This Policy, Alone – Part 8

NOBEL PRIZE-WINNING economist Douglass North observed that “economic history is overwhelmingly a story of economies that failed to produce a set of economic rules of the game (with enforcement) that induce sustained economic growth.”

A sound education system is the foundation of sustained growth. Yet, nowhere is the failure to produce a set of economic rules more evident than in the Indian education system. India’s literacy rate of around 60 percent places it in the company of countries such as Uganda, Rwanda, Malawi, Sudan, Burundi and Ghana. Broadly speaking, India accounts for 50 percent of the world’s illiterates even though India has only 17 percent of the world’s population. The failure of India’s primary education is predictably reflected at the higher education level: gross enrolment ratio is a mere six percent. Furthermore, the quality of Indian college graduates is poor to the extent that only about a quarter of them are employable.

Education in India is heavily controlled by the government both at the state and federal levels. Government agencies and regulations dictate every aspect of education, sometimes to the smallest details: who can run educational systems (generally only non-for-profit trusts can), who teaches, what is taught, who learns, what the fees and salaries should be, and so on. Most unfortunately, the entry barriers that the government imposes on the sector lead to such effects as high costs, low quality, and rampant corruption.

Entry barriers

The market for educational services is like any other market. By putting barriers to entry to the market, it increases competition for the market which leads to decreased competition within the market. This has two unfortunate effects. First, corruption is made endemic in the system. Persons in charge of government agencies with discretionary powers to grant entry into the market are susceptible to bribes.

Education providers compete for the market by paying immense bribes to obtain licenses. Later these amounts have to be recovered from the students in the form of huge capitation fees and other coercive measures. All this is possible because the entry barriers reduce supply so that economic rents can be extracted. In effect, this is a process that transfers wealth from those wishing to get an education to those who have control of the entire sector, with the education providers acting as intermediaries in the process.

The second effect is that the quantity supplied cannot meet the demand and the quality of the education service is poor. The entry barriers prevent normal supply response and limit the necessary competition within the market to improve quality. The incumbents continue to remain in business despite shoddy service.

Necessary Reforms

The education sector urgently demands reform. What follows is a short list of needed reforms. For the purposes of this discussion, the sector can be partitioned into the primary (kindergarten to class 6), secondary (classes 7-12) and tertiary segments (college and above). The tertiary segment can be further subdivided into professional, vocational and liberal education segments.

First and foremost is the liberalization of the system. The market has to be allowed to function by allowing for-profit firms to serve the sector. This will expand the supply. Market competition will ensure quality. Most of the entry will be in the tertiary segment (especially in the professional and vocational areas) because the returns on investment for a student is significant and short term compared to primary and secondary education.

Second, the public spending on primary education has to be channeled properly. Public support of primary education—around 2 percent of GDP—is ineffectively and inefficiently spent on funding government schools which don’t function. The problem is systemic and requires a radical reform to get the incentives right. This can be achieved by, instead of funding schools, funding the students. Primary education providers, whether public or private, will have to compete for students. The market, in effect, will bring about accountability by aligning incentives with performance.

Third is the creation of an independent “Education Regulatory Authority of India,” (ERAI). Some markets—especially ones in which there are significant externalities and/or have monopoly characteristics—have to be regulated to ensure socially optimal outcomes. The ERAI should have the mandate to not merely allow, but to actually encourage, competition.

The ERAI should be sufficiently empowered to resist political interference and regulatory capture. One of the most important mandates of the ERAI will be to guarantee a level playing field for all entrants—private, public, foreign, domestic—and prevent any special interest group from capturing the market.

A critically important function of the ERAI will be the rating of all providers of education. This will help consumers make informed decisions and thus provide feedback to the market.

Fourth, creation of a complete funding and credit market for education. Investment in primary education characteristically has long pay- back periods and high positive externalities. Publicly funding primary and secondary education— through grants—for those who cannot afford it is justified. Tertiary education, in contrast, has short payback periods and sufficient private return to investment that it can be funded by loans instead of grants. Mechanisms can be figured out which will ensure equality of opportunity at all levels and that no one is denied merely because of an inability to pay.

Fifth, policies that enlarge the set of options for post-secondary education. India’s growing economy needs a large number of people with a wide range of skills. To attain a proper mix of skilled people, vocational education has to be accorded appropriate attention. The number of vocational institutions has to go up. This can be achieved by the combined force of previously mentioned items: allowing free entry into the segment and completing credit markets where necessary. Sixth, a commitment to achieving 90 percent literacy rate in three years. The main cause of the failure to do this over the decades is one of will and not of opportunity or resources.

The fierce urgency of now

In any segment of the economy, including education, producing a set of rational rules is a political process. Frequently basic economic truths are willfully disregarded in a myopic but cynically calculated process of short-term electoral gains. In the long run, however, the persistent practice of politically motivated economically unsound policies has the unsurprising and unfortunate effect of impoverishing the economy.

India’s future depends on an educated citizenry. Despite heavy expenditure in education over the decades, the rules of the game have been a significant barrier to Indians’ gaining an education. The persistence of a dysfunctional system can only be explained by the fact that it works for the benefits of those who control the system and not for the larger social good. Reforms will therefore be immensely difficult because powerful vested interests will block them. To counter this, the already educated public has to take up the cause on behalf of those who desperately need a functioning education system.

We have a problem to solve. The solution has to begin with the recognition that our past policies—however well-meaning they may have been—have failed to produce the stated results. Evaluating what has not worked and why is a necessary first step in the most critically urgent task of reforming the educational system.

The consequences of not solving this problem of education are too horrifying to contemplate. It is impossible for a significant portion of humanity to face the twenty-first century without education in a globalized hyper-competitive world. The choice is stark: either solve this problem now or be forever relegated to being a Third World economy. There are no other options.

{I wrote this piece for the April 2009 edition of Pragati.  Though it is over 11 years old, it has aged well. It is still relevant and more urgently so.}

Image at the top of this post: Kids writing an exam for a class I taught at UC Berkeley. July 2011.

{Previously this series: Parts OneTwoThreeFour, Five, Six, Seven.}

Author: Atanu Dey


5 thoughts on “This Policy, Alone – Part 8”

  1. I am really liking this blog series – This Policy Alone.

    Regarding this statement – “Some markets—especially ones in which there are significant externalities and/or have monopoly characteristics—have to be regulated to ensure socially optimal outcomes.”

    What are the socially optimal outcomes? I think the devil is in the details as far as “socially optimal outcomes” is concerned.

    What are your thoughts on maintaining and encouraging the multilingual nature of the country; not just in day to day activities but also as a medium of education with a continuing and thriving literary culture. As of now most of the Indic languages are stuck being languages spoken in homes, movies and some novels etc.. And most of the science and technology work happens in English. If this trend continues won’t the Indic languages wane away with English taking up their space.

    Instead of setting up “Education Regulatory Authority of India”, isn’t it better to delegate education as a whole for the states to handle rather than the central government handling it?

    I also noticed that you did not make any mention of the recent NEP 2020, Did it address any of your concerns about the education policy?


    1. Anirudh,

      Good to know that you like this series.

      With regards to markets, socially optimal means that the total costs (private and social) are lower than the total (private and social) benefits. In markets where are no externalities, social costs and benefits are zero by definition. Therefore all we care about are private costs and private benefits.

      It’s easy to figure out if there are externalities; it is much harder to quantify them. For negative externalities, policy recommendations could include taxes, and for positive externalities, subsidies. But those instruments are themselves costly (they cause distortions) and have to be used very cautiously. We know, for instance, that being literate affords private benefits to an individual. Being literate also has externalities — it benefits the society to some degree but to what extent has to be mostly guessed. What should be the subsidy in that case, and how should be revenues be raised for the subsidy is hard to figure out precisely.

      Correcting for externalities is a tricky business.

      My position on the language question is simple: let the people decide and the government has no role in that matter. It’s a private matter that politicians and bureaucrats are not equipped to decide. Why? Because being a politician or a bureaucrat does not make one an expert on figuring out who should use what language. Which language should the student be instructed in? The parents pay the bill; they decide. What language movies or books? The publishers decide, and the customers decide.

      Education should be a local matter. My proposal for a regulatory agency is mainly focused on its function as a rating agency that does not impose standards but rates schools across the country. It’s not about delegation to states, anyway, because education should be regulated by the market for education. The only role the state may have is to provide need-based funding to students (and not to educational institutions.)

      I did not mention NEP 2020 because I don’t know what that is, and I don’t know what that is is because I don’t have time to waste going through bullshit, and I believe that the NEP is bullshit is because I have not come across anything that the government has done is not bullshit.

      Liked by 1 person

      1. About –
        “What should be the subsidy in that case, and how should be revenues be raised for the subsidy is hard to figure out precisely.
        Correcting for externalities is a tricky business.”

        Can you share links or pointers to case studies that do the above successfully?


  2. I have reconsidered the matter since when I wrote that piece. I think education should be left entirely to the market — every bit, including the rating agencies. Funding too should be left to the market and the civil society, and the government must be constitutionally prohibited from the education sector.


    1. Call me simpleminded but I don’t quite understand what people mean when they say capitalism. Douglass North (1993 Prize recipient of the Nobel Memorial Prize in economics) said, “I don’t know what the word capitalism means and therefore I have never used the term.”

      Certainly I know what I mean by capitalism. But I cannot assume that everyone attaches the same meaning to it. I think it is a useful word but its meaning should be spelled out before it is used. It refers to a collection of ideas. (This is unlike say the word ‘water’ which refers to a large collection of molecules with two H atoms and one O atom.) Here’s what I wrote some time ago — What’s Capitalism. I recommend reading it so that you can answer your own questions.


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