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TECH TALK: Doing Education Right: Scarcity

May 9th, 2007 · No Comments

By Atanu Dey

Consider this list: cars, scooters, telephone service, airline ticket, seats in schools and colleges, electricity, and railway tickets. Think of the year 1980. Notice the common feature of the list: shortages. Now consider the list in the year 2007. Notice some things on the list are no longer scarce. It cannot be mere coincidence that only those items which the government has released it stranglehold on are no longer scarce. Could it be possible that if the government lets go of its vise-like grip of schools and colleges, that shortage of educational services will also be a thing of the past?

Given sufficient time, shortages have a way of entering into our worldview so that we simply start considering them as normal and acceptable. Today the power supply where I live in Pune failed for over two hours. It is remarkable that I have accepted that power in India is unreliable and dont work up a sweat (only figuratively speaking, though.) It is part of our survival mechanism. We adjust to unreasonable situations. Thats how it is, we explain, and cope with it. We have become inured to the mad struggle that people go through to get their children into schools and colleges. We forget how astonishingly unnatural it is that something as basic as a good education involves almost superhuman effort.

Chronic shortages do not occur naturally. You can have acute sporadic shortages due to shocks to the system. But chronic shortages have to be carefully engineered and the machinery that creates shortages has to be kept in good working order. Otherwise the natural tendency for a market is to close the gap between the quantity demanded and the quantity supplied. This is a fundamental truth about the world of humans.

One effect of persistent shortage is low quality. Lacking the discipline enforced by the customers freedom of choice, suppliers dont have an incentive to ensure quality. The consumer is happy to receive even shoddy goods and services because it is a struggle to get anything at all. Take it or leave it, is the basic attitude of the producers in a sellers market.

In summary, it is misguided government policy that lies at the root of our dismal education system. The policy change required is to allow the private sector unfettered access to the education market. Will the private sector supply educational services? An unqualified yes because there is money to be made. Currently around 10 percent of GDP is spent on education, which amounts to around US$60 billion. Half of Indias population is below 25 years of age. That defines the addressable market for educational services. If the supply of educational services were to meet the suppressed demand, the annual spending on education will be many multiple times the current level.

Which brings up one of the most important matter associated with education. There is an implicit ban against for-profit educational institutions in India. Why this is so is hard to understand. For-profit producers of other goods and services are not banned. Indeed, it is clear to see that for-profit organizations produce most of the critically important goods and services. The only caveat is that these for-profit firms have to face competition. Thats the bottom line: allow all firms to enter the market, regardless of whether they are for profit or not. The market forces will regulate the firms so that the supply rises to meet the demand, the quality improves, and the prices reflect the underlying costs.

One final point: what about the poor? First, for education up to the secondary level, those who are unable to pay for their education should be publicly supported through vouchers which are redeemable at private schools of choice. Second, for post secondary education, those who are unable to pay should be given loans. Recall that post secondary education has a short payback period and the return on investment in education is positive. So the loan recovery with interest is not a problem.

In the remaining two pieces, I will explore the consequences of liberalizing education in India.

Write to atanudey at gmail.com if you have questions or comments.

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