HIGHER EDUCATION AND ECONOMIC DEVELOPMENT INDIA, CHINA, AND THE 21 ST CENTURY Martin Carnoy, Stanford University INDIA, CHINA, AND THE 21 ST CENTURY Martin Carnoy, Stanford University

Projected GDP/Capita

Can These Projections for the BRICs be Realized?  As we have discussed in the past two days, many factors enter into assessing the possibilities for India and China in the future.  I want to focus on one factor that has not been discussed much until now--the role of education, particularly higher education, in future economic growth.  In the new knowledge based global economy, a higher educated labor force is probably essential for developing new, high yield opportunities for growth.  As we have discussed in the past two days, many factors enter into assessing the possibilities for India and China in the future.  I want to focus on one factor that has not been discussed much until now--the role of education, particularly higher education, in future economic growth.  In the new knowledge based global economy, a higher educated labor force is probably essential for developing new, high yield opportunities for growth.

Direction of the Argument  In this paper, I argue that the empirical literature on education suggests that higher educated labor contributes to economic growth and that the payoff to investment in higher education is rising.  I show that India and China are not moving down the same path in their higher education strategies, and that both may be sub-optimal.  I also suggest that the quality of higher education in both countries is generally low, and that we know little about what either country is doing to raise quality.  In this paper, I argue that the empirical literature on education suggests that higher educated labor contributes to economic growth and that the payoff to investment in higher education is rising.  I show that India and China are not moving down the same path in their higher education strategies, and that both may be sub-optimal.  I also suggest that the quality of higher education in both countries is generally low, and that we know little about what either country is doing to raise quality.

Education and Economic Growth  Economic research has taken two approaches to the education and growth issue: macroeconomic (growth accounting); and microeconomic (rates of return to education).  Macroeconomic approaches emphasize the correlation between the stock of human capital and the increase in economic output per capita.  They suggest that there is a positive relation between initial stocks of educated labor and later growth, but little relation between investment in education and growth. They also suggest the contribution of higher levels of education to growth is generally positive, particularly in more developed countries.  Economic research has taken two approaches to the education and growth issue: macroeconomic (growth accounting); and microeconomic (rates of return to education).  Macroeconomic approaches emphasize the correlation between the stock of human capital and the increase in economic output per capita.  They suggest that there is a positive relation between initial stocks of educated labor and later growth, but little relation between investment in education and growth. They also suggest the contribution of higher levels of education to growth is generally positive, particularly in more developed countries.

Rates of Return to Education  Higher the rates of return to education the higher the positive contribution of investing in education to economic growth.  For decades, the WB was convinced that RORs were highest for primary education and that the pattern was invariate over time. This became prevailing view.  Turned out not to be the case. Although rates of return to education vary among countries, a dominant tendency worldwide in the past thirty years is for RORs to lower levels of schooling to fall, and for RORs to higher levels of schooling to rise.  Higher the rates of return to education the higher the positive contribution of investing in education to economic growth.  For decades, the WB was convinced that RORs were highest for primary education and that the pattern was invariate over time. This became prevailing view.  Turned out not to be the case. Although rates of return to education vary among countries, a dominant tendency worldwide in the past thirty years is for RORs to lower levels of schooling to fall, and for RORs to higher levels of schooling to rise.

Rates of Return Across Countries and Time

Rates of Return in China  Most rate of return studies in the 1990s showed low private rates of return in China. Li found, using wage data, rising private rates of return to secondary plus higher education--from 6 % in 1980 to 9.2% in to 9.5 in Others got similar results.  Also found higher RORs in less developed areas and lower RORs in more developed provinces.  But as Fleischer and Chen show, wages are good measures of private rates of return but poor measures of productivity, particularly of workers with higher levels of education. Using contributions to TFP, they estimated RORs to higher education of about 35%.  Most rate of return studies in the 1990s showed low private rates of return in China. Li found, using wage data, rising private rates of return to secondary plus higher education--from 6 % in 1980 to 9.2% in to 9.5 in Others got similar results.  Also found higher RORs in less developed areas and lower RORs in more developed provinces.  But as Fleischer and Chen show, wages are good measures of private rates of return but poor measures of productivity, particularly of workers with higher levels of education. Using contributions to TFP, they estimated RORs to higher education of about 35%.

Private Rates of Return in India

Rates of Return to Education in India  Tilak show rates falling over time in India to primary, middle, and secondary school, and rising to investment in university. The rate is consistently higher to university in each of the three years--reaching 10% in  Asaoka suggests that private rates of return to university completion for men in urban areas in 16 Indian states in 1993 were positively and significantly correlated with the state’s GDP per capita. Thus, rates of return to university completion are higher in states that are more developed, the opposite relationship from what Fleisher and Yang found in China in the 1990s.  Tilak show rates falling over time in India to primary, middle, and secondary school, and rising to investment in university. The rate is consistently higher to university in each of the three years--reaching 10% in  Asaoka suggests that private rates of return to university completion for men in urban areas in 16 Indian states in 1993 were positively and significantly correlated with the state’s GDP per capita. Thus, rates of return to university completion are higher in states that are more developed, the opposite relationship from what Fleisher and Yang found in China in the 1990s.

Higher Education Enrollment in China and India  China has achieved high rates of growth without much investment in higher education- -one lesson may be that it could have done even better with more higher educated labor. Now they are expanding the HE system rapidly.  India also has a relatively very low fraction of higher educated labor. Enrollment is expanding rapidly in absolute terms but slowly relative to the size of the age cohort.  China has achieved high rates of growth without much investment in higher education- -one lesson may be that it could have done even better with more higher educated labor. Now they are expanding the HE system rapidly.  India also has a relatively very low fraction of higher educated labor. Enrollment is expanding rapidly in absolute terms but slowly relative to the size of the age cohort.

Enrollment Growth in the BRICs

The Changing Financing of Higher Education  All four BRIC economies used to provide free public higher education to almost everyone who reached that level.  That financing model implicitly assumed high social externalities from investing in higher education and barriers to entry that would cause underinvestment without high public subsidies.  Today, however, all four countries have, in one way or another, either implemented cost share financing (tuition fees) in public universities, or allowed higher education to become “privatized.”  This has important implications for efficiency and equity in the higher education system.  All four BRIC economies used to provide free public higher education to almost everyone who reached that level.  That financing model implicitly assumed high social externalities from investing in higher education and barriers to entry that would cause underinvestment without high public subsidies.  Today, however, all four countries have, in one way or another, either implemented cost share financing (tuition fees) in public universities, or allowed higher education to become “privatized.”  This has important implications for efficiency and equity in the higher education system.

Changes in Financing Chinese Higher Education

Changes in Financing Indian Education  Proportion of total central government budget going to higher education declined from 15% in 1980s to 10% in 1990s.  In addition, government pushed through affirmative action for scheduled castes and other lower status Indians, so that more than 50% of places in public universities are reserved for these groups.  Thus, costs per student have gone up, but central government funding role has gone down, increasing financial pressure on the states to pick up the slack.  Proportion of total central government budget going to higher education declined from 15% in 1980s to 10% in 1990s.  In addition, government pushed through affirmative action for scheduled castes and other lower status Indians, so that more than 50% of places in public universities are reserved for these groups.  Thus, costs per student have gone up, but central government funding role has gone down, increasing financial pressure on the states to pick up the slack.

Increased Privatization in India  Flight of middle class to private institutions.  Decline in government share of educational expenditures from 80% in 1983 to 67% in  Students enroll in public colleges but pay for private IT courses.  Also, professional education, namely engineering (86% of seats in 2003), business (90 % private), and medicine (41 % private) has been marked by a major increase in private providers.  Flight of middle class to private institutions.  Decline in government share of educational expenditures from 80% in 1983 to 67% in  Students enroll in public colleges but pay for private IT courses.  Also, professional education, namely engineering (86% of seats in 2003), business (90 % private), and medicine (41 % private) has been marked by a major increase in private providers.

Quality of Higher Education  One way to measure quality is the cost per student and how it is changing over time. China and India appear to have increased public spending per pupil in recent years. But more “costly” students are increasingly entering universities, so quality may have fallen if the spending increases were not sufficient to cover increased costs.  Quality varies greatly among institutions. What is quality level in top percent of HE institutions? What about bottom fourth?  Important to know quality at the bottom because a high fraction of professionals get their training at such institutions.  Do we think that the financing changes taking place in each country are improving or decreasing quality?  What changes are taking place in top institutions that might or might not be improving the quality of those instituions?  One way to measure quality is the cost per student and how it is changing over time. China and India appear to have increased public spending per pupil in recent years. But more “costly” students are increasingly entering universities, so quality may have fallen if the spending increases were not sufficient to cover increased costs.  Quality varies greatly among institutions. What is quality level in top percent of HE institutions? What about bottom fourth?  Important to know quality at the bottom because a high fraction of professionals get their training at such institutions.  Do we think that the financing changes taking place in each country are improving or decreasing quality?  What changes are taking place in top institutions that might or might not be improving the quality of those instituions?