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Finding the right answer

Examining the possibility of using New Institutional Economics in the field of education

Finding the right answer
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Universalisation of primary education is a widely accepted objective of governments all over the world, particularly in developing countries and less developed countries (LDCs). "Education for all" was also accepted as an objective in the UNESCO sponsored Dakar Framework in the year 2000. Education was also a part of Millennium Development Goals and is an important component of the Sustainable Development Goals (SDG) being pursued by the UN currently. In particular, the SDG4 aims to ensure inclusive and equitable quality education and learning opportunities for all. The Indian Constitution (Directive Principles of State Policy, Article 45) also requires the State to provide free and compulsory education for all children until they complete 14 years.

Education and Economic Theory

In economic theory, education has been dealt with as human capital by Adam Smith as far back as 1776. In trying to explain the cause of the prosperity of nations, he isolated two factors: one, the importance of economies of scale and two, the importance of skill formation and human qualities. The second factor is popular today as 'human capital'. Thus, it is the comparative advantage in human skills, which gives nations an edge while trading with others, rather than just a difference in physical endowments and the number of factors of production. The latter interpretation of gains from trade is the one given by economists of the classical tradition such as Ricardo. The classical tradition has been long debunked by recent trade and growth theorists, who have emphasised scale advantages and gains from specialisation (Solow 1957; Krugman 1987; Lucas 1988), much as Smith had done two centuries back. The neoclassical model specified by Solow (1956) found a large 'residual' in explaining economic growth. Later work by Solow (1957) himself and other growth theorists (Romer 1986; Krugman 1987) attributed this 'residual' to school education and human capital. This crucial link between human capital and economic progress implies that we should look at the role of public policy in expanding education and promotion of skill formation.

In the neoclassical tradition, another important approach to education was put forward by Gary Becker in 1964. Proposing the 'Human Capital Theory', Becker regarded education as an investment that conferred benefits at the individual level as well as the collective level. However, since the individualistic perspective prevails in neoclassical economics, the collective aspects of education got pushed to the background. Another neoclassical interpretation of education is based on the characteristic of a public good, viz., non-rivalrous (one person's consumption does not reduce the other person's consumption) and non-excludability (one cannot exclude anyone from consuming a good once it has been produced). The logic here is that the public good supply such as that of education is plagued by the free-riding problem, which justifies the state provision of the good. The common thread in most neo-classical narratives is that education supply is characterised by market failure due to the free-riding problem and therefore is a fit case for being provided by the state.

The view of education as a public good has been challenged in recent times for various reasons. One reason is that it is neither non-rivalrous (increasing class size does reduce the other person's consumption) nor non-excludable (anyone can be excluded from consumption by imposing fee barriers). Another reason is that state provision of education, particularly primary and secondary education has not given desirable results. That this has been the case in both developed countries such as the United States and in most developing countries particularly in South Asia and Sub-Saharan Africa tells us that the level of development does not seem to be causing this dismal state of affairs. Typically, problems such as teacher absenteeism, low quality of teaching, poor learning outcomes and higher rates of dropouts are noticed in both developed and developing countries. Another problem in many developing countries is that the poor have to depend only on state-provided primary and secondary education since there are either no private sector schools available or are beyond the paying capacity of the poor. This gives the public sector a monopoly position leading to inadequate provision of education.

As an alternative to education as a public good, Musgrave in 1959 introduced the concept of merit goods and suggested that primary and secondary education be considered as such merit goods. The rational suggested by Musgrave was education services ought to be subsidised because of social and ethical reasons and the positive externalities that it provides.

Another reason why the idea of education as a public good is coming into question is because of the emergence of private players in the supply of primary and secondary education all over the world. Not only that, it appears that the public sector is also receding from the stage because of budgetary constraints. To take the example of India, the public expenditure on education (both at the central and state levels) has remained at 3 per cent of GDP at least for the last few decades.

An interesting development has been the use of vouchers in the supply of primary and secondary education. Vouchers are basically certificates provided to parents, which can be used to fund their children's education. Vouchers give more freedom to parents to choose a school of their choice. The school chosen can be a public or private school. The rationale of the school voucher system is that it provides a healthy competition among suppliers of education services, thereby leading to the most optimal quality of education at the best prices. In addition, the voucher system provides consumer choice. While vouchers have been popular in the United States, the Europeans have opted for a subsidised system of school education. In India, the Delhi Voucher Project was launched in 2007 where schools vouchers worth up to Rs 3,600 per year were given to students for a minimum of 3 years. The voucher system does not seem to have taken off in India. This is perhaps because of the Right to Education Act which was passed in 2009 which makes education a fundamental right of every child.

Education in an NIE framework

In a report by NITI Aayog of November 2018 titled Strategy for New India, the issue of education has been discussed in some detail. The report highlights the following challenges: Poor learning outcomes; poor Governance and inadequate monitoring of schools; lack of teacher training and falling enrolment in government schools and rising enrolment in private schools.

We may recall that NIE basically attempts to incorporate a theory of institutions into economics. This is different from the traditional neoclassical world, where there are no institutions, there is perfect and complete information, zero transaction costs and decision-makers are perfectly rational with unlimited computation powers. Hence, the important elements of NIE are asymmetric and incomplete information, challenges with respect to enforcement of contracts, limited mental capacity, high level of transaction costs and bounded rationality. In such a world, institutions become important and provide certainty in various exchanges, production processes and performance of the economy. We may recall that Ronald Coase in his essay in 1960, Problem of Social Cost had theorised that markets are not efficient because it is costly to transact and to overcome these transactions costs, institutions are important. Embedded in the NIE framework is the principal-agent problem which arises as a result of asymmetric information and incomplete information referred to above.

Applying the above framework to primary and secondary education settings, we see that there are a number of principal-agent dyads in the school education system such as parents – teachers, headmaster – teachers, government – teachers. The basic problem is that the government, through its education bureaucracy is unable to monitor behaviour, performance and output of the teachers.

The Way out

While school education in developing countries has witnessed great progress in terms of almost universal enrolment and better infrastructure (more classrooms, better teaching aids etc.), challenges of quality of outcomes remain. In India, various Education Commissions and National Policies, coupled with programs such as District Primary Education Program (DPEP) and Sarva Shiksha Abhiyan (SSA) have shown sterling results in terms of universal enrolment and better infrastructure. However, as noted by the NITI Aayog report above, challenges on quality remain.

The way out is provided from NIE above: 'Institutions' need to be strengthened in the following manner: The compulsory formation of Parent-Teacher Associations (PTAs); the District Inspectorate of Schools needs to be strengthened and made more accountable so that periodic inspections are made compulsory; these inspections must improve teachers' attendance and the quality of teaching; increasing teacher training and making it more contextual and effective and exploring school vouchers in those areas where private schools have come up in substantial numbers.

Evidence of the efficacy of the above institutional interventions was found in a study undertaken by this author when he was District Magistrate, Nadia in West Bengal (in 2003-04). In a program titled 'School Sampark Abhiyan', 927 schools were visited by all officials of the State Government and Panchayat bodies (including the author) and a questionnaire designed by the author was filled out to make a database of basic variables such as teacher's attendance, infrastructure of schools, teachers' training, inspection by the District Inspectorate and learning achievement. It was found that most of the variables, which we have referred to as 'Institutions' above, have a positive impact on learning outcomes. In short, institutions matter!

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