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10/24/2015 Economics of Education
http://www.worldbank.org/en/topic/education/brief/economics-of-education.print 1/9
(http://www.worldbank.org/) Education (/en/topic/education)
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Economics of Education August 25, 2014
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Economics of Education
What shapes the decisions of individuals and families to invest in education? How do families
choose between different types of schools? Are private returns to education shaped by the
number of years an individual spends in school or by the type of skills acquired while in school?
Why should the government devote scare public resources to finance/provide education? What
are the social pecuniary and non-pecuniary returns to education? What motivates teachers to
put in effort towards improving pupil learning? How can schools be held accountable to
education outcomes?
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The discipline of economics provides an indispensable framework for addressing these and
many other critical issues faced by policymakers. Furthermore, the analytical rigor brought by
economists has contributed to a coda of analysis on education inequality, role of peer effects,
class size, vouchers, cash transfers, school management, and education expenditures.
Economists are at the forefront of leading impact evaluations on a range of interventions
shaping the knowledge base needed to inform the education policy discourse.
The primary mission of the World Bank’s Economics of Education group is to help improve,
among Bank staff as well as clients and other development partners, knowledge of what shapes
education outcomes and results; to better understand how to strengthen the linkages of the
education system with the labor market; and to build and support a network of economists and
specialists who are interested in collectively addressing the challenges of the education sector.
The World Bank addresses key themes of Economics of Education through work in the
following six topic areas:
Economic Analysis of Education Interventions
Finance and Expenditures in Education
Public-Private Partnerships in Education
School-Based Management
Impact Evaluation
Quality of Education
1. Economic Analysis of Education Interventions
What is economic analysis?
The economic analysis of a project helps select and design projects that contribute to the welfare
of a country. Various tools of economic analysis help determine the economic and fiscal impact
of the project, including the impact on society and the major stakeholders involved, as well
as the project’s risks and sustainability. A good economic analysis answers the following
questions:
What is the objective of the project?
This helps identify tools for the analysis. A clearly defined objective also helps in identifying
the possible alternatives to the project.
What will be the impact of the project?
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This question concerns a counterfactual as the difference between the situation with or
without the project is crucial for assessing the incremental costs and benefits of the project.
Are there any alternatives to the project? If so how would costs and benefits of the
alternatives to achieve the same goal compare to the project in question?
Is there economic justification of each separable component of the project?
Who gains and who loses if the project is implemented?
The analysis has to make sure that the most benefit accrues to the poor.
What is the fiscal impact of the project?
Is the project financially sustainable and what are the risks involved?
Are there any other externalities? What is the environmental impact of the project?
(Adapted from Belli, P. et al (1998) Handbook on Economic Analysis of Investment Operations
(http://siteresources.worldbank.org/EDUCATION/Resources/278200-1099079877269/547664-
1099079934475/547667-1135281504040/Handbook.pdf) )
Why is economic analysis important?
All countries face the problem of allocating limited resources such as capital, skilled and
unskilled labor, land and other natural resources to a variety of different uses such as
production of consumer goods, investment in industry, infrastructure, education, health etc. with
an aim to reach a more fundamental goal of reducing poverty, accelerating economic growth
and/or reducing income inequalities. Given limited resources, choices have to be made between
alternative uses of these resources such that the benefit to the economy and society is as large
as possible. Therefore, all World Bank projects must meet certain selection criteria, including
economic justification.
The World Bank's Ten Dimensions of Economic Analysis
(http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTEDUCATION/0,,contentMDK:20754619
~menuPK:2448286~pagePK:210058~piPK:210062~theSitePK:282386~isCURL:Y,00.html) are used
as an organizing framework to represent categories necessary for sound economic analysis for
education projects. Information on these ten dimensions is available from "Key Issues".
2. Finance and Expenditures in Education
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To ensure macro-economic stability, as well as to promote equitable economic growth, countries
need to maintain public spending at a level consistent with their long-run financing ability while,
at the same time, establishing transparent budget mechanisms that allocate and manage public
resources equitably and reduce poverty. However, in the real world, public resource allocation
decisions do not always reflect sound economic policies.
The World Bank, with its lending programs in numerous client countries, must ensure that
borrowed World Bank funds reach the intended beneficiaries. World Bank Education Economists
collaborate with experts from Country units and Poverty Reduction and Economic Management
units to undertake economic and sector work (such as economic memorandums, poverty
assessments and public expenditure reviews) as well as reports on specific issues in education to
help with informed policy making in the sector.
Education policy research pays considerable attention to the productivity and efficiency of the
education sector, in particular of government expenditure in the sector. Determining how
governments and families can best finance and allocate scarce resources to produce quality
education and the skills that individuals need for success, is an integral task of the education
economists. The Education Sector Strategy Update (ESSU) also calls for integrating education into
a country-wide perspective focusing on how education ties into the macro-economic context. It
particularly emphasizes the need for close attention to fiscal policies and decentralization
policies affecting school management and finance.
In this regard, the education sector specifically seeks to answer the following questions in a
country's public expenditure analysis:
How much is spent on education and what is the share of the government's expenditure?
How do governments finance the education sector and what do they finance?
Is there equitable distribution of the public resources?
Is the public getting its money's worth?
Is the spending adequate and sustainable?
3. Public-Private Partnerships in Education
The provision of schooling is largely provided and financed by governments. However, due to
unmet demand for education coupled with shrinking government budgets, the public sector in
several parts of the world is developing innovative partnerships with the private sector. Private
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education encompasses a wide range of providers including for-profit schools (that operate as
enterprises), religious schools, non-profit schools run by NGOs, publicly funded schools
operated by private boards, and community owned schools. In other words, there is a market
for education.
The main rationale for Public-Private Partnership (PPP) programs is the potential role of the
private sector for expanding equitable access and improving learning outcomes. In low-income
countries excess demand for schooling results in private supply when the state cannot afford
schooling for all. In high-income countries, however, "differentiated" demand leads to a demand
for private schooling, as a sophisticated clientele demands different kinds of schools. By
providing demand-side financing and contracting private organizations to provide support
services, governments can provide better choices to parents and grant them an opportunity to
fully participate in their children’s schooling. The education market highlights the importance of
effective regulatory frameworks and contractual instruments to ensure quality and effective use
of public resources.
4. School-Based Management
School-based management (SBM) is the decentralization of levels of authority to the school level.
Responsibility and decision-making over school operations is transferred to principals, teachers,
parents, sometimes students, and other school community members. The school-level actors,
however, have to conform to, or operate, within a set of centrally determined policies.
SBM programs take on many different forms, both in terms of who has the power to make
decisions as well as the degree of decision-making devolved to the school level. While some
programs transfer authority to principals or teachers only, others encourage or mandate
parental and community participation, often in school committees (sometimes known as school
councils). In general, SBM programs transfer authority over one or more of the following
activities: budget allocation, hiring and firing of teachers and other school staff, curriculum
development, textbook and other educational material procurement, infrastructure
improvement, setting the school calendar to better meet the specific needs of the local
community, and monitoring and evaluation of teacher performance and student learning
outcomes. SBM also includes school-development plans, school grants, and sometimes
information dissemination of educational results (otherwise known as ‘report cards’).
Starting in the United States, the United Kingdom, Australia and Canada, SBM programs have
been implemented and are currently being developed in a number of countries, including Hong
Kong (China). The majority of the SBM projects in the current World Bank portfolio are in Latin
American and South Asian countries, including Argentina, Bangladesh, Guatemala, Honduras,
India, Mexico, and Sri Lanka. There are also two Bank-supported SBM projects in Europe and
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Central Asia (in FYR Macedonia and in Serbia and Montenegro), and one each in East Asia and
the Pacific (the Philippines), the Middle East and North Africa (Lebanon), and Sub-Saharan Africa
(Lesotho). Other projects and programs have been introduced more recently in Madagascar, the
Gambia, and Senegal.
Why is school-based management important?
Advocates of SBM assert that it should improve educational outcomes for a number of reasons.
First, it improves accountability of principals and teachers to students, parents and teachers.
Accountability mechanisms that put people at the center of service provision can go a long way
in making services work and improving outcomes by facilitating participation in service delivery,
as noted in the World Bank’s 2004 World Development Report, Making Services Work for Poor
People (https://openknowledge.worldbank.org/handle/10986/5986). Second, it allows local
decision-makers to determine the appropriate mix of inputs and education policies adapted to
local realities and needs.
Impact of school-based management
Evaluations of SBM programs offer mixed evidence of impacts. Nicaragua’s Autonomous School
Program gives school-site councils – comprised of teachers, students and a voting majority of
parents – authority to determine how 100 percent of school resources are allocated and
authority to hire and fire principals, a privilege that few other school councils in Latin America
enjoy. Two evaluations found that the number of decisions made at the school level contributed
to better test scores (King and Ozler 1998; Ozler 2001). Mexico’s compensatory education
program provides extra resources to disadvantaged rural primary schools and all indigenous
schools, thus increasing the supply of education. However, the compensatory package has
several components. If one breaks the intervention up in its multiple components, then it is
shown that empowering parent associations seems to have a substantial effect in improving
educational outcomes, even when controlling for the presence of beneficiaries of Mexico’s large
and successful conditional cash transfer program (Oportunidades, formerly Progressa). This is
strong evidence of the positive effects of decentralizing education to the lower levels. Various
evaluations of SBM programs in the United States have found evidence of decreased dropout
and student suspension rates but no impact on test scores.
5. Impact Evaluation
What is impact evaluation?
10/24/2015 Economics of Education
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The World Bank is committed to monitoring and evaluating the impact of its projects. Impact
evaluation is a policy tool that helps discern the causal impact of a project or a policy initiative.
Impact evaluation techniques compare the impact on the beneficiaries of a certain policy
intervention or project with a counterfactual group that has not been exposed to the same
intervention or project. The results from impact evaluations can help inform policy makers on
where to allocate scarce resources and can also provide evidence on whether current policies
are working or not. The economics of education cluster collaborates closely with the
Development Economics Research (http://econ.worldbank.org/external/default/main?
menuPK=476823&pagePK=64165236&piPK=64165141&theSitePK=469372) group, and with
country task teams to help project teams design and integrate impact evaluation components in
education projects. The Education Global Practice also hosts the Strategic Impact Evaluation
Fund (SIEF). The Education Cluster within SIEF supports impact evaluations of a range of cutting-
edge innovations in the education sector in various regions.
Why is impact evaluation important?
Under limited budgets and scarce resources, public policy requires evidence of what works, and
what does not. A rigorous impact evaluation can show if things work, and why they work.
Effective evaluation will inform policy makers and permit improvements in policies and program
implementation. Evaluation can inform program design (for example eligibility and types of
benefits) and can improve operations and efficiency. Additionally, the information generated by
impact evaluation may be useful for program sustainability and can be a valuable asset in the
negotiation of budgets and in the provision of reliable information to inform public opinion. The
lack of reliable information on the effects of many education projects is an area with important
information gaps and merits the highest priority for future research.
For example, until recently, efforts to improve education typically focused on providing more or
better inputs to schools, for example, (i) improved infrastructure, pedagogical resources, and
education expenditures; (ii) higher levels of training, qualification, and experience for school
leaders and teachers; and (iii) smaller class sizes. However, a large body of evidence from
experimental and non-experimental research (Glewwe et al. 2011; Hanushek 2003) suggests that
such input-based policies have had little impact on the production of student learning outcomes
as intended.
From July 2014, the Education Global Practice is hosting the Strategic Impact Evaluation Fund
which supports cutting-edge evaluations in the areas of education (including early childhood
development), health, water and sanitation. The Strategic Impact Evaluation Fund’s (SIEF)
education cluster is providing new evidence on education interventions that work to improve
student learning outcomes in low-income countries. The thematic focus of this evidence centers
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around a framework for the delivery of education services that acknowledges relationships of
accountability between the state, service providers, and the citizens and clients they serve as the
drivers of high-quality educational outcomes (World Bank 2004). The research follows two
streams of inquiry: the first investigating the impact of increasing levels of school accountability
for public providers (for example, through teacher performance incentives and information
campaigns), and the second investigating mechanisms of school-to-household accountability for
private providers.
SIEF has thus far funded (or is in process of funding 22 education impact evaluations). Of these
22 evaluations, 14 are attempting to raise the accountability of public schools and teachers,
while 6 are investigating the impact of education interventions in the private sector. Regionally,
SIEF has funded (or is in the process of funding) 4 evaluations in South and Central America
(Brazil, Haiti, and two in Mexico), 14 evaluations in Africa (Chad, Ghana, Guinea, Kenya, Malawi,
Mozambique, Nigeria, Rwanda, Sierra Leone, South Africa, two in Tanzania and Uganda), 3
evaluations in South Asia (India and two in Pakistan), and 1 in Eastern Europe (Bulgaria).
6. Quality of Education
Analyses of the benefits of education have a long history in the economics literature. Studies
have established that spending on education is an investment with a return. Conclusions about
education’s contributions to productivity are well established. The literature counts hundreds of
studies that estimate the economic benefits of investments in education. The link to growth is
especially critical. After establishing the link between education and growth in the 1960s, the
causal association came under attack in recent years. Adding the important dimension of quality
– what students know, or cognitive ability – re-establishes the link between education and
economic growth (Hanushek and Woessmann 2007
(http://siteresources.worldbank.org/EDUCATION/Resources/278200-1099079877269/547664-
1099079934475/Edu_Quality_Economic_Growth.pdf)). The crucial factor is learning achievement.
Improving learning outcomes, along with the expansion of schooling, will improve labor
productivity, reflected in workers’ earnings, and will contribute to higher and sustainable rates of
national income growth. The crucial next step is to establish what policies and programs can
improve learning outcomes. There are important efforts underway in a number of countries to
document through rigorous impact assessments the causal links between reforms and learning
outcomes.
There is also a need to better measure learning outcomes. While many countries have
examination systems and national standardized tests, too few countries participate in regional
or international achievement exercises such as the International Association for the Evaluation
of Educational Achievement’s (IEA) (Trends in International Mathematics and Science Study
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(TIMSS) and Progress in International Reading Literacy Study (PIRLS) or the OECD’s Programme
for International Student Assessment (PISA). However, more and more countries are signing up
for TIMSS and PISA. In 2000, 43 countries participated in PISA, rising to 57 countries in 2006, to
66 countries in 2009.
Researchers have begun to use international assessments to analyze the determinants of
learning. They have focused on such issues as central examinations, curriculum, school
autonomy, teachers, unions, student assessments, parental participation, administration and
competition, among other factors. The approaches vary but most use an education production
function. More recently, researchers have begun to take advantage of over time data and
applied more rigorous empirical strategies in order to get at the vexing question of causation.
There is a growing use of international assessment results to analyze the determinants of
learning in developing and emerging economies.
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