Liberalize the Education System or Fail.

These are some commonly agreed upon facts related to education. First, it is an investment and the benefits arise much after the costs have been paid. It therefore requires foresight and will, and also disposable resources. Second, it is a process which takes time. The time taken can be somewhat shortened if sufficient resources are available but it cannot be arbitrarily speeded up. Third, the level of education determines the future capacity to produce and be productive. Fourth, an appropriate education provides more benefits than it costs. Fifth, in our contemporary world of dynamism and rapid change, education is indispensable.

Those facts and many others like them hold both at the individual level and the collective level. An economy cannot prosper without an educated population in just the same way that an uneducated person cannot. One good predictor of the success of an economy – which generally means that it is able to meet the requirements of its population in terms of producing goods and services – is the level of education. By that measure, India’s historical and contemporary poor economic performance is understandable given that its educational system is extremely poor.

Why India has a flawed education system can be explained at least in part by recognizing that it was an instrument created by and for the benefit of its colonial rulers. By restricting education to only a select minority, they were able to control the economy more effectively. The colonial objective was to exploit the economy for extractive purposes and it was never development oriented, as is natural for a colonial government. But even after political independence, the objective of the government did not change. The institutions and processes established by the British served the narrow interests of the post-colonial rulers just fine and so the education system continued to be controlled by the state. It remains so today and unsurprisingly the system is dysfunctional at its core.

Universal primary education is guaranteed by the constitution of India but the system fails to deliver. The literacy rate is around 60 percent. India has the largest number of illiterates, around 400 million, in the world. That is, India has more illiterates than the combined population of the US and Mexico. Secondary school enrollment is around 25 percent and higher education only 8 percent of the relevant population. Furthermore, tertiary education is poor as only about one of four college graduates is employable.

Very few receive any vocational education. China has 500,000 vocational schools which train 60 million a year; India has only 12,000 vocational schools and graduates only 3 million students.

Hundreds of thousands of Indian students study abroad at an annual estimated cost of around US$ 1 billion. There are very few foreign students in India. India has around 27,000 foreign students. Compare that to tiny Singapore (population 5 million) which has 100,000 and Australia (population 22 million) which has 400,000 foreign students.

The public expenditure by the center and state governments is of the order of Rs 100,000 crores which is around 3.5 percent of GDP. What explains the dismal failure of the education system? One possible explanation is the license permit quota control raj.

Briefly, the government bureaucracy has a monopolistic hold on the Indian educational system. Monopolies maximize profits by restricting quantities so that the prices people are forced to pay are much higher than the costs. The established rules and regulations do not allow the supply of educational services (through schools and colleges) to expand to meet the demand. The excess profits are siphoned off by the politically connected. The presence of these excess profits acts as a powerful deterrent against the liberalization of the education system.

Aside from the profit motive, there is another very powerful reason why the supply is kept limited. Where there are shortages, political fortunes can be made by rationing out the limited supply to groups in exchange for their patronage. This is what reservations based on caste and religious lines achieve.

The general solution to much of India’s educational problem is to liberalize the sector so that the market is free to adjust its supply to meet the demand. The government must be fully out of the education business; its role must be restricted to regulating the sector. As in all other markets, the educational market will also have its share of market failures. Correcting for these market failures will be the job of the regulator. The regulator must be independent of the government.

The foreseeable market failures can be dealt with simply and cheaply. First consider primary education. Very poor people cannot afford to pay market prices for primary education. They need financial support. This can be delivered via vouchers that allow them to choose among various supplier of primary education. Once universal primary education has been ensured, the same method can be used for secondary education. And as for tertiary education, it should be entirely merit based. That is, if everyone has had an equal opportunity to be educated to the secondary level, they can compete for entry into tertiary education.

Tertiary education should be priced at full cost. Those who are eligible for tertiary education but are credit constrained, the role of the government would be to create the credit market for such students to be able to borrow what is required. This not only helps those who need the help but also does not subsidize those who can afford to pay. In the current system, the rich benefit more. They are able to afford a good education up to the secondary level and then are able to compete for the limited seats in tertiary education and often are the only ones who enjoy the subsidies in tertiary education.

When a way of doing something for decades does not work, it is reasonable to consider alternatives. The market and for profit entities have been barred from participating in the education sector. This needs to change. We do know that markets deliver a wide range of goods and services quite efficiently. There is no reason to believe that education as a service cannot be as effectively and efficiently delivered by the market. And where there are obvious market failures, the solutions are well known and can be implemented without difficulty. It is time for a different way of approaching the problem.

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