ECONOMICS OF EDUCATION: What is the rationale for financing education in the Public Sector?6a ii).



6a ii). Explain the rationale for financing education in the Public Sector

Rationale for Financing Education in the Public Sector:

Education is considered as both a private and social investment which is shared by individual students, their families, employers, government and other social groups e.g. NGOs, FBOs and CBOs. On the one hand, the high private rates of return to educational investments at all levels justify large investments by individuals and their families through immediate or deferred cost sharing. On the other hand, there is a strong case for government (Public) funding of education due to a number of reasons, namely; income distribution, capital market imperfections, information asymmetries and social benefits/externalities. Consequently, many governments are involved the provision of education at all levels, an activity which in many cases takes up a significant portion of public expenditure. Indeed, on average, public investment in education accounts for about 2/3 of all educational spending in many countries.

(numbering has issues)

1. Income Distribution:

Education can reduce income inequality by promoting productivity gains in agriculture and facilitating the absorption of labor into the modern industrial and service sectors. Equality of distribution of education usually results in equality of distribution of income. Thus, education opens new opportunities for the poor and so increases social mobility. Normally,, not all groups in society can afford to meet the direct and indirect costs associated with investing in education and the state/government, therefore, has a role in promoting equality of opportunity. If education were provided under pure market conditions, only those who could afford to pay tuition fees could enroll. This would result to not only underinvestment in education from the social point of view but also to the preservation of income inequalities from one generation to the next as education itself is a major determinant of lifetime income (60%)

2. Capital Market Imperfections

In many countries, the private cost of education, is beyond the means of many poor families. Most credit markets do not provide an effective solution because of strong imperfections that reduce participation, especially of the very poor people. Ideally, the financial constraints can be overcome by borrowing given the high private rates of return to education. However, there are high risks for both borrowers and lenders in educational financing and banks and other f financial institutions do not accept the promise of future earnings as collateral. The failure of the capital markets thus affects not only the lower income groups but also middle-income groups that cannot finance tertiary education without credit. To mitigate capital market imperfections, many countries have established government funded  Student  Loans Schemes which offer low-interest loans to higher education students, e.g. the Higher Education Loans Board (HELB) in Kenya which gives loans to university students.

3. Information Asymmetries:

Research has shown that parent with little education are usually less informed than better-educated parents about the benefits or quality of education. In the Uk, working-class parents tend not to encourage their children to aspire to a university education (Barr, 1993). Furthermore, the Capital Market for education is far from perfect. Students from poor households are understandably reluctant to saddle themselves with debt or to enter fixed obligations because they do not know their future incomes. Additionally, students from poor backgrounds tend to underestimate their prospects.

On the other hand, lenders hesitate to accept risks backed only by the uncertain future incomes of reluctant debtors (Arrow, 1993)

4.  Externalities/Social benefits:

Proponents of public expenditure on education argue that the benefits of education accrue not only to its direct recipients but also to the society at large. In the absence of government provisions, expenditures on education are smaller than would be desirable. According to an adaptation of the growth theory, a worker’s productivity is affected by the average level of human capital as well as by the worker’s own human capital (Lucas, 1988). Therefore, the state invests in the education of its citizens due to the following spill-over benefits:

  1. Reduction in fertility for women: – the more educated a woman is, the lower is her fertility. Education influences fertility through higher age of marriage for women and increased contraceptive use. Thus, education plays a major role in controlling population growth.
  2. Improved health: – the more educated the parents, especially the mother, the lower the maternal mortality and the healthier is the child.
  3. Better social relations: Education brings together people from different social-cultural backgrounds thus creating social cohesion.
  4. Reduction in crime rate

Challenges Facing Public Financing of Education:

1. Misallocation among education sub-sectors:

Public spending on education is often inefficient when it is misallocated across levels and within levels. In low and middle-income countries, the rates of return to investment in basic education (primary and lower secondary)are generally greater than those to higher education. Therefore, basic education should ideally get priority when it comes to public spending in education especially in countries that are yet to achieve universal enrolment in basic education. However, in most of these countries, spending per student is titled in favour of higher education students were subsidization is till very high. This subsidization increases the demand for higher education even though education at that level is generally less efficient for society as a whole in countries that have yet to achieve UPE and basic secondary education. Subsidization of Higher Education is most acute in Africa. Although private rates of return to higher education are 2.5 times higher than social rates, public spending per student in higher education in Africa is about 44 times spending per student in primary school.

2. Misallocation within subsectors

Inefficiencies which are prevalent within all education sub-sectors reflect an inefficient mix of input such as staff and instructional materials. For example, in Kenya and man other developing countries, about 80% of the public education budget is consumed by salaries for teachers and education personnel leaving very little for the acquisition of vital teaching-learning resources. Schools in low and middle-income countries could save costs and improve learning by increasing student-teacher ratios. They would thereby use fewer teachers and would be able to allocate resources for teachers to other inputs that improve achievement e.g. textbooks, in-service teacher training etc. the scope of improving efficiency through modest increases in student-teacher ratios is enormous because teacher costs typically account for 2/3 of total spending in education in most developing countries.

3. Inequitable public spending:

Public spending in education is inequitable when qualified potential students are unable to enroll in institutions due to lack of educational opportunities or because they are unable to pay or obtain financing, e.g. in Kenya only 10,000of the 60,000students who qualify for university admission get government funding.

Similarly, although public spending on primary education generally benefits the poor, total public spending on education in low and middle-income countries often favors the rich mainly due to the fact that relatively fewer poor children attend secondary and higher education institutions. Spending more public funds per higher education students than per primary student is inefficient in most countries as the social rates of return to primary education are higher than those of higher education, especially in counties with less than universal primary and secondary enrolments. It is also inequitable that those students who gain access to higher education receive a larger absolute subsidy that those at lower levels bearing in mind that higher education students come disproportionately from richer families which are better able to pay for higher studies.

4. Inadequate funds for education.

Although many developing countries devote almost a 1/3 of their national budgets to education, the funds are in a majority of the cases inadequate due to the numerous educational needs at all levels of education. This usually results to a thin spread of the financial resources allocated to education thereby comprising effectiveness.


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