Atanu Dey On India's Development

The Indian Education System — Part 10

[Previous post: Part 9.]

The liberalization of the education sector in India, that is, allowing free entry – especially for-profit firms – will result in increased supply of educational services. Here I will explore the predictable consequences of this. We begin by recognizing that education is not an undifferentiated homogeneous good; there are distinct levels within it, from basic primary education to post-secondary and tertiary levels. Each level has different pay-back periods for the “return on investment.” Furthermore, different people have different abilities to pay for the various levels of education.

Let’s graph the ability to pay along the x-axis, with the very poor at the left and the very rich on the right. On the y-axis, let’s graph the level of education, with basic primary at the bottom and specialized tertiary (Ph.D level) at the top. The top right quadrant of this diagram represents rich people and higher education, the lower left quadrant poor people and basic education. Recall that higher education has a short payback period and the payback is both private and social, that is, it has positive externalities. So the rich will pay for both higher and basic education if the capacity increases. Basic education, however, has long payback periods and most of the returns are social, and therefore poor people will under-invest in basic education given their shorter planning horizons.

Firms will profitably supply to the two right quadrants because the demand and the ability to pay, both, exist. The left top quadrant is also served by the for-profit firms. For the poor, who have basic education but are unable to pay for higher education they desire, if credit (educational loans) were available them, they would be able to pay for higher education and firms will supply to that need. That leaves the left lower quadrant: if the poor have public support (grants), they would be able to pay for basic education and thus the for-profit firms will supply to that market as well.

By allowing the private sector firms into education, the capacity for greater human capital increases and thus the economy itself grows larger and the growth rate increases. This increases the revenue base for the needed public support of basic education for the poor. Universal primary education can be a reality if the government raises the resources from a larger economy and allows the private sector to efficiently provide the education. Note that the funding is public but the provisioning is left to firms that compete in the market.

Guaranteeing universal basic education is a must for ensuring equality of opportunity. Even the poor, if given the opportunity, will be adequately prepared to continue on to higher education if they so wish. While for basic education the poor needed a grant, for higher education the poor will need a loan. Banks can easily enough provide these if the funds are efficiently spent on acquiring suitable higher education – which again depends on the availability of wide range of choices. And the choices will exist if the education sector is liberalized.

India is stuck in a low-level equilibrium: a US$50 billion education market and a GDP of US$500 billion. It is possible to move to a higher-level: a US$150 billion education market and a US$1.5 trillion GDP, if education were freed. But those who extract their annual US$100 million today from the low-level equilibrium by controlling the education sector, will not allow the liberalization of the education sector for then they will lose the rent. Year after year, they extract the rent but keep the economy effectively shackled.

Let me stress this: education is an amplifying mechanism for economic growth and development. If we fix our education system, what we will get for our efforts is going to be far greater than what we put in it. In today’s dynamic world economy, the returns to education are staggering, and so also are the losses that accumulate from a dysfunctional educational system. If need be, we should even borrow – money, people, ideas – from others to fix our system.

If I were a billionaire industrialist, here’s what I would do. I would get a few of my fellow billionaires to create a corpus of funds – say US$200 million – for a “Golden Goose” strategy. With the money, I would simultaneously buy out all the politicians of every party so that they will en masse vote to liberalize the education sector. It will be a one-time cost for us billionaires. But that would lay the foundation for an India with such formidable growth that we would recover our “investment” in short order.

But alas I am not a billionaire and nor are you. We, as the saying goes, are up a creek without a paddle.

  • ram

    Hi Atanu,

    Your numbers for GDP seem off. For U.S, from the CIA fact book https://www.cia.gov/cia/publications/factbook/ is looks to be $13.22Trillion (Official Exchange Rate) and for India, $796Billion.

    keep writing…

    Ram

  • Sharad

    Dear Atanu,

    Please read http://www.people.fas.harvard.edu/~muralidh/Public_and_Private_Schools_in_Rural_India_032206.pdf. This is a 2003 study by Harvard on the private sector, rural primary schools in India and its comparison with public schools. Would you consider this to mean that marketplace does exist in primary education? If so, how would you extrapolate the growth of this market?

    The article also mentions the provision of voucher for weaker sections in private schools as part of Right to Education draft bill. I do not know if the bill is now a law.

    Sharad

  • Sanjay

    Dear Atanu:

    I disagree with your theory that complete elimination of government control will improve the quality of education. I would chose an AIIMS trained doctor any day over the one trained in numerous donation based private colleges. In fact the quality of doctors and engineers trained in government owned institution far surpasses those from private colleges. If you look at the list of medical colleges facing derecognition from IMC (another government institution, BTW), you will notice that an overwhelming majority of these colleges are private colleges. No one wants to anatagonize their customers. For these private medical institutions, wannabe doctors are their customers and they don’t want to invite their wrath by failing them in examinations. Moreover, free market in education will mean that even those who lack basic competency in fundamental sciences will also be able to get admission in some or the other college. Is this what we want for ourselves?

  • Abhijat

    Hi Atanu,

    Let’s discuss: “who will bell the cat?”.

    I wonder what are the reasons that prevent the release of control over education?

    1. The amount of the rent collected?

    2. The ability to determine the amount of rent to be collected?

    3. Any other?

    The first seems relatively easier than the second. One probably would just work out the figures and show that the amount can be more if the control is released.

    The latter is more subtle. It isn’t the amount that is tempting to retain control. It is that the control permits me (as the State) to determine and collect whatever amount I please. If they don’t know what they need to know, how will they know what they loose? ;) . I can even promise them any fictional heaven and get away!

    Rhetorics that ask to tell how to bell the cat are useless. Better to ponder over the “chess” of self interest interactions between the rulers and the ruled :) . One way is to act locally and individually, and let the market forces determine the outcome statistically.

    The cat purrs and rubs itself lovingly to entice, but snarls and puffs up it’s tail if one tries to bell it! The problem is not merely to bell the cat, but to transform it into an obedient, guarding dog ;) .

  • http://www.natureglow.blogspot.com Ajay

    Hi

    The indian education now it seem to be improving, but then it is improving at lowest 5% though our background to teaching fails to give better lesson . In india many student studing in english medium do not even have proper english. We can’t make responsible to student but to the principle and teacher, we have a school where teacher chew gutka and paanmasala in school, and not even that they even drink and teach Though they are B.Ed and D.Ed. You only tell if such situation is there the how the qualification will improve of student. The way we teach the we reap.

  • Nikhil George

    Hi Atanu,
    Your arguments for the liberalization of the education system in the country,and how by not doing it we are delaying our progress make good sense.But don’t you think more institutions like ISB or Manipal university could be the solution rather than inviting top foreign schools to setup their branches…

  • http://www.cse.iitb.ac.in/~parijat Parijat

    @Sanjay:

    What you say is definitely correct. However, here is the thing. Initially, the institutions may slack and hence let their students get away without really learning anything. However, the population as a whole will soon figure out which institutions provide good education and which ones bad (for example, you’d choose someone who graduated from AIIMS over someone from a private college because experience has shown that doctors from AIIMS are more talented. It has nothing to do with whether or not AIIMS has recognition by a government body). Affiliation/Ratification by a government body (or otherwise) does not make a good institution, it is the other way round. The problem that can occur is that information about the good and bad institutions will be harder to come by. That is a secondary effect and can definitely be worked out (for instance, you already make such choices when choosing which hospital you go to, which school you send your kids to, where you buy your clothing).

    Now, once industry, and the population at large figures out the good institutions from the bad ones, the good jobs will start going to the institutions providing better education (government recognised or not) because the industry cares more about getting work done than about certification (or atleast it should). Parents/people will observe which colleges give better opportunities and people will flock there. Colleges with lesser reputations will either have to improve their quality of education or perish.

    The important point to keep in mind is that in a liberalized regime, success will be less dependent on what degree you hold than on what capabilities you have.