Nafziger Economic Development (4th ed)

336 Part Three. Factors of Growth

TABLE 10-1. Average Social Returns to Investment in Education

Note: In all cases, the figures are “social” rates of return: The costs include foregone earnings (what the students could have earned had they not been in school) as well as both public and private outlays; the benefits are measured by income before tax. (The “private” returns to individuals exclude public costs and taxes, and are usually larger.)

Non-OECD.

Source: Psacharopoulos and Patrinos 2002.

2,700,000 (with a network of local affiliated colleges to major universities in each state) costs only $250 per student.2 By contrast, returns to primary education reach a point of diminishing returns, declining as literacy rates increase from LDCs to OECD countries (Table 10-1).

John B. Knight, Richard H. Sabot, and D. C. Hovey (1992:192–205; Knight and Sabot 1990:170–171) argue that studies by Psacharopoulos, often with a collaborator, are based on methodologically flawed estimates. Although average rates of return on primary education were higher than that to secondary education, the marginal rates of returns to the cohort entering into the labor market were lower for primary education than for secondary education. In the 1960s and 1970s, primary graduates were in scarce supply; a primary-school certificate was a passport to a white-collar job. In the 1990s, however, after decades of rapid educational expansion and the displacement of primary graduates by secondary graduates, primary completers are fortunate to get even the most menial blue-collar wage job. As education expands and as secondary completers displace primary completers in many occupations, successive cohorts of workers with primary-school certificates “filter down” into lesser jobs and lower rates of return. However, secondary graduates, who have acquired more occupation-specific human capital, resist the reduction of scarcity rents and the compression of the occupational wage structure with educational expansion. Thus, Knight, Sabot, and Hovey question whether LDCs should place a priority on investment in primary education.

2The returns to investment in primary education are especially high in countries such as Bangladesh, “where mass illiteracy prevails” (U.N. Economic and Social Commission for Asia and the Pacific 1992:38).

Note: Figures shown are averages (weighted by enrollment) of costs (in 1976 dollars) in the countries in each region for which data were available.

Source: World Bank 1980i:46.

How do educational differentials in lifetime earnings vary internationally (assuming a 10-percent annual interest rate on future earnings)? In the late 1960s, the ratio of higher educational to primary education earnings in Africa (8–10:1) was much higher than Latin American (4–5:1), Asian (3–6:1), and North American (3:1) ratios. Indeed in Africa, where university and even secondary graduates have been scarce, the premium to graduates of both levels of education (highly subsidized) is high, whereas the premium is low for both levels in North America (Hinchliffe 1975:152–156).3

Noneconomic Benefits of Education

As we have hinted at earlier, schooling is far more than the acquisition of skills for the production of goods and services. Education has both consumer-good and investment-good components. The ability to appreciate literature or to understand the place of one’s society in the world and in history – although they may not help a worker produce steel or grow millet more effectively – are skills that enrich life, and they are important for their own sakes. People may be willing to pay for schooling of this kind even when its economic rate of return is zero or negative.

Some returns to education cannot be captured by increased individual earnings. Literacy and primary education benefit society as a whole. In this situation, in which the social returns to education exceed private returns, there is a strong argument for a public subsidy.

3Pritchett (2001) notes the high individual rates of returns in low-income countries amid low productivity and economic growth, resulting from widespread rent seeking and bribery, declining marginal returns to education from stagnant demand and low quality of education, the absence of externalities from entrepreneurship and social capital, and the large educational ethnic and gender gaps that contribute to low utilization of educated people (ibid.; Nandwa 2004:3).

338 Part Three. Factors of Growth

Education as Screening

It may be inadequate to measure social rates of return to education through the wage, which does not reflect added productivity in imperfectly competitive labor markets. In LDCs, access to high-paying jobs is often limited through educational qualifications. Education may certify an individual’s productive qualities to an employer without enhancing them. In some developing countries, especially in the public sector, the salaries of university and secondary graduates may be artificially inflated and bear little relation to relative productivity. Educational requirements serve primarily to ration access to these inflated salaries. Earnings differences associated with different educational levels would thus overstate the effect of education on productivity.

By contrast, using educational qualifications to screen job applicants is not entirely wasteful and certainly preferable to other methods of selection, such as class, caste, or family connections. Moreover, the wages of skilled labor relative to unskilled labor have steadily declined as the supply of educated labor has grown. Even the public sector is sensitive to supply changes: Relative salaries of teachers and civil servants are not so high in Asia, where educated workers are more abundant, as in Africa, where they are scarcer.

The World Bank, which surveys 17 studies in LDCs that measure increases in annual output based on four years of primary education versus no primary education, tries to eliminate the screening effect by measuring productivity directly rather than wages. All these studies were done in small-scale agriculture, where educational credentials are of little importance. The studies found that, other things being equal, the returns to investment in primary education were as high as those to investment in machines, equipment, and buildings. These studies conjectured that primary education helps people to work for long-term goals, to keep records, to estimate the returns of past activities and the risks of future ones, and to obtain and evaluate information about changing technology. All in all, these studies of farmer productivity demonstrate that investment in education pays off in some sectors even when educational qualifications are not used as screening devices.4

M. Boissiere’s,` J. B. Knight’s, and R. H. Sabot’s (1985:1016–1030) study in Kenya and Tanzania, which separates skills learned in school from its screening effect, shows that earning ability increases substantially with greater literacy and numeracy (as measured by tests given by researchers), both in manual and nonmanual jobs. These skills enable mechanics, machinists, and forklift drivers, as well as accountants, clerks, and secretaries, to do a better job. But cognitive skills, especially literacy and numeracy, are not certified by schooling but discovered on the job by the employer, who is willing to pay for them by giving a wage premium over time. Earnings do

4See, however, Schultz (1975:827–846), who differentiates between static technology, in which there are no returns to education, and an agricultural economy experiencing dynamic changes in technology, in which education provides returns. Schumpeter’s theory of the entrepreneur (Chapter 13) is one explanation of these dynamics.

The next three sections rely on World Bank (1980i:46–53); Bruton (1965:205–221); Boissiere, Knight, and Sabot (1985:1016–1030); and Nafziger (1988:133–135).

TABLE 10-3. Public Education Spending per Household (in dollars)

Source: World Bank 1980i:50.

not, however, increase much with increased reasoning ability (measured by Raven’s Progressive Matrices’ pictorial pattern matching, for which literacy and numeracy provide no advantage) or increased years of school.

In both countries, learning school lessons, not just attending school and receiving certification, substantially affects performance and earnings in work. However, earning differences between primary and secondary graduates could reflect screening or alternatively unmeasured noncognitive skills acquired in secondary education. Research in countries at other levels of economic development is essential before we can generalize about the effects of screening and cognitive achievement.

Education and Equality

The student who attends school receives high rates of return to what his or her family spends. Yet poor families who might be willing to borrow for more education usually cannot. A simple alternative is for government to reduce the direct costs of education by making public schooling, especially basic primary education, available and free. Expanding primary education reduces income inequality and favorably affects equality of opportunity. As primary schooling expands, children in rural areas, the poorest urban children, and girls will all have more chance of going to school. In general, public expenditures on primary education redistribute income toward the poor, who have larger families and almost no access to private schooling (Clarke 1992; World Bank 1980i:46–53; World Bank 1993a:197). Public spending on secondary and higher education, by contrast, redistributes income to the rich, as poor children have little opportunity to benefit from it (Table 10-3).

The links among parental education, income, and ability to provide education of quality mean educational inequalities are likely to be transmitted from one generation to another. Public primary school, whereas disproportionately subsidizing the poor, still costs the poor to attend. Moreover, access to secondary and higher education is highly correlated with parental income and education. In Kenya and Tanzania, those from a high socioeconomic background are more likely to attend high-cost primary schools, with more public subsidy; better teachers, equipment, and laboratories; and higher school-leaving examination scores; which admit them to the

340 Part Three. Factors of Growth

best secondary schools and the university. The national secondary schools, which receive more government aid and thus charge lower fees, take only 5 percent of primary school graduates. Additionally, the explicit private cost for secondary school graduates to attend the university (highly subsidized) is low, and the private benefit is high. Yet this cost (much opportunity cost) of secondary and higher education is still often a barrier to the poor. Moreover, those with affluent and educated parents can not only finance education more easily but also are more likely to have the personal qualities, good connections, and better knowledge of opportunities to receive higher salaries and nonmanual jobs. Not surprisingly, Tony Addison and Aminur Rahman (2003:94) find that the underlying cause of unequal educational and other public spending “is that economic power and associated wealth provide the affluent with a disproportionate influence over the political process, and therefore over expenditure allocation.” The rural poor are less well organized and lack the resources to lobby. Climbing the educational ladder in LDCs depends on income as well as achievement.

In low-income countries in 2000–01, primary enrollment of girls as a percentage of girls age 6–11 years was 69 percent compared to the comparable ratio for boys of 79 percent; for middle-income countries, the corresponding figures were 93 to 93 percent. Sub-Saharan Africa’s primary ratio was 56 percent compared to 64 percent for boys, and South Asia’s 72 percent compared to 86 percent for boys (U.N. Development Program 2003:121). For secondary and university levels, the gender ratios are about the same or less (Nafziger 1997:276). Even if girls never enter the labor force, educating them may be one of the best investments a country can make in future economic welfare. Studies indicate clearly that educating girls substantially improves household nutrition and reduces fertility and child mortality (U.N. Economic and Social Commission for Asia and the Pacific 1992b:16–19). Yet, in most parts of the developing world, especially South Asia, the Middle East, and Africa, the educational bias in favor of male enrollment is pronounced (ibid., 1992). Parents view education for their daughters as less useful than for their sons. Frequently, they fear that education will harm a daughter’s marriage prospects or domestic life. A girl’s education may result in fewer economic benefits, especially if she faces job discrimination, marries early and stops working, or moves to her husband’s village. However, educating her does increase the opportunity for paid employment, and families waste no time in educating their daughters when cultural change reduces the bias against woman in the labor market.

Educational options will widen as LDCs increase their investment in telecommunications. The electronic and video media offer extensive future opportunities for enhanced schooling, learning, and continuing education, as discussed later.

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FIGURE 10-1. The Poor Are Less Likely to Start School, More Likely to Drop Out. Percentage of 15to 19-year-olds who have completed each grade or higher. Notes: The bold grade number denotes the end of the primary cycle. Fifths based on asset index quintiles. Source: World Bank 2004i:21.

342 Part Three. Factors of Growth

Education and Political Discontent

The World Bank (1996c) shows that, on average, low-income countries, especially sub-Saharan Africa, spend substantially more on education for households in the richest quintiles than those in the poorest ones. Although secondary and (especially) university education is highly subsidized, the private cost is still often a barrier to the poor. Providing free, universal primary education is the most effective policy for reducing the educational inequality that contributes to income inequality and political discontent. Near universal primary education in Kenya, Uganda, Ghana, Nigeria, and Zambia have dampened some discontent in these countries, whereas the low rates of primary school enrolment in Ethiopia, Mozambique, Angola, Sierra Leone, Rwanda, Burundi, Congo DRC, Somalia, and Sudan have perpetuated class, ethnic, and regional divisions and grievances in educational and employment opportunities.

Still, virtually universal basic education is not a panacea. In Sri Lanka, with continuing high enrollment rates in primary and secondary school, the majority Sinhalese perception of Tamil economic success as a threat to their own economic opportunities increased during the period of slow growth and high unemployment after independence in 1948. This perception contributed to governmental policies of educational, language, and employment discrimination against Tamils, beginning in the mid-1950s, which contributed to the Sri Lankan civil war of the last quarter of the 20th century. Thus, in Sri Lanka, educational policy favored the majority community.

Generally, however, expanding educational opportunities for low-income minority regions and communities can reduce social tension and political instability. Politically, the support for expansion in education, especially basic schooling, can come from educators, peasant and working-class constituents whose children lack access to education, and nationalists who recognize the importance of universal literacy for national unity and labor skills for modernization. Examples of these coalitions supporting universal basic education include Meiji Japan (Nafziger 1995) and Africa in the 1960s.5

Secondary and Higher Education

Although primary education in LDCs is important, secondary and higher education should not be abandoned. Despite the high numbers of educated unemployed in some developing countries, especially among humanities and social sciences (but not economics!) graduates,6 there are some severe shortages of skilled people. Although

5 Nafziger (1988:127–139), on “Maintaining Class: The Role of Education,” discusses the political barriers to universal quality education.

6Psacharopoulos (1985:590–591, 603–604) indicates that the average returns to human capital investment for 14 DCs and LDCs are higher for economics than six other fields, which suggests that unemployment rates for economic graduates are also low.