Assessing education and the mystery of its missing benefits

Ari A. Perdana, Cambridge, USA

Is education the key to explain the wealth (and poverty) of nations?

As in many other things, economists are not united in their answer. According to studies by Nobel Laureate Robert Lucas (1986) and Mankiw, Romer and Weil (1992), adding the variable of education makes standard growth theory more powerful when explaining data on growth in cross-country income differences.

However, there remain elements of mystery. Contrary to the expectations of the theory, returns on global education investment have been disappointing. In 2001 Former World Bank economist William Easterly pointed out that from 1960-1990 there has been a constant increase in school enrollments in developing countries. The median enrollment rate for primary education increased from 88 to 90 percent, while that for secondary schools tripled from 13 to 45 percent.

These increases, however, have not been translated into consistent increases in economic growth in developing countries. In Africa, for example, overall education levels increased by more than 4 percent per year from 1960-1987. But average GDP growth of African countries was only 0.5 percent per year. And that growth was thanks to African "growth miracles" such as Botswana and Lesotho. A more extreme case was Senegal, in which average economic growth was negative despite having annual school enrollment growth of 8 percent.

Meanwhile, during the same period, the "miracle economies" of East Asia experienced only modest growth in education compared with that in Africa. Thus, the data suggests that countries can have more education without growth, and growth without having more education.

Education was also not the answer in terms of global income equality. Another World Bank economist, Lant Pritchett, found that from 1960-1995 the level of education across countries has been converging. At the same time, per capita income has increased.

So where has all the education gone? There are several possible reasons for the missing returns from education.

First, if we consider that the benefit of higher education is higher productivity, then this only applies to certain types of jobs. In many cases in developing countries, these types of jobs are not ones in which the majority of population works. Consider a study by Andrew Foster and Mark Rozensweig on the impact of education for Indian farmers during the green revolution (1986).

The study found that for workers in the agricultural sector, education increases productivity only when there are new technologies being introduced, such as new kinds of seeds or fertilizers. New technology means new challenges; education is useful when one has to deal with these new challenges. The authors concluded that productivity is significantly higher for farmers with primary education compared with those with no education.

But increasing farmers' education to secondary school level did not give as much increase in productivity as primary education. On the other hand, in areas that have poorer climate or land quality, education matters less than experience. Thus, for workers in these areas, going to school is not only unprofitable, but it also costs them several years of farming experience.

By way of corollary, in developing countries where agricultural sectors dominate the economy, the benefits of higher education go only to those who are working outside of this sector. As they may only be a very small fraction of the population, the return on education investment is not enjoyed by the majority.

Secondly, education contributes to economic growth only if the skills people acquire from education are rewarded adequately. In a fully meritocratic society, rewards will reflect productivity and skills. Thus a more educated society means more productive economy. But in societies where people are not rewarded based on merit there is no incentive to be more productive even though the education level in the country is high.

In a meritocratic society, education allows people to have social mobility. Through education, a farmer can move to the city and get a better life. Someone from a poor family may have the opportunity to become rich. But in many developing countries there are barriers to social mobility; caste, patriarchic systems, nepotism, or corruption in civil service recruitment such as in Indonesia, are just some examples. Such barriers again reduce the returns on education.

Note, however, that this does not mean that improving the level and quality of education is unimportant. On the contrary, it is important. However, we should be very careful when translating these ideas into policy. Improving education takes a lot more than setting administrative targets on enrollment rates or increasing the public budget on education.

Budget is important, though. But not just in terms of size, but also in terms of how it is allocated. Should we spend more on teacher salaries, or on buildings and equipment? According to some experts, the problem in most developing countries is the latter.

Should more be spent on primary and secondary education, or on tertiary education? In her 2000 article, Anne Booth argued that government subsidies on tuition fees during the 1980s contributed to growing inequality in Indonesia in the 1990s. During the economic boom of the early 1990s, university graduates were the ones that benefited most. But they are only very small fractions of the whole population. This illustrates that high public budgetary outlays for tertiary education, especially for tuition fee subsidies, may not always be a good thing.

Or perhaps the problem is low level of health and nutrition that has reduced the learning ability of students. A study by Miguel and Kremer (2001) in rural areas of Kenya found that intestinal parasites (worms) were the cause of students' low nutrition levels. In turn, it affected the students' academic capability. The authors demonstrated that spending more money on deworming programs, instead of on providing extra classes, was more effective in improving academic performance.

To conclude, education is important, but it is not a magic wand for economic growth. There is also no general solution in improving a country's education. Each intervention should be a specific one for a specific problem.

The writer is a researcher at the Centre for Strategic and International Studies, Jakarta, Indonesia and the Kennedy School of Government, Harvard University, Cambridge, USA. Ari_Perdana@ksg06.harvard.edu