Profiting from Education

My contribution to the August issue of Pragati. I am reproducing the piece here below the fold, for the record. Regulars to this blog pretty much know my position on what needs to be done on education. Still you may find something of use.

Profiting from Education

India’s position in the emerging world of globally interconnected economies will doubtlessly be dictated by how successful it is in overcoming the severe limitation of its education system.

With an estimated 360 million of its citizens in the school-going age—a third of its entire population—it has an unmatched potential of becoming a major economic powerhouse. It has an opportunity to shape not only its own future but the future of the world at large. The challenges it faces in realizing that potential are many but the most formidable of them are those that are in a sense “self-inflicted.” The greatest hurdle in India’s path to the future is the near-monopoly government control of the education system.

The Numbers

A quick review of the numbers illuminates the challenges and opportunities. Of the total 360 million who should be in the K-12 system, around 140 million children are not in school. Not just a private loss—they will never have the opportunity to participate fully in the global economy—it is a loss to society because they will never be able to fully contribute to it.

Yet the spending for education is large. The Indian government has allocated around US$ 8.6 billion for FY2009 for education; private spending annually on K-12 tuition is an additional US$ 20 billion; tutoring adds another US$ 5 billion a year; private professional education is another US$ 7 billion. The education sector is expected to grow to around US$ 70 billion by 2012. Compare that to the US$ 45 billion spending for power, telecom, and transportation infrastructure in the 11th Plan.

Failed Public System

Regulations allow only non-profit trusts to run educational institutions. The results are disappointing and point to a failed public education system. The private sector schools do deliver much more than the public sector schools and do so comparatively more efficiently. Private schools account for only 7 percent of around 1 million K-12 schools and yet they accommodate 40 percent of the total enrolled. Studies show that public sector schools are plagued by teacher absenteeism, lack of basic infrastructure, and poor performance. India urgently needs to remedy the shortage of quality private schools.

The situation in tertiary education is not very good either. Published figures show India graduates 350,000 engineers and IT professionals a year, compared to China’s 600,000, and the United States’ 130,000. The quantity appears reasonable until one recalls that only about one out of four engineers is employable. This creates the paradoxical situation of vast numbers unemployed engineers on the one hand, and on the other employers desperately seeking skilled engineers.

Compared to China

Comparison with another comparably large developing country—namely China—is instructive. By 2005, China was graduating around 12,000 PhDs a year, about seven times what is did in 1995; India maintained an average of 700 PhDs every year during the same period.

The education system is supply-constrained. Around 400,000 compete in the IIT-Joint Entrance Examination for 10,000 seats in the few Indian Institutes of Technology, for instance. Another 240,000 took the common admissions test for the Indian Institutes of Management. On aggregate, over 2 million students take entrance tests for seats in the 1,200 private and 400 public professional schools. Test preparation is a huge market but ultimately the spending is directly unproductive and only serves as a means of rationing the limited quantity on supply relative to demand.

Foreign Education

Unable to find the opportunity domestically, Indians spend an estimated US$ 10 billion every year for higher education abroad. This lends support to the claim that if the education sector were to be liberalized—that is, if for-profit domestic and foreign private sector entities were allowed entry—then the capacity constraint will be released. Furthermore, market competition would ensure that the quality of the education would also improve.

The private sector is essentially denied the opportunity to fully participate in the education sector. Resistance against commercialization of education is held with what approaches religious conviction. Profit from education is anathema to Indian policymakers. The Supreme Court of India in a 1993 decision wrote:

“Imparting of education has never been treated as a trade or business in this country since time immemorial. It has been treated as a religious duty. It has been treated as a charitable activity. But never as a trade or business. . . The Unni Krishnan Decision does not imply that private schools cannot exist but states that they should not ‘commercialise education’ and impart education with the motivation to profit from it.”

The Market Response

But the market does find a way around and somehow manages to overcome to some degree the serious defects of the hobbled education system. However it is a costly exercise. Infosys spent US$ 120 million for a training facility employing 300 teachers to train its raw recruits; Wipro trains its recruits for three months before putting them to work; Satyam trains thousands in-house similarly. Therein lies a very clear and important lesson: that for-profit entities can and do promote social welfare in the education sector—they train people to become productive, thus enhancing private and social welfare.

Education as an Attractor

The argument for liberalizing the education system is simple enough to state. Globalization, which is essentially the free movement of capital in pursuit of profits, is an established fact. It means that global capital will continue to move differentially to those parts of the world where it most profitably complements the human capital available. Even though motivated by profit, global capital has the capacity to contribute directly to rapid economic growth, as evidenced by the growth stories of the East Asian economies in the past and of China more recently.

Only those economies that have the human capital to absorb global capital will benefit from globalization. Modern manufacturing is the basis for any large modern economy. It requires skilled manpower and therefore the emphasis on education and training. Currently India does have a small but significant position in the skilled services sector of business process outsourcing and information technology enabled services. But the news there is that shortage of skilled manpower is becoming a reality.

Diversifying the Economic Base

India needs to diversify its talent pool because economic development demands the ability to produce a diverse set of goods and services. Furthermore, for India’s economic growth, it has to serve as a global talent pool for all aspects of a modern economy—from services to manufacturing to research and development. Otherwise the unskilled and poorly educate will find themselves unemployed in the structural changes that are guaranteed in a globalized world. Most importantly, for driving domestic innovation, at the higher end of the education spectrum, one not only has to have quantity but world-class quality which can only be achieved if one has world-class institutions.

Manufacturing Human Capital

India has the raw numbers but lacks the financial resources to transform them into human capital in world-class educational institutions. Fortunately, global capital itself can help India build capacity for creating human capital. The argument for it is straightforward. Return on investment in education is positive and significant in the case of individuals. Therefore, given the ability to pay for it and the opportunity to gain an education, most people would educate themselves to their full potential. Therefore there are immense profits in education in India that global capital cannot afford to ignore.

The Indian government has to withdraw fully from tertiary education. The private sector has the incentive and the ability to provide tertiary education. Private sector investment will release the capacity constraint in education. For those who are unable to pay for the education upfront, they face what is called a credit-constraint, and they can be helped with educational loans from private and public sector financial institutions.

For K-12, the private sector already does address 40 percent of the market. By removing the restriction that only allows non-profit institutions, the capacity will grow and thus permit the scarce public funds to address the needs of the 140 million children not in school currently. The role of the government could then shift from funding schools to funding school children.

Paradigm Shift

What Indian education urgently requires is a paradigm shift, a different way of approaching the matter. The ostensible reason for not allowing private for-profit institution is to safeguard the interests of those who are poor. But one can be skeptical of that and a reasonable hypothesis advanced that through its monopolistic control, the government and its agents find an opportunity to extract rents from the supply-constrained market. This creates a system in which only the rich can afford to pay the rents and the poor get rationed out.

India cannot afford the current education system any more. Too many of its children are denied an education today. Globalization is a double-edged sword: it rewards talent as handsomely as it penalizes those who are unskilled. It is quite possible for India to employ global capital to solve its local problems—provided that it understands that voluntary trade is beneficial to both parties and both profit from it. Undoubtedly global capital will profit from investing in education in India. But that is only because India will profit even more from an educated population.