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TECH TALK: Education and Reservation: Atanu Deys Primer (Part 4)

June 1st, 2006 · No Comments

In general the role of the government in a society must be limited to that of a referee in a game: to see that rules are followed and everyone plays fair. When the government becomes a player, as well as the referee, the character of the game changes because those who comprise the government have an incentive to change the rules of the game in their favor, thus hurting the game.

The fundamental problem with the education system is that the government is too involved in it. Instead of ensuring that adequate capacity is built, it prevents the market from building capacity. Rules and regulations exist which make it impossible for investment to flow into the education sector. The rules essentially make it illegal for investors to earn a reasonable return on their investments.

Is there no role for the government in the education sector? Yes, there is, but it is severely restricted to three functions:

First, funding (but not the provisioning) of universal education up to high school level. Competitive private sector firms can do the actual provisioning.

Second, providing an independent regulatory authority for the higher education sector so that private firms can compete fairly on a level playing field. Keep out of higher education altogether aside from that.

Third, providing educational loan guarantees to banks. Get out of the business of providing subsidies for higher education.

The first function is necessary because the returns to investment in primary education are over the long term, a term that is beyond the planning horizon of sufficiently poor people. Moreover, the benefits of a school education accrue to society as a wholea positive externalityand therefore the cost of primary education must be subsidized since the market will typically under-supply the socially optimal quantity of school education.

The second function of providing an independent regulatory higher education authority is required to ensure that political interference in the education sector is minimized, and that standards of performance are set and maintained.

The third function is the most vital. Education has positive returns, meaning that the benefits of an education are greater than the costs. But sufficiently poor people are credit constrained. Here is what I mean. If a poor person could borrow to pay for education, his earnings would go up sufficiently after education that he would be able to repay the loan with interest and still have some left over. Being unable to borrow to get an education is a major barrier that the poor face. This credit constraint can be released by banks but since the sufficiently poor cannot provide collateral on their own, the government has to step in and guarantee the educational loans.

Educational loans must be given to the poor for higher education but there must be no subsidies for higher education. Higher education, for all intents and purposes from the point of view of an individual, is a private good. That is, the private benefits of higher education exceed the private costs. Admittedly higher education also has positive externalities (and therefore has public good characteristics), but that externality does not have to be internalized by subsidizing higher education for those who are rich enough to afford it.

The criminal neglect of education, in my considered opinion, is the most important charge upon which the policy makers of India stand indicted. An entire generations of Indians have lived and died since independencea reasonable estimate would place the number around 500 million humansabout half of whom were illiterate, not just uneducated. The lost potential is stupefyingly mind boggling. How many Ramanujans and Einsteins have they condemned to obscurity and waste, how many did not even see the insides of a school or learn to read, write, reason and do arithmetic?

Tomorrow: Atanu Deys Primer (continued)


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