This Policy, Alone – Part 4 – Life is a Random Draw

In this essay I aim to argue that if the education sector is totally deregulated and the free market is allowed to operate in it, then it will bring about a transformation that will enable the Indian economy to reach its potential by liberating the human capital that is the limiting factor now.

(Previously Part 1, Part 2, Part 3.)

For the moment I will leave the matter of why liberalization of education will transform the sector and how the free market will meet the obvious challenges. For now, I will address the point about why the government will not allow the liberalization of education regardless of how urgently necessary that may be or how unimaginably beneficial it could be for the country.

The urgent need for change is generally known. The quality is abysmal. Schools are failing to provide even the basic skills. Perhaps one percent of students are getting a somewhat acceptable education — and that is broadly limited to the rich. The very rich send their children abroad for secondary and tertiary education.

I am willing to bet that every person who is reading this knows of at least one student who is studying abroad. Among my family, friends and acquaintances (most of them upper middle and rich class), out of around 30 students, around 20 of them are studying abroad. The poor have no choice but to suffer — even after paying unaffordable amounts, they get very little quality education.

India’s education system is not only keeping India poor today but it is guaranteeing that India will continue to fall further behind the rest of the world. India will lose trillions of dollars worth of wealth every year as a consequence. This is easy to demonstrate but for the moment, let’s assume that for the sake of the argument.

I also assume that this argument is not really quantum mechanics. Anyone who thinks about it for a bit and does the simple arithmetic can confidently arrive at that conclusion. There must be literally thousands of people in India who can do that — and some of those are surely in the hundreds of government bureaucracies related to education.

So if the bad current policy is costing the nation $X trillion a year, and if liberalizing education will stop that loss and instead add $Y trillion a year, the net benefit to India will be $X+Y trillion a year. Why then is the current bad policy in place, and why is education policy not being changed?

The answer is simple. The current bad policy is bad for the country but is good for the policymakers, and a good education policy will be good for the country but bad for the policymakers. The policymakers get to make the change and they will not do anything that hurts their interest. This is not too hard to understand.

Suppose the current policy extracts rents of say $10 billion a year, and that is distributed to say 10,000 policymakers, then on average each policymaker collects $1 million a year. By “policymakers” I mean the politicians, bureaucrats and other higher officials related to educational institutions. These are all estimates and are correct to a first approximation. The exact numbers do not change the argument.

Collectively the policymakers gain $10 billion a year but the country loses $2 trillion a year, say. That’s a loss to the nation two orders of magnitude higher than the gain to the policymakers. That’s the tragedy. They will block the huge potential gain to protect their rents; they don’t care that the country loses immensely.

The governmental control of the educational system allows the policymakers to extract the rents. That is primarily done by restricting entry through license requirements and other barriers. For a license to operate a medical school, I am told, the bribe is around Rs 10 lakhs per seat per year.

If all license, permit, quota and regulations were eliminated and there were no barriers to entry or exit (that’s a free market), then the bribes would stop. And in short order, the existing dysfunctional government licensed institutions will go out of business because people would move to the new institutions.

The government wastes public money on running bad schools and colleges but it will have to stop when there would be no students in those. They will empty out because people will have really wonderful alternatives.

I will of course go into the details of how and what changes would happen if the government were to let go of its stranglehold on education. But the likelihood that the government will let do that is zero. This essay is just for my amusement. It will not have any practical impact on the world.

{Continue on to Part 5.}