The Economics of Higher Education

Presentation by Robin Sherbourne to the Polytechnic of Namibia 22 January 2003

First some definitions…

• Higher education, tertiary education • Organisation for Economic Cooperation and Development (OECD) • Gross Domestic Product (GDP)

Presentation outline

• Economic theory and evidence Use this to address the following questions: • How much should we spend?

• What should we spend it on?

• Who should pay?

• What improvements can we make?

Economic theory

• Economists’ views of higher education: “screening” or “human capital”?

• The cost-benefit calculation to individuals and firms

Two contrasting theories of higher education

• Screening - Is higher education simply a way of identifying the brightest future employees?

• Human capital - Is higher education an investment which makes individuals more productive?

Screening

• Job advertisements specify “graduate wanted” • Companies trawl campuses to recruit best and brightest • Academic requirements for particular professions

Screening

Helps explain two striking facts in OECD countries: • Everywhere graduates earn more than non-graduates • Everywhere graduates are less likely to be unemployed

Human capital

• If sieving were all higher education achieved there would be little reason for government to subsidise it • Surely cheaper ways to sieve than through universities and polytechnics • Some evidence that graduate pay premiums declined following expansion of higher education in OECD • However, even in OECD countries with high proportions of university graduates, graduates earn more and are less likely to be unemployed • Likely that graduates learn something useful which makes them better workers

The Cost-Benefit Calculation

• Individuals weigh up the private costs of education (fees and forgone earnings) with the benefits (higher future earnings) • Firms weigh up the private costs of training (fees and forgone production) with the benefits (higher future production)

Why government intervention?

• Broader social as well as private benefits (externalities) • Consumers may undervalue education (merit good) • Consumers may unduly lower value of future benefits (myopia) • Consumers may be uncertain of future benefits (risk aversion) • Consumers may not be able to borrow to fund investment (credit constraints) • Employers may be worried about other firms pinching their newly trained workers (free riders) • Society may want to finance education for poor using taxes from rich (redistribution)

Economic evidence

• Does education lead to economic growth?

• Does education foster entrepreneurship?

• What are the private returns?

• What are the social returns?

• How much do countries spend?

• Who pays and who benefits?

Education and economic growth

• Economic research supports the existence of a link between education and economic growth (vast literature) • Harder to pin down the relationship between investment in higher education and economic growth

Education and entrepreneurship

Global Entrepreneurship Monitor finds that: • problems with education and training were most important factors inhibiting entrepreneurial activity in South Africa (lack of basic skills, creative thinking, and business skills) • In South Africa tertiary education increases the probability that a person will exploit a new business opportunity and create a successful new firm

Private returns to education (OECD)

Private returns to education (OECD)

“University education is the best investment most people can make. The OECD’s new estimates of the annual returns to successful students range from 6.5% in Italy to 17.3% in Britain. The calculation treats the costs of study, including earnings forgone, as the investment; and the gains in post-tax earnings above those of school-leavers as the pay-off. Shorter university courses are one reason why returns are so high in Britain.” The Economist 31 st October 2002

Total returns to education

Asia Europe/Middle East/ North Africa Latin America/Caribbean Primary 16.2

Social Secondary Higher 11.1

11.0

Primary 20.0

Private Secondary Higher 15.8

18.2

15.6

17.4

9.7

12.9

9.9

12.3

13.8

26.6

13.6

17.0

18.8

19.5

OECD Sub-Saharan Africa 8.5

25.4

World 18.9

Source: Psacharopoulos and Patrinos, World Bank 2002 9.4

18.4

13.1

8.5

11.3

10.8

13.4

37.6

26.6

11.3

24.6

17.0

11.6

27.8

19.0

Private returns to education (Namibia)

Education and income

Average household income by educational level of head of household in N$ 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 No formal education Primary education Secondary education Source: Namibia Household Income and Expenditure Survey 1993/94, Central Bureau of Statistics Tertiary education

Private returns to education (Namibia)

Unemployment rates by educational attainment

Post graduate University Teacher training Standard 10 Senior Junior Primary None 0% 5% 10% 15% Source: 1997 and 2000 Namibia Labour Force Surveys 20% 2000 Broad 1997 Broad 25% 30% 35% 40% 45%

Public expenditure on higher education

Government subsidies to higher education

annual subsidy per enrolled student to UNAM and the Polytechnic in N$ 25,000 20,000 15,000 10,000 GDP per capita UNAM subsidy per student Polytechnic subsidy per student 5,000 0 1996 '97 '98 '99 Source: National Accounts 1993-2001, UNAM and Polytechnic of Namibia annual reports 1996-2001 2000 '01

Public expenditure on higher education (Namibia)

Subsidies to higher education as % of GDP

0.8% 0.7% 0.6% 0.5% 0.4% 0.3% 0.2% 0.1% 0.0% 1996 '97 '98 '99 Source: 1993-2001 National Accounts, CBS and UNAM and Polytechnic annual reports Polytechnic subsidy University subsidy 2000 '01

Tertiary enrolment in Namibia

Gross enrolment ratio in tertiary education in %

OECD Higher Income Upper Middle Income South Africa Lower Middle Income Namibia SADC SSA 0 Source: EdStats, World Bank 10 20 30 40 50 60 70

How expensive is tertiary education?

Spending per tertiary student as % of GDP per capita in 1997 Middle income High income Lesotho Malawi Mauritius Namibia Swaziland Zambia Zimbabwe Malaysia Source: World Development Indicators 2000 and 2002, World Bank 40.8% 36.9% 1022.3% 1492.0% 140.6% 103.4% 229.8% 356.2% 340.3% 53.6%

Conclusions

• Little data or analysis on returns to education in Namibia (forthcoming World Bank study) • Important role for government policy and government subsidies • Private returns to education likely to be high • Potential case for demanding higher private contributions • Higher education in Namibia expensive • Potential case for expansion of higher education • Danger of spending on wrong sort of higher education • General education rather than specific training • System may not be reaching the brightest and best (lower education system failures)

How much should we spend?

• What are other countries spending?

• What can we afford?

• What do we get in return?

What should we spend it on?

• Which sectors have grown?

• Which sectors have employed more people?

• Which sectors are likely to grow in future?

• Dangers of over-education (brain drain and lower returns)

Which sectors have grown?

Sectoral growth 1993-2001

% increase in value added in constant 1995 prices Post and t elecommunicat ion Financial int ermediat ion Hot els and restaurant s M anuf acture of f ood and beverages Wholesale and ret ail t rade and repairs Construction Electricit y and wat er Transport and storage Fishing Ot her manuf acturing Ot her real estat e and business services Owner-occupied dwellings Communit y, social and personal services Ot her mining Diamond mining Producers of government services Ot her producers Commercial Subsistence M eat processing Fish processing -60% -40% -20% 0% 20% 40% 60% 80% 100% 120%

Which sectors have grown?

Sectoral growth 1993-2001

% increase in value added at current prices Diamond mining Wholesale and retail trade and repairs Fishing Manufacture of food and beverages Other mining Construction Commercial Other real estate and business services Other producers Fish processing Meat processing 0% 50% 100% 150% 200% 250% 300% 350% 400%

Which sectors have grown?

Non-agricultural employment

No t stated Extra-territo rial o rganisatio ns and bo dies P rivate ho useho lds with emplo yed perso ns Other co mmunity, so cial and perso nal services Health and so cial wo rk Educatio n P ublic administratio n, defence and so cial security Real estate, renting and business activities Financial intermediatio n Transpo rt, sto rage and co mmunicatio n Ho tels and restaurants Who lesale and retail trade, repair o f mo to r vehicles Co nstructio n Electricity, gas and water M anufacturing M ining and quarrying Fishing 0 2000 1997 1991 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

Who should pay?

• How can we get individuals to contribute more?

• Does state-subsidised higher education help those already better off?

• Are the returns to other areas of public spending higher?

What improvements can be made?

• • • • • • • • Provide information (regular survey of graduate employment, wages and work permits for foreigners) and conduct regular research Boost financing (reprioritise spending, consider more loans and graduates tax and work permit tax) Reduce discretion (introduce performance-related formula to fund higher education) Increase competition (turn Polytechnic into university) Links to foreign institutions (quality, specialisation and choice) Improve quality (international standards and PISA comparisons) Cost (investigate cost effective alternatives) Maintain focus (too many plans, initiatives and institutions) • • Promote research and innovation relevant to Namibian business (private contributions will come when there are private benefits) Fund raising from ex-alumni and benefactors