The Economics of Higher Education Presentation by Robin Sherbourne to the Polytechnic of Namibia 22 January 2003

First some definitions… Higher education, tertiary education Organisation for Economic Cooperation and Development (OECD) Gross Domestic Product (GDP)

Presentation outline Economic theory and evidence Use this to address the following questions: How much should we spend? What should we spend it on? Who should pay? What improvements can we make?

Economic theory Economists’ views of higher education: “screening” or “human capital”? The cost-benefit calculation to individuals and firms

Two contrasting theories of higher education Screening - Is higher education simply a way of identifying the brightest future employees? Human capital - Is higher education an investment which makes individuals more productive?

Screening Job advertisements specify “graduate wanted” Companies trawl campuses to recruit best and brightest Academic requirements for particular professions

Screening Helps explain two striking facts in OECD countries: Everywhere graduates earn more than non-graduates Everywhere graduates are less likely to be unemployed

Human capital If sieving were all higher education achieved there would be little reason for government to subsidise it Surely cheaper ways to sieve than through universities and polytechnics Some evidence that graduate pay premiums declined following expansion of higher education in OECD However, even in OECD countries with high proportions of university graduates, graduates earn more and are less likely to be unemployed Likely that graduates learn something useful which makes them better workers

The Cost-Benefit Calculation Individuals weigh up the private costs of education (fees and forgone earnings) with the benefits (higher future earnings) Firms weigh up the private costs of training (fees and forgone production) with the benefits (higher future production)

Why government intervention? Broader social as well as private benefits (externalities) Consumers may undervalue education (merit good) Consumers may unduly lower value of future benefits (myopia) Consumers may be uncertain of future benefits (risk aversion) Consumers may not be able to borrow to fund investment (credit constraints) Employers may be worried about other firms pinching their newly trained workers (free riders) Society may want to finance education for poor using taxes from rich (redistribution)

Economic evidence Does education lead to economic growth? Does education foster entrepreneurship? What are the private returns? What are the social returns? How much do countries spend? Who pays and who benefits?

Education and economic growth Economic research supports the existence of a link between education and economic growth (vast literature) Harder to pin down the relationship between investment in higher education and economic growth

Education and entrepreneurship Global Entrepreneurship Monitor finds that: problems with education and training were most important factors inhibiting entrepreneurial activity in South Africa (lack of basic skills, creative thinking, and business skills) In South Africa tertiary education increases the probability that a person will exploit a new business opportunity and create a successful new firm

Private returns to education (OECD)

“University education is the best investment most people can make. The OECD’s new estimates of the annual returns to successful students range from 6.5% in Italy to 17.3% in Britain. The calculation treats the costs of study, including earnings forgone, as the investment; and the gains in post-tax earnings above those of school-leavers as the pay-off. Shorter university courses are one reason why returns are so high in Britain.” The Economist 31 st October 2002

Total returns to education

Private returns to education (Namibia)

Public expenditure on higher education

Public expenditure on higher education (Namibia)

Tertiary enrolment in Namibia

How expensive is tertiary education?

Conclusions Little data or analysis on returns to education in Namibia (forthcoming World Bank study) Important role for government policy and government subsidies Private returns to education likely to be high Potential case for demanding higher private contributions Higher education in Namibia expensive Potential case for expansion of higher education Danger of spending on wrong sort of higher education General education rather than specific training System may not be reaching the brightest and best (lower education system failures)

How much should we spend? What are other countries spending? What can we afford? What do we get in return?

What should we spend it on? Which sectors have grown? Which sectors have employed more people? Which sectors are likely to grow in future? Dangers of over-education (brain drain and lower returns)

Which sectors have grown?

Who should pay? How can we get individuals to contribute more? Does state-subsidised higher education help those already better off? Are the returns to other areas of public spending higher?

What improvements can be made? Provide information (regular survey of graduate employment, wages and work permits for foreigners) and conduct regular research Boost financing (reprioritise spending, consider more loans and graduates tax and work permit tax) Reduce discretion (introduce performance-related formula to fund higher education) Increase competition (turn Polytechnic into university) Links to foreign institutions (quality, specialisation and choice) Improve quality (international standards and PISA comparisons) Cost (investigate cost effective alternatives) Maintain focus (too many plans, initiatives and institutions) Promote research and innovation relevant to Namibian business (private contributions will come when there are private benefits) Fund raising from ex-alumni and benefactors