Applying Economic Analysis to Decision-Making in Developing Nations

In mainstream economic analysis, education is seen as a production process in which inputs (e.g., students, teachers, and textbooks) are combined to yield desired outputs (e.g., student learning) within the education sector, and larger societal outcomes outside the sector (e.g., increased earnings in the workplace or greater social equality), under the prevailing educational technology (encompassing pedagogy, curriculum, and school organization) and input prices. A major application of economic analysis is to inform decision-making in education in order to improve efficiency in educational production; that is, producing more desired education outputs and outcomes given educational resources. Analytically, educational efficiency can be distinguished as internal efficiency and external efficiency. Internal efficiency relates educational outputs to educational inputs, while external efficiency relates educational outcomes to educational inputs. Analysis of educational efficiency is not confined to economic concerns only, since educational outputs and outcomes also pertain to social and political dimensions of national development.

A substantial literature exists concerning the economic analysis of educational development in developing nations. Developing nations are not a homogenous group; there are substantial differences between them in terms of the level of socioeconomic development, extent of ethnic and religious diversity, history, and cultural values.

Internal Efficiency of Education

The internal efficiency of education is improved when more education outputs are produced at given education resources or fewer education resources are used in producing the same amount of education outputs. Thus educational economic analysis is centrally concerned with the production of education outputs and with education costs.

An educational production function is a mathematical construct that mainstream economists and researchers from other disciplines often use to study educational production. It relates some measure of education output (e.g., student achievement) to various inputs used in education (e.g., student characteristics and family background, teacher characteristics and other school-related factors). An early application in developing nations is the 1975 study by Leigh Alexander and John Simmons that found that family backgrounds and socioeconomic factors, not school factors, were the most important determinants of student achievement. But a 1983 study by Stephen Heyneman and William Loxley countered that school factors could also affect student achievement, and that such factors had stronger effects in low-income nations than in high-income nations. Other studies also tried to identify school factors that could boost student learning and to show that spending on school quality could have a good return. These studies argued that it is not enough to focus on quantitative development of the education system, and that the government and the donor community should pay more attention to improving school quality. Patrick McEwan and Martin Carnoy's 2000 study and Emmanuel Jimenez and Marlaine Lockheed's 1995 study of educational production include data that compare the effectiveness of public versus private schools and that employ more sophisticated statistical techniques.

The costs of education refer to resources utilized in the education production process; they include not only government expenditure on education, but also household spending on education and the foregone opportunities of schooling (e.g., gainful employment). Education cost studies range from macroanalysis of national educational expenditures across nations to microanalysis of educational decision-making by individuals and households. Cross-national studies have found that government spending on education (as a percentage of national output) has declined in the developing nations since the 1980s, after a rising trend in the 1960s and 1970s. Studies in a number of developing nations have shown that private spending on education is a significant part of the total spending on education, and that private costs are an important source of educational inequality and inequity in these nations. In addition, household education costs could be a heavy economic burden on poor and rural households, resulting in negative educational consequences such as dropping out. Financial assistance targeted at poor and rural populations should be part of the overall strategy to improve school attendance for marginalized population groups. There is a need to carefully estimate the costs of educational inclusion of marginalized groups because such costs tend to be quite different from those for nonmarginalized groups.

Privatization of schooling has been proposed as a strategy for improving the effectiveness and cost-effectiveness of education in developing nations. Proponents of privatization argue that private schools are more effective and are more likely to be less costly than public schools. Competition in the education market could also lead to improvement of public schools. Critics of privatization point out that there is no conclusive evidence to show that private schools are more effective than public schools. For example, in 2000 McEwan and Carnoy found that Chile shows different types of private schools–some more effective; others, less effective than government schools. An unpublished review by Mun C. Tsang of the costs of public and private schools in developing nations finds that most studies tend to underestimate the costs (thus overestimate the internal efficiency) of private schools relative to public schools. Controversy remains as privatization is concerned not only with cost-effectiveness, but also with opposing ideologies and competing goals of schooling.

A subject of sustained interest in developing nations is the economic analysis of new educational technology because of the need to provide educational services in remote and sparsely populated areas, to reduce unit cost and meet educational demand under very tight government education budgets, and more generally to improve educational quality through more cost-effective alternatives to traditional schooling. Studies found that small media (e.g., radio) were less costly and more cost-effective than large media (e.g, television). Distance education is an effective way to reach learners in remote and sparsely populated areas. Cost analysis indicates that programs using educational media demonstrate economies of scale. But since they require large start-up costs, these programs have to have large enrollments and a long period of operation in order to be comparable to traditional schooling in terms of unit costs. The use of computers in the school context has had mixed success. Of particular current interest is the use of the Internet in education. It is necessary to ascertain the potential of the Internet in developing nations and to address the concern of some observers that there is an increasing digital divide between developing nations and advanced industrialized nations. A mindful introduction of new technology into education, informed by a careful analysis of the education problems to be addressed and the range of technological alternatives available, is highly desirable.

Teachers are a key input in educational production, and an adequate supply of skilled teachers is a prominent policy concern in many nations, including developing ones. Not unexpectedly, teacher supply is influenced by such factors as teachers' salaries and working conditions relative to those in other occupations, and the costs of teacher preparation relative to those for other occupations. The harsh working conditions in rural areas in developing nations often lead to a shortage of skilled teachers in these areas. In some developing nations, low educational quality is related to the existence of a significant proportion of untrained teachers, an uneven distribution of teachers across schools, and teacher absenteeism. There is a lack of published studies of teachers' markets and the utilization of teachers in the developing world.

Educational finance is an important domain in education economics since it deals with the mobilization and allocation of resources in the production of education. For many nations in the developing world, especially poor ones, external resources, in terms of bilateral or multilateral assistance, are a key source of funding for educational development. However, international funding is becoming more problematic over time because of a combination of factors, including declining financial support from advanced industrialized nations, the increasing demand and competition among receiving nations, and the imposition of more stringent conditions for receiving aid. Economic reforms pushed by the International Monetary Fund in developing nations often impose strong limits on government spending. Such a policy was associated with negative effects on the education sector in much of the 1970s and 1980s. Since the 1990s international development agencies have become more vocal in calling for more spending on the social sectors, including education. The ability of developing nations to finance educational development has also been hampered by the need of each government to make interest payments on international and domestic debts. Increasingly, there is a call that debt relief for developing nations and for international development agencies be in the form of grants instead of loans to these nations, especially in the social sectors. As the leadership of the World Bank pointed out in 1995, however, debt relief is only part of the solution; what is also needed is the opening up of agricultural and other markets in advanced industrialized nations to products from developing nations.

It would be misguided to focus only on central government and external sources for financing education. In many developing nations, the community has been an important source, in cash and/or in kind, for educational development. Community involvement is useful not only for financial reasons, but also for educational and accountability purposes. Participation from parents and community members can discourage teacher and student absenteeism. In addition, fiscal and administrative decentralization in education have the potential for not only mobilizing additional resources to education from various levels, but also enabling more informed and more efficient decision-making about education matters at the local level. To mitigate the disequalizing and inequity effects that often accompany decentralization, however, central and regional governments need to provide equalization aid to poor and rural areas. Moreover, nongovernmental organizations (NGOs) could have an important role to play in raising additional resources for education and/or in implementing educational programs, particularly for marginalized populations. Finally, there is an increasing emphasis on cost recovery in education, especially at the higher-education level, so that the financing responsibility is shifted more from the government to households.

External Efficiency of Education

The external efficiency of education is improved when more education outcomes are produced at given education resources or fewer education resources are used in producing the same amount of education outcomes. During the closing decades of the twentieth century, emphasis in developing nations regarding educational development has been placed on three broad outcomes of education: contribution to economic growth and competitiveness, improvement in social equity, and poverty alleviation.

According to human capital theory, education is a form of human capital that could raise the productive capacity of individuals in economic production. Empirical studies in agriculture found a positive and significant relationship between productivity and education. At the macro level, education was also associated with economic growth. Spending on education can be seen as an investment activity with both costs and benefits, and thus subject to a cost–benefit analysis. A review of rate of returns studies, such as the 1994 study of George Psacharopoulos, found that in developing nations education had a high rate of return and that the return was higher at lower education levels. Paul Bennell, however, has criticized these studies, in terms of appropriateness of method and quality of data. Some analysts, such as Ronald Dore, point out that educational expansion in a depressed economy could lead to unemployment of the educated or overeducation. Nevertheless, there is increasing consensus across nations that human capital, particularly in terms of problem-solving skills, communication skills in a diverse setting, and the ability to adapt to change, can enhance economic competitiveness in the global economy of the twenty-first century. There is also increasing attention to investment in preschool education and in education for sustainable development.

Growth with Social Equity?

There have been different views on whether increased economic growth and improved social equity could coexist. Using the experience of eight East Asian economies, the World Bank concluded in a 1993 publication that growth with equity was possible. This study made a guarded but positive assessment of the role of education: education was only one of many contributing factors to growth with equity but appropriate education policy did matter, especially in terms of adequate investment in education and the focus of government policy on lower levels of education. The financial crisis that began in 1997, however, underscored the importance of noneducation factors that could affect the health of the economy in these nations.

Earlier efforts in promoting education for poverty reduction have been accompanied by high hope and disillusionment. The urgent need for poverty reduction in the developing world is reflected by the World Bank's redefining itself as a poverty-reduction organization. There is common understanding in the early twenty-first century that "quality basic education for all" is an important part of the overall strategy for poverty reduction. But education alone is not sufficient; rather a multisectoral approach involving related interventions in agriculture, education, health (including addressing the AIDS epidemic), credit market for small producers, and other social sectors, is needed. Poverty reduction also requires targeted interventions. Women are one of the most important targeted groups because they are often subject to multiple disadvantages in the developing world. Increasing educational access and improving quality for girls could have profound economic, social, and political benefits for women and for society.