Getting the education mix right

Economists, the poor dears, are often unable to tell the difference between policy and implementation. So if the latter is bad, they automatically assume that the former must be bad as well. Then, of course, they proceed to hold forth.

Nowhere is this truer than of education in India. Thanks to Amartya Sen and his well-meaning acolytes, it has become received wisdom that India's education policy has been rotten all along.

And, as a result, the fact that government teachers don't attend school in the rural areas, or that rural school infrastructure is poor, has been blamed on policy. Actually, of course, the one is an issue of discipline and the other of money.

Inevitably, a flawed policy prescription has followed: invest more in school education -- without a matching prescription for discipline -- and less in higher education. The result is today we have neither.

In fact, it would seem that, as a recent paper* by Rodney Ramcharan of the IMF shows, our policy has been absolutely right.

"Which type of schooling -- secondary or tertiary -- should public policy promote," asks Ramcharan and the answer will come to as music to the ears of the small minority that believes we haven't got it wrong.

"Initial investments in both types of schooling should be the heaviest, and that investments should occur in both education types", he concludes after the usual mathematical gyrations.

The reason: you don't know which type will pay off in the long run. India, according to the Moaning School of Economics, should not have invested so much in tertiary education and should have focused more on secondary education. (For obvious reasons primary education is not a matter of choice).

Well, says Ramcharan, don't be so sure. "Important complementarities do exist between various types of human capital. And as the evidence from the Green Revolution in Asia suggests, these apparent complementarities can greatly affect development. The highly educated, such as scientists and technicians, appear to have a comparative advantage in understanding and adapting new or existing ideas into production processes. Meanwhile, some minimum level of education is required to follow the production template and successfully execute the production steps."

If that be so, what are the characteristics of an optimal education policy? Ramcharan says you got to look at the role of the composition of the human capital stock. He makes two key assumptions. First, that there is demand for each skill type and second, these demand factors are endogenous, that is, over time they change each other.

The key insight in this paper, therefore, is that it is not the level of human capital but its composition that is important. It is like cooking: unless you are English and boil everything, you don't make a good chicken dish with just a lot of chicken. You need other things as well.

Thus, an economy with a limited number of secondary-educated labour will not be able to use technology properly (Indian farmers use too much urea, for instance) even though educated farmers adopted the more technologically advanced seed strains more rapidly.

An equally important point Ramcharan makes is about the returns to schooling. "Moreover, the low returns to education may not justify the fixed cost required to invest in schooling, resulting in little human capital accumulation."

In a paper that I had written for a seminar at the Rajiv Gandhi Foundation, I had found that dropout rates were correlated to the decline in factory investment in Bihar and UP. It made no sense to go to school after class 4 or 5.

So where does Ramcharan leave us? First, he says, "education investment is ongoing over time along an optimal path but its rate of increase diminishes."

In plain English this means that the cost is front loaded. That is, initial generations experience the biggest increases in schooling investment. However, as enrolment increases, the total cost also increases.

Second, he says, "because the social marginal product of labour in the skilled sector depends on the level of the complementary input, the expansion in schooling should occur across both types of schooling simultaneously."

This is the key message. Not very profound, perhaps, but necessary nevertheless for uni-focal people.

*Higher or Basic Education? The Composition of Human Capital and Economic Development, IMF Staff Papers, Vol. 51, No. 2, 2004

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