Lecture 1 investment in education

INVESTMENTS IN EDUCATION

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INVESTMENT IN EDUCATION

Introduction: Stakeholders in education are required to consider

complex issues involving the economics of education and educational finance, including:o Public investment in educationo Educational funding choiceso Productivity and incentiveso Accountability in public schools

INVESTMENT IN EDUCATIONKey Questions to be explored:

Why invest in education?

What is human capital theory?

To what degree does education contribute to national economic growth?

What is the relationship between what schools teach and the skills required in the labour market?

The production of education including questions of how educational outcomes are produced by schools, and which school inputs are more or less effective in producing desired educational outcomes.

The introduction of several societal goals – efficiency, equity, and liberty - that must be considered when making decisions about allocation of education resources.

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What is an “educated person” ?

What should educated people know and be able to do when they graduate from school?

Who is an educated person?

• Need grounding in the broad domains of knowledge – sciences, social sciences, arts and humanities

• Should also possess:• A number of core competencies• The ability to search out, evaluate, and integrate

knowledge from many sources and contexts;• Historical and contemporary knowledge;• Ethical judgement, grounded values, and a well-

developed sense of responsibility; and• A demonstrated capacity to turn knowledge into good

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THE HUMAN CAPITAL THEORY

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Human Capital Theory

Human Capital refers to:“the stock of competencies, knowledge and personality attributes embodied in the ability to perform labour so as to produce economic value. It is the attributes gained by a worker through education and experience”.

Human Capital Theories developed by:o Adam Smith (1976)o Thomas W. Schultz (1971)o Jacob Mincer & Gary Becker (1964)o Sakamota & Powers (1995)o Psacharopoulus & Woodhall (1997)

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Theory of HUMAN CAPITAL by T. W. Schultz He argues that both knowledge and skill are a form of

capital, and that this capital is a product of “deliberate investment”.

Schultz highlights western countries, and explains “that their increase in national output is as a result of investment in human capital. He also makes a direct link between an increase in investment in human capital, and the overall increase in workers earnings”.

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It can also be stated as follows: “Individuals acquire skills and knowledge to increase their value

in the labour markets. The main mechanisms for acquiring human capital are experience, training and education.

Education facilitates the acquisition of new skills and knowledge that increase productivity. This increase in productivity frees up resources to new technologies, new businesses, and new wealth, eventually resulting in increased economic growth”.

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Advantage: it enables us to think of not only the years of schooling, but also

of a variety of other characteristics as part of human capital investments, including: school quality, training, attitudes towards work, etc.

Using this type of reasoning enables us to have some understanding towards the di erences in earnings across ffworkers that are not accounted by schooling di erences alone.ff

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Disadvantage: Thinking of every di erence in remuneration that we ff

observe in the labor market as due to human capital. There are notable exceptions in relating all pay

di erences including:ff Compensating di erentialsff Labor market imperfections Taste-based discrimination

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Sources of Human Capital Differences

Innate ability Schooling School quality and non-schooling

investments Training Pre-labor market influences

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Education and Human Capital

Education is an economic good because it is not easily obtainable and thus needs to be apportioned.

Economists regard education as both consumer and capital good because it offers utility to a consumer and also serves as an input into the production of other goods and services.

As a capital good, education can be used to develop the human resources necessary for economic and social transformation. The focus on education as a capital good relates to the concept of human capital, which emphasizes that the development of skills is an important factor in production activities.

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It is widely accepted that education creates improved citizens and helps to upgrade the general standard of living in a society.

This increasing faith in education as an agent of change in many developing countries has led to a heavy investment in it.

The pressure for higher education in many developing countries has undoubtedly been helped by public perception of financial reward from pursuing such education. Generally, this goes with the belief that expanding education promotes economic growth.

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However, the paradox accompanying this belief is that, despite the huge investment on education, there is little evidence of growth-promoting externalities of education in these countries.

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According to Babalola (2003), the rationality behind investment in human capital is based on three arguments: that the new generation must be given the appropriate parts of

the knowledge which has already been accumulated by previous generations;

that new generation should be taught how existing knowledge should be used to develop new products, to introduce new processes and production methods and social services; and

that people must be encouraged to develop entirely new ideas, products, processes and methods through creative approaches.

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Education and Human Capital The importance of education and human capital has

been brought out in many studies of economic growth and development. Robert (1991) Van-Den Berg (2001) Smith (1976) Garba (2002) Odekunle (2001) Ayara (2002)

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The review of empirical tests of the theory have shown positive correlation between educational attainment and economic growth and development.

Odekunle (2001) affirms that investment in human capital has positive effects on the supply of entrepreneurial activity and technological innovation.

Ayeni (2003) asserts that education as an investment has future benefits of creation of status, job security and other benefits in cash and in kind.

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However, Ayara (2002) reports that education has not had the expected positive growth impact on economic growth in Nigeria. Hence, he proposes three possibilities that could account for such results, which are: Educational capital has gone into privately remunerative but

socially unproductive activities; or There has been slow growth in the demand for educated

labour; or The education system has failed, such that schooling provides

few (or no) skills.

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The contribution of education to economic growth and development occurs through its ability to increase the productivity of an existing labour force in various ways. Babalola (2003)

However, the economic evaluation of educational investment projects should take into account certain criteria:o Direct economic returns to investment, in terms of the balance between the opportunity

costs of resources and the expected future benefits;o Indirect economic returns, in terms of external benefits affecting other members of society;o The private demand for education and other factors determining individual demand for

education;o The geographical and social distribution of educational opportunities; ando The distribution of financial benefits and burdens of education.

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Sensitivity of Human Capital Theory

The main problem associated with the belief that education is good for economic growth and development concerns how to maintain an equilibrium position: Babalola (2003). That is, where there will be no evidence of either shortage or surplus supply of educated people.

A shortage of educated people might limit growth, while excess supply of it might create unemployment and thus limit economic growth and development.

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Implications of Human Capital Theory to Educational

Development

The basic implication of the human capital model is that allocation of resources on education should be expanded to the point where the present value of the streams of returns to marginal investment is equal to or greater than the marginal costs.

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CONCLUSION AND RECOMMENDATIONS

Developing countries are confronted by most of the problems that could limit the capacity of expansion in education to stimulate growth and development such as under-employment, low absorptive capacity, shortage of professionals, regional imbalances and brain-drain.

The persistence of many of the problems in spite of the various policy formulation and responses points to the need for a more focused, responsive, functional and qualitative educational system.

To contribute significantly to economic growth and development, education must be of high quality and also meet the skill-demand needs of the economy.