Major Reasons for Education - Essay Example

1. Education for What? Easterly begins by considering the lofty sentiments about education as have been expressed by world bodies like UNESCO, UNICEF, the World Bank, the UNDP and the IADB. In the light of these affirmations of faith in education, it may be suprising to learn that the growth response to the significant educational expansion of the last four decades has been particularly disappointing. This failure of government-sponsored educational growth is once more owing to our motto: “people respond to incentives.” Inspite of the impressive expansion of schooling from 1960 to 1990 fuelled by donors’ emphasis on basic education, there has been little or no response of economic growth to this educational explosion. This in part, is due to the lack of association between growth in schooling and GDP growth as has been noted in several studies. There is a negative and insignificant relationship evident in the comparison drawn between Asia and Africa. Also, a similar study found that there is no relationship between growth in years of schooling and per capital GDP growth. Another study found that disparity in growth across nations have little to do with variations in human capital growth. To mention but three. Although physical capital and human capital growth may have failed to explain variations in growth, some economists assert that physical capital and human capital can explain the large international variations in income. Such was the endeavor of Gregory Mankiw who points out that “income in the long run in the Solow model is determined by saving in the form of physical capital and by saving in the form of human capital.” To reconcile his position with the nonrelation of growth in output to growth in human capital, Mankiw ties up some loose ends: in the Solow framework (as applied to poor countries) by adding human capital; of the slow growth of poor countries by holding that once capital accumulation and education are controlled for, poor countries did tend to grow fast; and of the lack of capital flow to poor countries by supposing that physical capital as opposed to human capital could move across countries. Easterly identifies three problems with Mankiw’s relationship between secondary enrollement (which he uses as his measure of human capital saving) and income. Firstly, secondary education is not a sufficient measure of educational accumulation so that Mankiw overstated the variation of education in general by a narrowed concentration on it alone. Secondly, to “assume that capital flow would equalize rates of return to physical capital leaves only human capital to have different rates of return across countries.” Lastly, there is an issue with causality. Suppose the causality is a reversal then there is no prove of the productiveness of secondary enrollment. Why then is education of little worth to a society that desires grow? Easterly advanced three clues. Firstly, this depends on what the educated people are doing with their skills. Schooling is only compensated for when government actions create incentives for growth rather than creating redistribution of income. Secondly, administrative targets for universal primary education (especially free public schooling) do not per se create the incentives for investing in the future that is needed to growth. Lastly, high skills are productive if they go together with high-tech machinery. Conclusively, if the incentives to invest in the future are lacking, expanding education is of little worth. So, education becomes another magic formula that has failed to live up to expectations. Realizing this, the international community set sights on another idea: controlling population growth so as to economize on machines and schools. 2. Cash for Condoms? Easterly began his fifth chapter by stating the position of many development experts who hold that population control is the philosophy that would avoid cataclysmic starvation and enable poor nations to grow financially. This is hinged on the assumption that population growth directly affects economic progress giving rise to social problems. Thus, the clarion call for more family planning – the use of codoms during sex – so as to avoid population disaster which Easterly comically termed “cash for condoms.” This unlikely remedy of cash for condoms is not consistent with the principle that people respond to incentives since, by the passionate concentration on aid for contraceptives, it signifies that the free market by itself would not supply enough contraceptives to meet demand of the pressumed 150 million couple who have unsatisfied need for contraception. Is there such a thing as population disaster? In fact, if the relationship often made between population growth and economic progress exists, then countries with fast population growth should have low or negative GDP growth per capital since according to alarmists the population growth is overpowering the present productive capacity’s ability to generate jobs and exceeding food production. This presumed relationship is one that has been expansively studied and most well-know statistical relationship between growth and its ramifications finds no considerable effect of population growth on per capital growth. Based on certain facts about the world, this inconsequential relationship is not surprising. Firstly, both population growth and per capital economic growth have increase significantly over the very long run. Secondly, population growth does not vary significantly across countries to explain variations in per capital growth. Thirdly, there is no correlation across countries between success at decelerating population growth and success at advancing per capital growth. Thus, economic growth depends on a certain factors that have nothing to do with population growth. That haven being said, is population growth good or bad? Though parents deciding to have children do not consider such effects of their decision as a higher population unfavourable to natural environment, they do not also consider the positive effect of the reality that one more baby is an additional future taxpayer who can help subsidize existing government problems. The genuis principle by which the more babies there are, the greater is the possibility that one of them will someday be Mozart, Einstein, or Bill Gates is a likely positive consequence of population growth. Since ideas can be shared at no cost, a larger population would profit more from a single idea. More so, population growth may spur technological innovation for specifically for the reason it increases strain on available resources. In fact, studies have shown that there is a positive correlation on the long run between initial population and subsequent population growth. So, if subsidizing population control is desired, subsidizing contraceptive is surely not the way forward. Also, the net benefits and costs of a large population are not very clear. Nonetheless, if for any reason a country wants to cut its population growth, then development itself is a more potent “contraceptive” than cash for condoms. This is because high returns to skill will propel more investment in skill acquisition giving rise to continuous economic growth by inducing parents to spend less time rearing family – having a smaller family. Finally, Easterly considered the benefits of the industrial and demographic revolutions which gave rise to the spread of extensive growth and the stagnation of intensive growth. The latter is a result of lack of incentive to invest in the future. To create the right incentives, international institutions began giving out loans on conditions of policy reforms. 3. The Loans That Were, the Growth That Wasn’t It was generally thought that the solution to the debt crisis of 1982 to 1995 was adjustment lending – aid lending to developing countries conditional on policy reforms. These adjustment loans were meant to balance the blow from the commercial cutoff of lending, while making possible changes in policies that would sustain growth. Thus, “adjustment with growth” became the hope of the World Bank and IMF in the 1980s involving countries in Africa, Latin America, Asia, Eastern Europe, and Middle East. The entire endeavor is summarized thus: “there was much lending, little adjustment, and little growth in the 1980s and 1990s.” However, there were some success stories in Ghana, Thailand, Korea to mention but three. The vital indication of the insignificant success recorded by adjustment lending comes from which countries the donors were financing and how those countries responded. The loans were available but the adjustment seldom was; for this arbitrary lending created meagre incentives for making growth-sustanable reforms. Perharps most startling of all is the fact that adjustment lending did not distinguish clearly between more corrupt and less corrupt government. Not much can be achieved by disbursing aid loans to a corrupt government. More so, recent World Bank study found that aid has no bearing on countries’ choice of policies nor do donors take into account the worthiness of countries’ policies on determining loan beneficiaries. A government that was irresponsible prior to the adjustment loan has unchanged incentive to be irresponsible afterwards. Such a government will initiate a false impression of adjustment without actually implementing it. Thus, countries may improve in the short run and seem to be complying with the loan conditions, when in fact the problem lingers. Perhaps the most significant shortcoming of adjustment lending is the failure to put in place growth-advancing policies – paying insufficient attention to incentives to expand the assets of these countries. Why then wasn’t adjustment lending the perfect inhibiting formula of two decades of lost growth? Firstly, the donors’ solicitude for the poor renders their threat of cutting off lending if conditions are not satisfied inplausible. This also creates even more perverse incentives for the beneficiaries since the poorer they are, the more aid they receive. Secondly, donors are also faced with the wrong incentives for disbursing aid for a less generous reason. Since fat burgets are linked with more prestige and advancement in career, the incentive to disburse even when loan conditions are unmet is high. Thirdly, lenders create another perverse incentive for beneficiaries by making loans respond to the change in policies. Lastly, lenders give new loans to nonreforming countires so that old loans could be paid back. Aid would have positively impacted on growth if the beneficiaries had had good policies. So, linking aid to a country’s past performance could give its governments an incentive to work at growth-creating policies. To enforce these conditions, countries should enter into “aid contest.” As such, there would be a radical change in aid allocation. The ultimate sign of the failure of adjustment lending is the international institutions’ admission that debts cannot be repaid showing that the money was not used productively. 4. Forgive Us Our Debts The problem of highly indebted poor countries is not a new one. But at the turn of the millenium, many advocated the forgiveness of all debts of poor countries. In addition to the World Bank and IMF HIPC (Highly Indebted Poor Countries) initiative, debt forgiveness came to be considered the latest panacea for alleviating the poverty of poor countries. Hitherto, there is a two decade history of debt forgiveness since 1979 in which the rich countries, the G7, was actively involved. The inevitability of providing continuing waves of debt relief may suggest that something is erroneous with debt relief as a panacea for development. What went wrong? Perhaps countries that borrowed a great deal did so because they were willing to mortgage the welfare of future generations. If “people respond to incentives,” then any debt forgiveness will give rise to new borrowing by irresponsible governments. More so, as debt relief data shows, new borrowing was the highest in countries that got the most debt relief. Besides, there are other subtle signs of mortgaging the future by irresponsible governments evident in the present value debt to export ratio which increased greatly in the period between 1979 and 1997, and the selling off of assets such as oil reserves and sales of state enterprises to private foreign purchasers. In the midst of all these, the per capital income of a typical HIPC declined. Thus, two decades of debt relief could not avert negative growth as the decline in income is an indirect indication of the government’ running down their economies’ productive capability and playing a part in the general depression of the HIPCs. Perharps, the high debts of HIPCs may be thought of as a product of bad luck. More than this, it is a result of bad policies. This is evident in their high external and budget deficits whose average at this period was worse for HIPCs. The HIPCs are more likely to pursue short-term policies that create subsidies for favored supporters while penalizing the future. Irresponsible governments will also be apt to subsidize import so as to favor their clients or subsidize consumption of imported goods at the expense of potential growth. Just as there were “irresponsible borrowing” there was also the financing of irresponsibly high external deficit. Simply put, the concesional lending by IMF, World Bank and bilateral donors, in the event of withdrawal by private and nonconcesional lenders, is the principle of this debt burden. This is because these institutions espoused granting of new loans to irresposible governments, a methodology known as filling the financing gap by which good money is injected after the bad, creating an official debt succession by which the failure of countries to service their existing debt is the rationale for granting new loans. Conclusively, debt relief is pointless for countries with untransformed government behaviours since the same mismanagement will be applied to aid sent through debt relief. A debt relief program could be effective if: (1) it is granted to countries with a proven change from irresponsibility to good policies; (2) It is a one-time measure that will not be repeated. A debt relief program that fails to meet any of these two proviso results in more funds flowing to countries with bad policies than poor countries with good policies in which instance, debt relief will go against peoples’ (governments’) respone to incentives. Debt forgiveness will then be another unsatisfactory panacea on the quest for growth. 5. Tales of Increasing Returns: Leaks, Matches, and Traps The prospect of future high income is a potential incentive to do whatever it takes to achieve it. If technology was the most significant factor of income and growth difference across nations, why didn’t all poor countries act in response to the high incentive to implement advanced technology? Easterly suggest that leaks of knowledge, matches of skills and traps of poverty – increasing returns is responsible. Using the story of the birth of the Bangladeshi garment industry, Easterly illustrates why there might be increasing returns: because knowledge leaks. That is, investment in knowledge does not remain with the original investor. Knowledge grows through determined investment in it. It is prone to leak because a piece of knowledge can be utilized by several persons at a time as opposed to a piece of machine; an idea itself does not limit the amount people that can use it. Also, new knowledge is complementary to existing one so that there are increasing returns to investment in knowledge. So, the more initial knowledge there is, the higher the return to each new piece of knowledge; and the higher the returns, the more compelling the incentive to invest more. Conversely, initial low knowledge means low rate of returns and little or no investment. Thus, the rate of return to new bit of knowledge depends heavily on how much initial knowledge there is. If there is initial high knowledge, there will be a virtuous circle of leaks and increasing returns. But where there is initial low knowledge, there will be a vicious circle of low investment and low rate of returns. In the event of the latter, a country gets caught-up in a trap from which it is almost impossible to escape. Moreso, the knowledge leak story makes clear the fact that the market left to itself, will not necessarily create growth; an injection of government subsidies is often needed to kick-start a growth process. At another level, matches of skill result to increasing returns. Production is often a chain of tasks in which the worth of each workers’ efforts is dependent on the quality of all the other workers’ efforts put together. This creates a strong incentive for match up of best workers, one to the other. Thus, returns to skills for the individual go up with the society’s skill average and average skill increases with increased investment in it. If therefore a nation has low average skill, there will be low incentive to invest in skills. More so, if skills complement the general state of knowledge, then the educated populace in a society with little knowledge would not profit as much as those in a society with much knowledge. Consequently, like its counterpart, knowledge leak, if a nation starts off skilled, it becomes more skilled. If it starts off unskilled, it remains unskilled. This matching illustraation predicts poverty traps as well as wealth traps – the virtuous and viscious circles. Leaks, matches and traps account for how dismal poverty is coherent with people responding to incentives. Income differences are described by differences in knowledge and matching opportunities across boundaries. Poor people risk weak incentives to improve their skills and knowledge since their leaks and matches come from other poor people. Nevertheless, good government policies can shape incentives in the worldview of leaks, matches and traps. Government intervention may be needed to salvage an entrapped economy and care must be taken on how this intervention affects incentives. Bad policies (low rate of return to private sector) that cause trap must be abolished. On the whole, policy differences are poor justification for the variations in growth across nations. Some nations are poor because of their poor start or because everyone expect them to be poor. Read More