as % of GDP per capita in 1997Middle income 40.8%High income 36.9%Lesotho 1022.3%Malawi 1492.0%Mauritius 140.6%Namibia 103.4%Swaziland 229.8%Zambia 356.2%Zimbabwe 340.3%Malaysia 53.6%Source: World Development Indicators 2000 and 2002, World Bank

Conclusions

• Little data or analysis on returns to education in Namibia (forthcoming World Bank study)

• Important role for government policy and government subsidies• Private returns to education likely to be high• Potential case for demanding higher private contributions• Higher education in Namibia expensive• Potential case for expansion of higher education• Danger of spending on wrong sort of higher education• General education rather than specific training• System may not be reaching the brightest and best (lower education

system failures)

How much should we spend?

• What are other countries spending?

• What can we afford?

• What do we get in return?

What should we spend it on?

• Which sectors have grown?

• Which sectors have employed more people?

• Which sectors are likely to grow in future?

• Dangers of over-education (brain drain and lower returns)

Which sectors have grown?

Sectoral growth 1993-2001% increase in value added in constant 1995 prices

-60% -40% -20% 0% 20% 40% 60% 80% 100% 120%

Fish processing

Meat processing

Subsistence

Commercial

Other producers

Producers of government services

Diamond mining

Other mining

Community, social and personal services

Owner-occupied dwellings

Other real estate and business services

Other manufacturing

Fishing

Transport and storage

Electricity and water

Construction

Wholesale and retail trade and repairs

Manufacture of food and beverages

Hotels and restaurants

Financial intermediation

Post and telecommunication

Which sectors have grown?Sectoral growth 1993-2001% increase in value added at current prices

0% 50% 100% 150% 200% 250% 300% 350% 400%

Meat processing

Fish processing

Other producers

Other real estate and business services

Commercial

Construction

Other mining

Manufacture of food and beverages

Fishing

Wholesale and retail trade and repairs

Diamond mining

Which sectors have grown?

Non-agricultural employment

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

Fishing

Mining and quarrying

Manufacturing

Electricity, gas and water

Construction

Wholesale and retail trade, repair of motor vehicles

Hotels and restaurants

Transport, storage and communication

Financial intermediation

Real estate, renting and business activities

P ublic administration, defence and social security

Education

Health and social work

Other community, social and personal services

P rivate households with employed persons

Extra-territorial organisations and bodies

Not stated

2000

1997

1991

Who should pay?

• How can we get individuals to contribute more?

• Does state-subsidised higher education help those already better off?

• Are the returns to other areas of public spending higher?

What improvements can be made?

• Provide information (regular survey of graduate employment, wages and work permits for foreigners) and conduct regular research

• Boost financing (reprioritise spending, consider more loans and graduates tax and work permit tax)

• Reduce discretion (introduce performance-related formula to fund higher education)

• Increase competition (turn Polytechnic into university)• Links to foreign institutions (quality, specialisation and choice)• Improve quality (international standards and PISA comparisons)• Cost (investigate cost effective alternatives)• Maintain focus (too many plans, initiatives and institutions)

• Promote research and innovation relevant to Namibian business (private contributions will come when there are private benefits)

• Fund raising from ex-alumni and benefactors