The Challenge of Education

Peter F. OrazemDepartment of Economics, Iowa State University

Summary

This paper was produced for the Copenhagen Consensus 2008 project.

The fi nal version of this paper can be found in the book, ‘Global Crises, Global Solutions: Second Edition’,

edited by Bjørn Lomborg

(Cambridge University Press, 2009)

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The benefits and costs of alternative strategies to improve educational outcomes Peter F. Orazem, Paul Glewwe and Harry Patrinos

Benefits from schooling Numerous studies have found consistently positive private returns per year of schooling in developing countries. Actual returns vary, but are typically in the 8-10% range. In the great majority of countries, returns are higher for girls than for boys, on average 9.8% and 7.2% respectively. Although the difference is smaller, in about two thirds of the countries urban residents receive greater benefits than rural dwellers. However, the most important point to note is that these differences are rather small. If labor markets reward urban males for education, then they also reward women and the rural population. Where are benefits from schooling greatest? Education has a negligible effect on productivity in static economic environments. Education has the greatest value in disequilibrium which requires strategic managerial decisions in place of traditional resource allocations. For example, in countries without agricultural innovations, farming practices based on long standing rules may be the best option, even if they generate no growth. But in the face of technological advances, educated farmers are the first to adopt improved crop varieties, equipment and management practices. This can be important for economic growth, which requires an agricultural transition in which rural labor is freed up for emerging industrial sectors and the price of food is reduced to give an increase in real wages for urban workers. Human capital attains its highest returns in a free market environment where skills can migrate to their highest reward. This was demonstrated dramatically by the rapid increase in returns to schooling in the former planned economies during their transitions to market. Developing countries that are characterized by less regulation, wage and price flexibility and enforceable property rights on the Heritage Foundation's Economic Freedom Index had returns to education averaging 10%. However, for more restricted economies, returns averaged only 6.4%, suggesting that investment in education is more valuable in freer economies. There is clear evidence that parents respond to rising perceived returns. For example, the bias towards employing educated young women in rapidly growing export-oriented manufacturing sectors in South Asia and Central America has increased school enrollment rates for girls without the need for any explicit program School attendance itself is not enough: the evidence is that cognitive skills rather than years at school are what drive earnings. Nevertheless, there is a link between literacy and years of schooling, with children who complete primary education being almost certain to be literate. This underlies the Millennium Development Goal of attaining universal primary education by 2015. Estimates of the cost of achieving this are between $9-34 billion, but this may understate the costs of reaching rural areas, for example. We need to identify which illiterate populations can be served most economically.

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Should investments concentrate on the primary level or other levels? We concentrate on how to raise the proportion of literate adults in the world, which implies focusing only on countries which have not yet achieved universal primary education. Since studies show that returns to education diminish as the level increases, this represents the most effective intervention. Furthermore, efforts to improve human capital early in life have proven more cost effective than remediation later in life. Even in environments where returns to secondary or tertiary schooling levels are high, raising the schooling levels of the poorest segments to literacy offers at least a chance to escape poverty and lessens income inequality. If parents respond to returns, what is the public role in schooling investments? Although parents increase their investment in education as expected returns rise, they may underinvest relative to the social optimum if there are external benefits to schooling. Social returns to schooling include a reduction in fertility rates as women become more educated and improvements in health and quality of life for children are associated with education of both sexes. More schooling is associated with later marriage and fewer teenage mothers. In developing countries, the link between parents schooling and improved child welfare seems particularly strong. Improved education also improves the overall efficiency of economies, with both private and social benefits. In particular, migration of rural workers to urban areas gives them access to more productive jobs. Better educated people are also more likely to adopt new technologies. Experience from India's Green Revolution showed that relatively skilled farmers were the first to adopt new crop varieties and management techniques, to the benefit of themselves and to the wider economy. Similar improvements are found in the quality of public servants and governance in general. In developing countries, substantial segments of the population are likely to face credit constraints which can limit children's educational opportunities. There is clear evidence that schooling is atypically sensitive to unforeseen fluctuations in household income, whether positive or negative. Such constraints mean that government provision of education can be justified as a way to equalize opportunities for households to escape poverty. Where are the most serious gaps in enrollment rates? The MDG for universal primary education (UPE) is unlikely to be met, despite the strong evidence for positive returns. Completing grade 5 virtually guarantees adult literacy and numeracy, but substantial gains are needed to get all children through the primary cycle. World Bank data shows that an average 77% of women and 84% of men in the 20-29 age range reached this standard in urban areas, but this reduces to 54% and 63% respectively in rural areas. There is considerable variation between countries, but the male-female gap tends to be greatest amongst rural populations. Where can schooling be increased most efficiently? Children who do not complete grade 5 fall into two categories: those who never went to school and those who dropped out. We suggest that it is less expensive to get children who have dropped out to complete primary education than to get children who have never attended school to become literate. Children who dropped out must have had access to a school and parents have already demonstrated their willingness to make an

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initial investment of their children's time. For children who never attended, we cannot tell if they have a readily available school or if their parents would care to send them. In the developing world, excluding China, Eastern Europe and Central Asia, 30% of children fail to complete their fifth grade, and of these, 55% start school but drop out. Of the 112 million children born in developing countries in 2004, 26 million will fail to complete grade 5, and 14.4 million of these will be drop-outs. Getting the dropouts to complete the primary cycle would reduce the gap in UPE from 23% to 10%. Gains would be greatest among the poor who disproportionately make up the population of children failing to gain literacy. For children in the bottom two income quintiles, 37% fail to complete primary schooling of whom 54% drop out. Focusing on drop outs would therefore benefit all social groups. Supply-side interventions Demand-side policies which attempt to influence parental incentives to send their children to school show more promise, but first we explain our views on supply-side interventions which aim to increase the quantity or quality of schooling offered. If you build, they may not come The costs of building and staffing schools are incurred before we know if parents will send their children. Indonesia's massive program to double the number of primary schools gave only a 3% increase in average years of schooling, for example, and shortening the distance to school makes little difference to enrollments. Also, in urban areas, increased provision of public education may simply mean that a proportion of children move from private schools, some of which may close. Quality matters, but we don't know how to foster quality Higher quality schools undoubtedly enhance human capital production and raise school demand, but we do not know how to make schools better. Good teachers produce better results, but cannot be distinguished from bad teachers in terms of education, training, demographics or compensation. Studies provide inconsistent evidence of the aspects of schools that generate superior outcomes and so we do not know which schooling inputs are critical to school quality. Teacher absenteeism is a significant problem in developing countries, with an estimated 10-24% of primary education expenditures lost. Finding ways to encourage teachers to attend more regularly also increases pupil attendance and better performance in standardized tests, but we do not yet know how to achieve this across the board. Are better-managed schools better or are better schools better managed? Decentralization of school management has become a focus of efforts to improve the efficiency of public service delivery, but the available evidence is too uncertain to say whether this otherwise-attractive option would work in all settings. Studies in El Salvador and Nicaragua show that locally managed schools perform better, but only schools with managerial capacity are locally managed. As yet, we do not have a good model by which governments could successfully foster local management.

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Returns to increased school supply come after a long lag All supply-side interventions have the disadvantage of upfront cost with uncertain and delayed outcome. Demand-side interventions clearly have some distinct advantages in benefit-cost terms. Nevertheless, some supply-side policies may be justified in terms of equity, even if they cannot be justified on benefits versus costs. For example, adding schools to rural areas is expensive and there may be too few pupils to make them cost effective. Demand-side interventions We look here at interventions which improve children's physical or mental ability to learn, which make education more affordable and which make income transfers conditional on school attendance. Such policies work best where there is an existing excess school capacity so that the marginal cost of adding more pupils is low. Health and schooling 28% of children in developing countries are moderately or severely undernourished, and nutritional supplements or treatments for intestinal parasites can be an inexpensive way to raise school attendance and increase physical and mental capacity. Malnutrition in early life has a negative effect on cognitive and physical development, which is only partially reversible in later life. Malnourished children start school later and complete fewer years of education. Programs providing nutritional supplements and daycare to young children in Bolivia and Philippines have shown permanent gains in cognitive and fine motor skills, and similar types of intervention have raised attendance levels elsewhere. Health interventions are particularly cost effective because their primary aim is to improve child healthcare, and increased schooling is a collateral benefit. Nutritional programs can also have real benefits to teenagers and adults. Benefits could be large if expanded worldwide, but we should keep in mind that the effect of such interventions is to raise the attendance of children already at school, rather than increase enrollments. Nevertheless, such programs are inexpensive to deliver, produce benefits in addition to the educational goals and will be particularly relevant to the poorest households where dropout rates are highest. Lowering schooling costs Tuition fees, uniforms and school supplies can represent a significant proportion of a poor family's income. Some countries, including Ghana, Kenya, Tanzania and Uganda have cut or eliminated fees in public schools, with dramatic effects on enrollments. In Uganda, elimination of primary school fees cut costs by 60% or $16 per child, resulting in a 60% increases in enrollments. The downside is much larger class sizes, the effect of which is unknown, although it must have had some disadvantage to children already at school. The availability of less expensive teaching and infrastructure in the private sector, together with the excess capacity of private schools in some countries, suggests that modest public subsidies to the sector could increase enrollments more cost effectively than in the public schools. The evidence is that even short-term and rather small

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subsidies (e.g. $3 per month each for 100 schoolgirls in the Balochistan province of Pakistan) can be effective in inducing operators to open new schools. However, this seems only to be sustainable where there would be sufficient demand for such schools without subsidy, which is primarily in urban areas. In some countries facing constraints in expanding public school capacity, enrollments can be increased by using vouchers to raise enrollments at private schools with excess capacity. Children randomly assigned to the voucher program in Colombia were 10% more likely to complete 8th grade and had test score improvements equivalent to a further year's schooling. They were also less likely to marry young or engage in child labor. A further mechanism to allow the poor to access education has been used in India. Children who had fallen behind because their families were unable to afford the after-school tutoring used by their peers were provided with low-cost tutoring from local women with high school degrees. At a cost of only $5 per child, a two-year program gave a test performance improvement equivalent to an additional year's schooling. Conditional cash transfers Latin American countries (and now also Bangladesh and Turkey) have implemented programs which provide income for households in exchange for them sending their children to school. Additional health-related components are often also added, and efforts are made to target the programs at the lowest income strata of society. To avoid problems associated with estimating current income as the targeting criterion, focusing on poor rural villages or using parental education as the decision metric may be more effective. Such transfers will be most effective when aimed at populations not currently in school. The greatest efficiency will come from focusing on the age when school dropouts occur: primary school age in the least developed countries. In contrast conditional transfers had almost no impact on primary enrollments in Mexico, a more developed country. Overall, the largest effects have been in rural areas and particularly poor areas. Benefit-Cost summary Returns will vary considerably depending on the circumstances, and estimated overall benefit-cost ratios should be treated with caution. Across the range of interventions, it seems that poor, rural female populations respond to demand-side policies to the greatest extent: exactly the groups which have the lowest levels of primary education currently. Returns are greatest for interventions at primary level, and this is the stage where most dropouts occur in developing countries. In urban areas, private suppliers may be able to provide services at a lower cost than the government. We adopt a conservative estimate of returns to schooling being 8% of average earnings for labor per year of schooling. Skeptics would argue that returns will dwindle as literacy increases. However, there is good evidence that returns have remained remarkably stable in both developed and developing countries, so we do not regard this as justified. A more credible criticism is that school standards will drop as class sizes increase and school supplies are not increased sufficiently, but there is no consistent finding that pupils in larger classes perform less well.

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In our analysis, we assume a 45 year work career. We make no adjustments for external benefits of girls' education such as healthier children and reduced fertility. Neither do we adjust for better functioning labor markets, more efficient use of capital and technology, or better functioning government institutions. Allowing only for increased earnings from schooling, benefit-cost ratios are nonetheless large, and some are extremely large. Using a 5% discount rate, and with the sole exception of the Colombian voucher scheme for secondary education, BCRs fall between 2.5 and over 500. Early stage interventions are particularly effective because they are inexpensive and the opportunity costs are less. Appropriate targeting is also needed: conditional cash transfers for primary education in Mexico were not cost effective, because most of the children were already at school. We should note that expansion of some of these programs would undoubtedly reduce their cost effectiveness, as they are generally being targeted to places where they are likely to be atypically productive. Conclusions The 14.4 million children who drop out of primary schooling each year could be induced to become literate using cost-effective, demand-side interventions. $250 per child would pay for all but the most expensive interventions proposed. This would give a total annual cost of $3.6bn to lower the fraction of developing country children failing to complete the primary cycle from 23% to 10%.