The Indian Economy Blog

June 5, 2007

The Indian Education System — Parts 9 & 10

Filed under: Education — Atanu Dey @ 11:58 am

Part 9: Freedom

By liberalizing the education sector I mean that it has to be made totally free of government control and involvement. Whoever wants to provide educational services must be free to do so, be it domestic or international, for profit or not for profit, at the primary, secondary, or tertiary level. What would be the expected benefits of doing so?

The supply of educational services will increase, and the quality will improve. Most importantly, prices will come down because producers in search of profit have an incentive to reduce costs, and the competitive market forces the prices to track costs. These are all everyday first-order efficiency effects of letting markets work. The second-order effects will be increased productivity, increased production, and better allocative efficiency within the sector. The third-order effects will arise from the increasing returns to scale associated with the production of education. Finally, there are very important forward and backward linkages that bind the sector with the overall economy. One of them is the use of information and communications technology (ICT) tools. It will give a boost to the IT sector in a way that is unthinkable in any other endeavor.

Increase in the supply of education is a natural outcome of removing all barriers to entry. Domestic and foreign institutions will invest in educational institutions. One can imagine corporations such as Tata, Reliance, Harvard, and Stanford opening shops in India, all eager to make a profit. This is no different from a large number of automotive companies starting manufacturing in India to supply the domestic market. The effect is predictable: an increase in the variety and therefore expanded choice for the consumers.

No longer will one have to fight to get into a good school or college. Instead of a sellers’ market, we would have a buyers’ market where the consumer is king and therefore the producers will be ever eager to reduce their costs and deliver a quality product. The best part is that with competition, even the incumbents – the public sector institutions – will wake up from their “lack of competition” induced slumber. Competition for students will force institutions to be nimble on their feet and therefore provide education that is relevant. No longer will the education system be producing graduates the majority of whom are unemployable.

Think about the waste of resources that accompanies the current supply-constrained system. Just one example: each year hundreds of thousands of students spend incredible amounts preparing for the entrance exam for IITs. That is directly unproductive use of time and money. That spending would be sufficient to fund a dozen IITs every year. Or think of the estimated US$10 billion that Indians spend in getting an education abroad.

In today’s world, an educated population is more valuable than any natural resource. Yes, India has a large population with favorable demographics. But only the private sector has the resources to provide the investment required for educating them. The operative word is “investment.” Firms don’t invest unless they expect to make a profit. And yes, there is profit to be made from providing education because education itself has positive returns and therefore people will pay for education.

Servicing such a large domestic population necessarily implies a very large installed base. That results in the industry learning by doing, and the economy gains what is called a comparative advantage in producing educational services. Which means that education in India will have a quality/price ratio that would attract foreign students. That would make India the education capital of the world, if India plays its cards properly. India’s income from producing education could dwarf what it earns from IT and IT enabled services today.

Which brings us to a very important point. Producing education will be massively dependent on the use of IT to reduce costs and improve quality. Private firms will use it intensively and effectively to produce education. Meaning that instead of a few computers sitting around in a dusty room in your average school, you will find the best technologies being used in schools and colleges. Students will be learning to use the IT tools while learning other things. More importantly, one will not have to worry about the much lamented digital divide: whoever attends an educational institution will become a digital native.

And who, you may ask, will be attending schools and colleges? My answer is: everyone. If India liberalizes the education sector, then everyone – rich poor, minority, majority, this caste, that caste, this religion, that religion, you name it – will be able to get an education. Only problem will be: the politicians will have to figure out some other way of dividing the country. But that is their problem, not ours.

[Continue on to the final part.]

Part 10: Up a Creek Without a Paddle

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.

[Postscript: Previous post: Parts 7 & 8.This series was meant to provoke some debate among those readers of the Indian Economy Blog who care about India's education. I am grateful for those who have taken the time to add to the discussion. In a followup post, I will write a comprehensive reply to such points raised in comments that I find require clarification. I am done for now.]

12 Comments »

  1. Atanu,
    Your case against public provision of education is good and many theories besides public choice can support the failure of government. I too support private education (Private Schools for the Poor), and point you to James Tooley’s work – and recent appointment – for more data to support your case.

    The one weakness I see in this verbose essay is that you spend too little time challenging your own solution. Yes, “markets work”, but not always, yet that point gets hardly a mention? If you can write 10 lengthy parts about the failures of government, one would hope that at least 1 could be dedicated to the failure of markets as well? Not doing so makes it exactly what you say it is not – a course in free market “basic economics”, even capitalism.

    Privatization of schools has some challenges, and interestingly, most are not economic, but social. For some, read The Farce of School Choice (my comment: Private Schools for the Poor-Part 2).

    Comment by Dweep Chanana — June 5, 2007 @ 12:53 pm

  2. But how will liberlizing help in solving the problem of raw material i.e. required faculy if we treat the education as manufacturing. By same logic private entrepreneurs will try to procure raw material with least possibel cost thus driving teachers’ salries downhill & drain of good researchers & faculty will continue to abroad or from less paid fields to high paid fields.

    Comment by Anshul — June 5, 2007 @ 1:48 pm

  3. Good GOD!

    Comment by Atanu Dey — June 5, 2007 @ 2:15 pm

  4. Hey, part 9 was damn good. I’m only a little doubtful abt the falling costs that’s all…but what u said overall was pretty good…

    Comment by Amogh — June 5, 2007 @ 2:54 pm

  5. Dear Mr. Dey,

    I read your series on Education in India. Very compelling. But there is one factor that you have missed out. The willingness of people to be educated. The thought stuck me when I thought of the millions of slum dwellers and beggars that live in Mumbai. It’s not as if governments have not tried to educate slum dwellers of the hazzards of and need to move out of such squalid living conditions. In Dharavi, the largest slum in Asia, the government built Slum Rehabilitation Apartments. People were allotted houses. A few years down the line, these very people gave their houses on rent or sold them under benami transactions and returned to the slums. As for beggars, people once used to not working for a living will not want to work. Many beggars in Mumbai own flats in suburbs such as Virar and Vasai. When misplaced charity is making millionaires of beggars, where’s the need to work. Same would be the case with education. Most parts of the country where anarchy prevails, education has lost out to “Might is Right”. When people have realized that wielding a knife or gun fetches them money in a year that would take them a lifetime through hard work, do you sincerely believe that education stands a chance. A large part the 300 million people your are talking about belong to this category. The only thing that can change all this is Political Will and Draconian Legislation that will be implemented and not ignored. Once that happens, only then will private participation make sense.

    Thanks & regards,
    Eswaran

    Comment by Eswaran Krishnan — June 5, 2007 @ 3:22 pm

  6. Atanu,

    Thanks for putting in a huge amount of work and time into this. I really liked the analysis in terms of rich/poor, primary/higher education. If you’d shown this from the beginning and used it to qualify some of the points you’d raised, it would have been a much richer series of articles. Especially since all the points you make are not equally applicable in all quadrants.

    In terms of privatization, at least in Tamil Nadu, higher education is almost completely privatized – there are many more seats in private engg colleges and deemed universities than there are in government colleges. The quality of many of these institutions is very bad though, since they put the almighty buck before the quality of education they provide. And prices are not going down anywhere – the only way they go is UP.

    In primary education, there are many, many private schools. However, there are many areas where private schools will never go due to lack of returns. And the only way to serve these areas will be through the government schools.

    The government will also always need to regulate the education industry, in much the same way that financial institutions are regulated. And quality and standards maintenance in education is not something that can be easily privatised IMHO.

    If you’re interested in things that are being done in Indian education, look at what AID India has been doing for Science and Maths education in Tamil Nadu. They have a simple and highly replicable methodology for improving the way these subjects are being taught. And in co-ordination with government schools they are replicating this wherever they can.

    Thanks once again!

    Comment by Prasanna — June 5, 2007 @ 3:30 pm

  7. I totally disagree with your logical extension of the idea that liberalization in education will increase the supply of educational services.
    I feel its a very urban kind of view.The expansion of educational services is required the most at grass root levels in villages, without a government interest and interference I do not see private players getting there.
    Opening up will pave the way for private players to open more schools in cities (here I agree with you) and fight for a place in already crammed educational space of urban india.
    Last but not the least, expansion at the cost of quality may not be very much appreciated in the educational industry. Its not soap, steel or coke, where volume will bring down price and also bring in money for R&D. Quality of education will surely suffer with mindless expansion for the sake of profit only.

    Comment by Samir — June 5, 2007 @ 3:56 pm

  8. Atanu,

    Can’t agree more! I just hope this ends up being read by policymakers in this country.

    I mean some education is better than no education. Those commie *$(#)# (edit by Admin) who are such stricklers for “quality” (which private providers would obviously neglect) end up denying education to millions of our children.

    I’m Bong so it just hurts to see Osteoporosis Club hold up progress in Bengal/India.

    Sudhir

    Comment by Sudhir — June 5, 2007 @ 8:14 pm

  9. Hi Atanu,
    Two of the recurrent themes of those who criticise your views here are:
    1) Where would you find teachers and other raw material?
    2) In today’s scenario private colleges and universities (like BITS or Manipal) have not done well.

    The answers are not entirely clear to me, but let me try.

    1) There is ample raw material of teachers and researchers. A lot of my friends would return to teaching, if salaries were a little more productive and administration is not breathing on the neck of academicians. The second point results in the first, actually. So, in a truly liberal education sector, one would have no government body overseeing the quality or licensing. this would produce more raw material, and one would pay for good raw material.

    2) The second one is answered partly above: the key point is no licensing or control by the government. What has happened is, BITS and Manipal pay so much to the beureaucrats and other neta’s that they have to recoup those costs some where. Birlas may also have some other tax issues in mind, since they keep transferring land/cash from one place to another under the guise of education. So, given such unethical practices, salaries and quality of teaching can be lower. Students really do not have that much of choice, if not IITs (7), BITS (3), or NITs (12), where else would one go for quality engg education? in total only 10,000 students will be able to get in there…

    metta,
    ashish
    PS: you know this, comments are for others to think about.

    Comment by Ashish Asgekar — June 6, 2007 @ 12:23 pm

  10. This may be encouraging news for you, Atanu.
    Georgia Tech campus to come up in Andhra
    Excerpt from article -
    “Atlanta-based Georgia Tech University signed a memorandum of understanding with the Andhra Pradesh government on Tuesday to set up its international campus in the state, making it the first foreign university to set up such a centre in India.
    Focusing on systems engineering and research, the Georgia Institute of Technology would aim to help meet the requirements of global corporations with large operations in the country, such as IBM, according to Gary Schuster, provost of Georgia Tech.”

    Comment by Abhishek Nair — June 6, 2007 @ 7:37 pm

  11. Nothing is going to be lost is allowing private players so why not? Th worst case scenario will be some unprofitable schools.

    In higher education I am sure the Stanfords and Princetons would do good.
    Maybe new primary schools would open too again more the merrier.
    it would certainly be an improvement on the current scenario.

    We do already have quite of private investment education many many of us study in private schools and colleges. The engineering college phenomenon in Tamilnadu is an example of private colleges acting as complements to govt colleges. Dozens of colleges have come up but the students still are finding it tough to get seats. There seems to be such heavy demand the prices haven’t gone down the reverse in fact is happening. Private schools are also very expensive all over the country.

    The idea is not just liberalization but to shock the system with a sudden spike in supply.

    Comment by Sridhar Jagannathan — June 7, 2007 @ 5:30 pm

  12. [...] A lot of ink has been spilt lately on privatizing education, particularly by Atanu Dey (on IEB, and Pragati-Issue 2). I myself have tentatively supported vouchers in the past (Evaluating Vouchers). But the excessive liberal free-market promotion of the concept has me wondering if things are indeed as they seem. Before committing to a position, however, it is good to educate oneself, and I have begun to do that. Detailed thoughts will follow, but an old debate in the February 1997 issue of the World Bank Research Observer is extremely interesting, as it brings forth both pro- and anti- privatization arguments. [...]

    Pingback by Preparatory Reading On Privatizing Education - The Discomfort Zone — June 21, 2007 @ 1:40 pm

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