Economics of Education - Distance Education Course Outline PDF

MDE-417 DISTANCE EDUCATION: Indira Gandhi National Open University ECONOMIC Staff Training and Research PERSEPECTIV...

MDE-417 DISTANCE EDUCATION: Indira Gandhi National Open University ECONOMIC Staff Training and Research PERSEPECTIVE Institute of Distance Education Block 1 ECONOMICS OF EDUCATION UNIT 1 Conceptual Foundations 5 UNIT 2 Education as Investment 22 UNIT 3 Cost Analysis in Education 49 UNIT 4 Generation and Utilization of Resources 68 MDE-417: Distance Education: Economic Perspective (New Course in place of ES-317: Distance Education: Economic Perspective) Expert Committee Prof. A. Sukumaran Nair (Chairman) Prof. K. Murugan Former Vice Chancellor Director, School of Humanities Mahatma Gandhi University Tamil Nadu State Open University, Kottayam, Kerala Chennai Prof. O.S. Dewal Prof. S.V.S. Chaudhary Former Founding Director School of Education National Open School, New Delhi IGNOU, New Delhi STRIDE Faculty Prof. K. Sudha Rao Prof. P.R. Ramanujam National University of Educational Prof. C.R.K. Murthy Planning and Administration, Prof. Madhu Parhar New Delhi Prof. Basanti Pradhan Prof. P.K. Biswas Prof. Chandra Bhusan Dr. Sanjaya Mishra Formerly CIET, National Council for (Now with COL) Educational Research and Training, Dr. Ashok K. Gaba New Delhi (Now with SOVET, IGNOU) Dr. Mythili G. Prof. Santosh Panda (Convener) Mr. Tata Ramakrishna Director Dr. Rose Nembiakkim Staff Training and Research Institute of (Now with SOSW, IGNOU) Distance Education, Dr. Satya Sundar Sethy IGNOU, New Delhi (Now with IIT, Chennai) Course Team Course Contributors Course Coordinator Content, Format, & Language Editor Dr. P. Geetha Rani (Units 1, 3) Prof. Santosh Panda Prof. Santosh Panda Associate Professor STRIDE, IGNOU, STRIDE, IGNOU, National University of Educational New Delhi New Delhi Planning & Administration, New Delhi Prof. M.M. Ansari (Unit 2) Former Director, Distance Education Council, IGNOU, New Delhi Dr. M.S. Bawa (Unit 4) Formerly at University of Delhi, Delhi PRODUCTION Mrs. Promila Soni Mr. Manoj Thakur Assistant Registrar (Publications) Assistant, STRIDE, STRIDE, IGNOU, New Delhi IGNOU, New Delhi April, 2019 © Indira Gandhi National Open University, 2019 ISBN-978-93-88980-73-9 All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any other means, without permission in writing from the Indira Gandhi National Open University. Further information on Indira Gandhi National Open University Courses may be obtained from the University’s office at Maidan Garhi, New Delhi-110 068. Printed and Published on behalf of the Indira Gandhi National Open University, New Delhi by Prof. Madhu Parhar, Director, Staff Training and Research Institute of Distance Education (STRIDE), IGNOU, New Delhi. rd Cover design by Mr. Tamal Basu, 271, Masjid Moth, Near Uday Park, 3 Floor, New Delhi-110049. Laser Typeset at M/s/ Rajshree Computers, V-166A, Bhagwati Vihar, (Near Sec. 2, Dwarka), New Delhi-110059. Printed by M/s Hi-Tech Graphics, D-4/3, Okhla Indl. Area, Phase-II, New Delhi-110020.  MDE-417: Distance Education: Economic Perspective Course Outline Block 1 : Economics of Education Unit 1 : Conceptual Foundations Unit 2 : Education as Investment Unit 3 : Cost Analysis in Education Unit 4 : Generation and Utilization of Resources Block 2 : Economics of Distance Education Unit 1 : Distance Education and Human Resource Development Unit 2 : Funding of Distance Education Unit 3 : Pricing in Distance Education Unit 4 : Cost and Quality in Distance Education Block 3 : Costing in Distance Education Unit 1 : Cost Analysis of Distance Education Unit 2 : Cost Structures in Distance Education Unit 3 : Cost Functions in Distance Education Unit 4 : Costing Technology-Enabled Learning Block 4 : International Perspective Unit 1 : Cost Effectiveness of Distance Education in Asia: An overview Unit 2 : Cost of Distance Education in China Unit 3 : Costing Open and Distance Education in India Unit 4 : Costing in Selective Distance Learning Systems: International Case Studies Block 5 : Readings in Economics of Distance Education Unit 1 : The Economics of Mass Distance Eduation Unit 2 : The Distance Education Chameleon: New Technologies and The Changing Cost-Structure of ODL Unit 3 : Comparative Cost Analysis in Distance Teacher Education Unit 4 : The Costs and Costing of Networked Learning Unit 5 : A System-Level Comparison of Cost-Efficiency and Return on Investment Related to Online Course Delivery Unit 6 : Activity-Based Costing Models for Alternative Modes of Delivering On-Line Courses Unit 7 : Private Cost of Education: A Comparative Study of Distance and Campus-based University Students in Nigeria Unit 8 : Costing of Distance Learning: A Study of the Indian Mega Open University  INTRODUCTION TO THE BLOCK As you will notice, the Course on “Distance Education: Economic Perspective” comprises five Blocks, which is of six (6) Credits, and will require, on an average, 180 hours of your study time (though you may take time duration, i.e. 20 to 40 hours, to complete each Block or Module). We have redesigned this course in this form, different from the curse structure that we had in its earlier version. The first four Blocks deal with various conceptual and practical aspects of economics of education, and economics of distance education, while in the last Block we have compiled eight select articles/papers in the area of distance education written by international expets in this field. We have obtained copyright permission to reproduce them with reformatting in this Block which is tittled as ‘Readings in Economics of Distance Education’. In Block 1 you will find four units that provide for conceptual foundation to enable further study of ‘economis of distance education’. These deal with the meaning of economics of education and concepts associated with it; education as consumption and investment, including earnings, wastage, and production function in education; various types of costs and cost analysis in education; and generation and utilisation of resources for education. Block 2 is devoted exclusively to the study of ‘economics of distance education’ – human resource development, funding, pricing, and cost and quality – the last two being exclusively new areas of study within this field. In Block 3, we have focused entirely on the cost aspect of distance education and technology-enabled learning. We have provided international perspectives on this field through some case studies in Block 4. Further, you will find the eight selected readings in economics of distance education given in Block 5 useful to your current comprehensive understanding of this field, as also for your future research work in this area, including the project work for MDE-320. We have tried to make the units as presentable as possible; and hope you find them interesting to study. All the best indeed.  Conceptual Foundations UNIT 1: CONCEPTUAL FOUNDATIONS Structure 1.1. Introduction 1.2. Learning Objectives 1.3. Introduction to Concepts 1.3.1. What is economics of education? 1.3.2. Public good and private good 1.3.3. Consumption and investment goods 1.3.4. Social good and merit good 1.4. Human Capital Theory 1.4.1 Rates of return approach to education 1.4.2 Education as a screening or credentialism hypothesis 1.5. Education and Economic Growth 1.5.1 Growth accounting framework 1.5.2 Endogenous growth theory 1.6. Contemporary Economic Reform Policies and their Effects on Education 1.6.1 Privatization of education 1.6.2 Internationalization of education 1.7. Let Us Sum Up 1.8. References/Further Readings 1.9. Model Answers to Activities 1.1 INTRODUCTION This is the first Block of the Course on “Distance Education: Economic Perspective”, and provides the foundation to the study of economics of distance education with conceptual clarifications. Besides conceptual foundations/clarifications given in Unit 1, the subsequent three deal respectively with education as consumption and investment, various educational costs and cost analysis in education, and how resources are utilized within/for education. With the foundational clarity provided in this Block, you will be equipped better to appreciate the detailed study of economics of distance education in Block 2, costing in distance education in Block 3, and international perspectives in Block 4 on costing in distance education which are contributed by international experts in the area of economics of distance education; and the critical study of select papers given in Block 5 shall expand the horizon of your understanding of this area, as also facilitate you to take up research studies of your own in future, as also for your project work within the Masters programme. 5 Economics of Education 1.2 LEARNING OBJECTIVES After going through this unit, you should be able to:  Define ‘Economics of Education’.  Differentiate between public and private good; investment and consumption goods; and social good and merit good.  Explain the human capital theory with a critique on it.  Examine the relationship between education and economic growth.  Explain the endogenous growth theory.  Examine the contemporary economic reform policies and their effects on education, such as privatization and internationalization of education. 1.3 INTRODUCTION TO CONCEPTS 1.3.1 What is economics of education? ‘Economics of Education’ is a branch of Economics which applies various economic theories, principles and models to the issues and problems of education. Economics of Education was born as a formal area of study only about five decades ago, with ‘the human investment revolution in economic thought’ created by Theodore Schultz in his Presidential Address to the American Economic Association in 1960. It builds powerful interface with theories of growth, labour economics, international economics, public finance, welfare economics, micro economics, household economics, and simultaneously going deep into the ‘basic tenets’ of Economics of Education. To begin with, the interests of economists in the field of education have centered chiefly on four topics: (a) measurement of the economic cost and benefits of education, (b) educational planning, (c) efficiency criteria, and (d) adequacy of revenue sources. Further, three major economic approaches to educational planning, viz. i) rate of return analysis, ii) manpower planning, and iii) social demand analysis have vastly contributed to better understanding of several economic dimensions of education. These have also influenced considerably the boundaries of the theories of growth, labour economics, and development economics. Research studies that examined private and social demand for education have made significant dents into ‘Development Economics’, necessitating broadening the framework of studies on poverty, inequality, household consumption, and levels of living. For its own development, Economics of Education has drawn heavily from Economics, and in turn influenced heavily the development of Economics too. It has become a specialized branch of Economics and also a separate area of Educational Studies. The other major components of human capital, viz. health and migration also branched out of it as important areas of study. 1.3.2 Public good and private good Public good is a good which has the twin characteristics of non-rivalous and non- 6 excludability nature. In Paul Samuelson’s words, public good is “good, which all enjoy in common in the sense that each individual's consumption of such a good leads to no Conceptual Foundations subtraction from any other individual's consumption of that good...”. Public goods are goods or services that can be consumed by several individuals simultaneously without diminishing the value of consumption to any one. This key characteristic of public goods that multiple individuals can consume the same good without diminishing its value is termed as non-rivalry. Non-rivalry characteristic is the one which most strongly distinguishes public goods from private goods. A pure public good also has the characteristic of non-excludability, that is, an individual cannot be prevented from consuming the good whether or not the individual pays for it. For example, fresh air, a public park, national defense. Education, more broadly defined as knowledge or ideas as postulated in the modern growth theories (discussed later), has the inherent nature of non-rivalness (Romer, 1994). On the contrary, private goods are exclusive and rival in nature. Exclusiveness means once the good or service is bought, the buyer owns it and consumes. Rivalness means the competitiveness -that is once a good is sold off, it is not there for other people to consume. For example, food, clothing, toys, cars, etc. In the recent periods, education is also argued as a private food, but has immense positive externalities. Externality means the benefits of education that is conferred on the society, which further means the benefit the society receives as the people are educated. Examples include cleanliness, better health practices, etc. Similarly, education has the characteristics of both consumption and investment goods. 1.3.3 Consumption and investment goods Goods in economics can be categorized as consumption and investment goods. Consumption good or service is one that is used (without using it for further transformation in production) for the direct satisfaction of individual needs or wants or the collective needs of members of the community. Investment good is a good which enables further production of goods which is also called as capital goods. Capital goods are generally human-made, and do not include natural resources such as land or minerals. For example, plant, machinery, tools, equipments, etc. The nature of education is such that it possesses both consumption and investment characteristics of good. However, since 1960s, education has been recognized as an investment for both the individual and the society. Education is both investment as well as consumption. There is no method of estimating in what proportion these two contribute to education. In primary education, the investment component is lesser than consumption component. In secondary education both the components may more or less equal and in the case of higher education, investment benefits are much higher than consumption benefits. Moreover, whether education is a consumption or an investment good needs to be examined from both the private and social point of view. 1.3.4 Social good and merit good Social goods are distinguished as those goods to which exclusion principle cannot be applied. In other words, it is a good or service that benefits the largest number of people in the largest possible way. Some examples of social goods are clean air, clean water and literacy. Merit good is a socially desirable good whose distribution of benefits is the maximum. In the case of merit goods, people do not realize the true or 7 Economics of Education actual size of benefit. For example, people underestimate the benefits of education such as the scientific innovations and the benefits of using them like the benefits of using vaccinations. Activity 1.1 Write, in your own words, brief statements on each of the following with an example for each: i) Public good: ii) Investment good: iii) Social good: 1.4 HUMAN CAPITAL THEORY After the conceptual introduction, let us turn to a very important aspect of economics and economics of education, i.e. human capital. The human capital theory postulates that education is an investment activity that increases skills, and hence labour productivity and the lifetime earnings of individuals (Schultz, 1963; Becker, 1964; Mincer, 1974). A simple description of this process is illustrated in Figure 1.1 which depicts that investment on education leads to enhanced skills which in turn lead to higher productivity which in turn causes higher earnings. The higher wages and salaries in turn lead to higher economic growth. Investment Enhanced Higher Higher on Skills Productivity Earnings Education Figure 1.1: Process of education as investment Human capital theory brought out that education is a major source of acquired abilities. It brought out the distinctive attributes of education as human capital distinguishable from that of from physical capital: i) The stock of knowledge is embodied in human capital unlike in physical capital. ii) In acquiring human capital, the individual must invest both of his/her time and 8 resources. Another important facet of human capital theory deals with investment in on-the-job Conceptual Foundations training and the criteria for determining who will pay for such training and who will benefit there from. Based on the pioneering work of Becker (1964), a distinction is made between general and specific training. That the accumulation of human capital occurs through both formal instructional programs and through informal ways such as the cumulative experience on a job, in which one learns by doing. General training refers to training that provides valuable knowledge and skills to workers useable both within the present employment and in other employments. On the other hand, specific training has value only within the current employment and is totally irrelevant for the workers’ productivity in other firms. The distinction between general skills in terms of portability and specific skills in terms of non-portability are important. The general skills defined in terms of portability have a central place in both learning and at work as parts of an integrated theory of human capital. Applying the criteria who will pay for the cost and who will benefit from what kind of training (general or specific) can result in four alternatives as shown in Figure 1.2. Individual Employer General Cost, Additional cost, spread over benefit similar benefit Specific Additional cost, Cost, benefit specific to a firm additional benefit Figure 1.2: Who pays for training The alternatives are the following. i) For general training: a) The individual would be willing to bear the cost as the benefit is spread over to more than one employment opportunity. b) But, for the employer, it would be an additional cost for no additional benefit. ii) For specific training: a) For the individual, it is an additional cost and the benefit is specific to a particular firm. b) For the employer it is an additional cost and would bring in additional benefit. Among these four alternatives, one can deduce the two desirable ones as: i.a) The individual would be willing to bear the cost for general training as the benefit is spread over to more than one employment opportunity, and ii.b) For the employer it is an additional cost for a specific training but would be benefiting more from that cost of specific training. Mincer (1974) applied empirically to separate out-the-schooling and on-the-job training components of earning streams by the interpretation of the concave shapes of earning paths over a person’s life. Hence, the rates of return to education are estimated using the age-earnings profile or Mincer’s earning function. We will briefly discuss these two methods of estimating rates of return to education as follows. 9 Economics of Education 1.4.1 Rates of return approach to education The economic returns to education can be measured by the internal rate of return to education, which is the interest rate that equates the present value of the costs incurred for education to the present value of additional lifetime earnings attributable to education. It is the profitability or rate of return on investment as a measure of the expected yield of investment in terms of future benefits, or income stream generated by capital compared with the cost of acquiring the capital asset. The rate of returns to education can be measured for both the individual (private) and social rates of returns. The private rate of return is used to explain the demand for education. It can also be used to assess the equity or poverty alleviation effects of public education expenditures, or the incidence of the benefits of such expenditure. The social rate of return summarizes the costs and benefits of the educational investment from the state's point of view, i.e., it includes the full resource cost of education, rather than only the portion that is paid by the recipient of education, i.e. the student or the trainee. Private Rate of Return The costs incurred by the individual are his/her foregone earnings (since he/she may have earned in a job if had not gone for further education) while studying, plus any education fees or incidental expenses the individual incurs during schooling. The private benefits amount to what a more educated individual earns (after taxes), above a control group of individuals with less education. The private rate of return to an investment at a given level of education in such a case can be estimated by finding the rate of discount (r) that equalizes the stream of discounted benefits to the stream of costs at a given point in time. Social Rate of Return The main difference between private and social rates of return is that, for a social rate of return calculation, the costs include the state's or society's at large spending on education. Gross earnings (i.e., before taxes and other deductions) is used in a social rate of return calculation, and such earnings also include income in kind where this information is available. Since the costs are higher in a social rate of return calculation relative to the one from the private point of view, social returns are typically lower than a private rate of return. The difference between the private and the social rate of return reflects the degree of public subsidization of education. Adjustments Estimating the returns to investments in education, as for any other sector, involves an implicit projection of anticipated benefits over the person’s or society’s lifetime. Since only the past earnings are observed, or, most commonly, only a snapshot of the relative earnings of graduates of different levels of schooling is observed, adjustments have been used in the literature to provide a realistic projection of earnings of graduates. The most common adjustments refer to the anticipated real growth in earnings, mortality, unemployment, taxes and innate ability. 10 Earning Function Conceptual Foundations ‘Mincerian method’ or earning function involves the fitting of a function of log-wages, using years of schooling, years of labor market experience and its square as independent variables (Mincer, 1974). Often weeks-worked or hours-worked are added as independent variables to this function as compensatory factors. We call the above a "basic earnings function." In this semi-log specification the coefficient on years of schooling can be interpreted as the average private rate of return to one additional year of schooling, regardless of the educational level this year of schooling refers to. 1.4.2 Education as a screening or credentialism hypothesis Many economists particularly Arrow (1973), Spencer (1973) and Stiglitz (1975) among many others have argued that education remained as a screening or filtering device. The skepticism of human capital theories have led to development of alternative theories such as Screening theories and labeling mechanisms. This hypothesis contends that education or investment on education is not productive by imparting necessary knowledge and skills, but simply acts as a screening device, which enables employers to identify individuals who possess either superior innate ability or certain personal characteristics such as attitudes towards authority, punctuality, or motivation, etc. Rather, education screens, labels and identifies the higher credentials in people and leads to higher earnings (see Figure 1.3). Investment Higher Higher on credentials earnings education Figure 1.3: Education and earnings relationship Arrow (1973) noted in his filter argument that higher education not really adds up to productivity but adds to some information to the extent that it identifies higher credentials in people. However, the screening hypothesis is important as it focused the attention on education and other forms of investment in human capital which influence productivity. It served as a reminder that education does far more than imparting knowledge and skills. The educational process helps to shape and develop those attributes. This restates that the concept of human capital is still valid that it must be extended to include activities which affect personal attributes as well as skills, and it must recognize that such activities increase workers’ productivity in complex ways. 11 Economics of Education Activity 1.2 Distinguish between ‘Rates of Return Approach to Education’ and ‘Education as a Screening Hypothesis’. Write within 100 words in the space given below. 1.5 EDUCATION AND ECONOMIC GROWTH The relationship between education and economic growth has been one of the major tenants of economics of education. This relationship has been examined by economists under two theoretical frameworks: i) The growth accounting framework which Solow, Dennison and other followed; ii) The modern or endogenous growth theories, which Romer, Arrow and Lucas have contributed these two frameworks are discussed as follows. 1.5.1 Growth accounting framework During 1950s, growth had been extraordinarily rapid and in reflecting on this experience, economists began to recognize what Tinbergen had shown in 1942 itself that conventionally specified Cobb-Douglas aggregate production functions left a large part of observed growth in national income per capita unexplained. This fact was rediscovered in 1950s in Norway, Finland and in U.S. The residual was given many designations as technical change, human factor, and measure of ignorance. However, it was generally agreed that education is a vital element in economic development. The discovery that increases in physical capital and labor did not, by themselves, explain economic growth led to an analysis of the factors determining the "residual," in particular the role of education and technical knowledge. One of the first attempts to measure the contribution of education to growth was made by Denison (1964), who argued that about 23 percent of recent increases in U.S. national income during the period 1929 to 1982 were due to the increased education of the labor force. In Denison’s accounting the effects of scale economies were arbitrarily assumed and the residuals were simply supposed to reflect the effects of advance in knowledge with no explanations of how scale economies work and how human knowledge advances. Harrod and Domar are the earliest exposition of growth models. The rate of growth in 12 the economy is determined by the ratio of rate of savings (s) to capital output ratios (v). The assumption made in the First Five Year Plan in India was that rate of savings Conceptual Foundations is equal to investment in the economy, which is not necessarily the case. If the rate of growth is lower, it results in cumulative unemployment. It is important to recognize that the strategy to promote economic growth by forced savings was based on the assumption of a special production function. The peculiar nature of this production function is evident from the specification that only capital but not labor is included as a factor of production. It also assumes that labor and capital are not substitutable in production and hence output does not increase by applying more output for given stock of capital. The warranted rate of growth is referred as knife-edge, and it is also the unstable growth path. The dynamic question on how fast the economy should grow is not addressed in the model. This model does not concern about how the variation in growth rate occurs across space and time. Using the neoclassical production function, Solow and Swan in 1956 advanced a very different perspective from the Harrod-Domar model on the relationship between capital accumulation and economic growth. Unlike in Harrod-Domar, the labour and capital ratios were allowed to change by Solow and Swan. It can be derived from this model that both capital input per worker and output continue to grow at the same rates as the rate of increase in the efficiency of labor resulting from technological progress. Thus, it implies that the growth of income per capita cannot be sustained without continuous technological progress. However, Solow’s convergence keeps on growing at the same rate and does not allow for any difference across space or time as in Harrod-Domar. An important contribution of the neo-classical growth model of Solow-Swan was to elucidate the decisive role of technological change in economic growth. However, the problem was treating technological progress as exogenous in the growth model. 1.5.2 Endogenous growth theory An attempt to incorporate the effects of scale economies and endogenous technological progress into the growth theory is called endogenous growth models pioneered by Paul Romer (1986, 1994), Kennth Arrow (1973) and Robert Lucas (1988). These models try to explain the mechanism of how new knowledge is created through economic activities, giving rise to scale economies. Its basic assumption is that new knowledge to improve economic production accentuates bit by bit through the efforts of individual firms to design and construct more efficient machines and factories in their investment activities. It is assumed that certain useful knowledge created by a firm sooner or later becomes usable by other firms despite the firm’s efforts to prevent other firms from using it. According to Romer, an inherent characteristic of ideas or such knowledge is that they are non-rivalrous. But they vary substantially in their degree of excludability. Excludability indicates the degree to which a good is excludable, i.e. the degree to which the owner of the good can charge a fee for its use. As discussed earlier, non rivalrous goods that are essentially non-excludable are called public goods. On the contrary, a rivalrous good must be produced each time they are sold; goods that are non-rivalrous need to be produced only once. That is non- rivalrous goods such as ideas involve a fixed cost of production and zero marginal cost. An example is Thomas Edison and his lab to produce the first commercially viable electric light. Additional lights could be produced at a much lower per-unit cost. Once 13 Economics of Education the product is developed, each additional unit is produced with increasing returns to scale under imperfect competition. This process can be viewed as production with a fixed cost and a constant marginal cost, which exhibits increasing returns to scale (see Figure 1.4). Ideas are very different from other economic goods. Ideas are non-rivalrous and also non-excludable after some time at least in the medium term. Once an idea is invented, it can be used by one person or by one thousand people, at no additional cost. That the size of the economy–its scale–plays an important role in the economics of ideas. Increasing Imperfect Non- returns competition Ideas rival Figure 1.4: The process in endogenous growth In particular, the non rivalry of ideas implies that production will be characterized by increasing returns to scale. In turn, the presences of increasing returns suggest that we must move away from models of perfect competition. It is because the inventor expects to be able to charge a price greater than marginal cost and earn profits. It is important to understand that the technical progress in machines and equipments is embodied, whereas in labour it is disembodied. In the production function of goods and services, the constant returns to scale operate, whereas in the stock of knowledge function the increasing returns to scale operates. However, the rate of knowledge accumulation depends upon the initial stock of knowledge. Higher the stock of knowledge, the more one can add to it. This proposition gets accentuated under the contemporary economic policies. Activity 1.3 Establish the relationship between education and economic growth by briefly explaining the two frameworks – growth accounting, and endogenous growth. Write in about 150 words in the space given below. 14 1.6 CONTEMPORARY ECONOMIC REFORM Conceptual Foundations POLICIES AND THEIR EFFECTS ON EDUCATION Knowledge is the driving force in the rapidly changing globalised economy and society. Quantity and quality of highly specialized human resources determine their competence in the global market. It is now well recognized that the growth of the global economy has increased opportunities for those countries with good levels of education and vice versa (Carnoy, 1999; Stewart, 1996). It is also widely recognized that to the extent globalization and macro economic reforms intensify competitive pressures, it correspondingly de-emphasizes the redistributive strategies and push governments away from equity-driven reforms (Bowles, 2001). India is no exception to this global phenomenon. As a part of globalization, economic reforms initiated in India in the beginning of 1990s consisting of structural adjustment and stabilization policies. Further, the second generation of economic reform policies especially the Fiscal Responsibility and Budget Management (FRBM) Act, notified on August 2003, aims to eliminate the revenue deficit by 2008-09. With economic reforms and other pressures of the government, higher education has been listed as non-merit good. Following the structural adjustment policies and later the macro economic and fiscal policies, a fiscal squeeze is experienced in all social sector investments, which has trickled down to public expenditure on education in general, and higher education in particular. Economic reforms initiated in India in the beginning of 1990s consist of structural adjustment and stabilisation policies. Following the structural adjustment policies, a fiscal squeeze is experienced in all social sector investments, which has trickled down to public expenditure on education in general, and higher education in particular. On account of the cut in the budget for higher education, there are severe pressures for the higher education system to mobilise resources from non-governmental resources. Simultaneously, the demand for higher education has been growing rapidly with comparatively faster growth in enrolment in higher educational institutions 1 than the growth in number of higher educational institutions. On account of the cut in the budget for higher education, there are severe pressures for the higher education system to mobilize resources from non-governmental resources. As a consequence, augmentation of resources by higher educational institutions covering either a larger portion of cost of higher education or full cost recovery even in public higher education institutions has become the order of the day through introduction of self-financing courses and seats in tune with liberalisation policies2. The emerging alternatives on various financial reforms/innovations 1 It pertains to public higher educational institutions. However, there is no comprehensive information available on growth of private higher educational institutions and number of students enrolled therein. 2 Certain number of students in each department pay full cost fee, while the rest of the students pay normal (subsidised) fees. It is to be noted that the normal fee itself has been increasing, besides the full cost fees. 15 Economics of Education including hike in student fees, student loans and privatization in public higher education institutions along with increasing private sector participation. 1.6.1 Privatization of education Private higher education is one of the most dynamic and the fastest-growing segments of post-secondary education at the turn of the 21st century. A combination of unprecedented demand for access to higher education and the inability or willingness of governments to provide the necessary support has brought private higher education to the forefront. Private institutions, with the long history in many countries, are expanding in scope and number, and are increasingly important in parts of the world that have relied on the public sector (Altbach, 1999.). This transition process in higher education is primarily on account of the new goals, policies, and practices of neo- liberal market principles. There has been a paradigm shift in the attitude towards the role and efficiency of state per se and financing of any public services (including education) in particular. India is no exception to this global transformation especially during 1990s. Historically, private sector participation in education in India is not a new phenomenon. In India, over the years, there have been private initiatives in education initially for philanthropic reasons and more intensively during 1990s, in professional and even in general higher education not only to meet the growing demands but also to realize the huge and quick profit potential. Such a rapid growth of private higher education institutions is also on account of the policy changes at the macro economic level and also at the micro or sub sectoral level, i.e. higher education. This is primarily the impact of economic reforms initiated during the beginning of 1990s. The five major components of the new economic policy initiated in the beginning of 1990s include: liberalisation, globalisation, privatisation (called LGP), currency convertibility, and reduced role of state. These reform packages imposed a heavy compression on the public budgets on education sector, more specifically so on higher education (see Figure 1.5). With macro economic reforms leading to severe cuts on the education budget resulted in several policy directions. Such policy changes have paved way to several alternatives, including student fees, student loans and privatization in higher education. The increased role of market is manifested by the expansion of private sector education industry (i.e. marketisation). 16  Conceptual Foundations 60 50 40 30 20 10 0 2006-07(BE) 1970-71 1975-76 1981-82 1985-86 1990-91 1995-96 2000-01 2001-02 2002-03 2003-04 2004-05 % elementary % secondary % higher others Source: Based on Analysis of Budgetary Expenditures on Education in India Figure 1.5: Sectoral allocation of public expenditure on education by levels of education in India (in %) 1.6.2 Internationalization of education Until late 1980s, education was thought to be essentially a non-traded service. Under General Agreement on Trade and Services (GATS) in January 1995, education has become a tradable service. Since then, internationalization of higher education gained momentum. Internationalization of higher education is seen as one of the ways the country responds to globalization, while maintaining the individuality of the nation. Knight (2002) defines internationalization of higher education as the process of integrating an international/intercultural dimension into the teaching, research and service functions of the institutions. There are several key concepts in this definition, e.g., the idea of internationalization being a dynamic process and not a set of isolated activities, integration or infusion contributes to the sustainability of the international dimension. Finally, the definition refers to the primary and universal functions of an institution of higher education, namely teaching, research and service to the nation. Internationalization of higher education is pursued via four modes (see Table 1). The first important mode, Cross-Border Supply, corresponds to the normal form of trade in goods and service which crosses the border. Cross-border supply of educational services might grow rapidly in the future through the use of new information technologies for distance learning (cable and satellite transmissions, audio and video conferencing, PC software, CD-ROMs, and the Internet). In particular, the Internet is seen as a promising tool for distance learning. A number of private companies and universities have launched recent initiatives in this area. 17 Economics of Education Table 1.1: Main modes of international supply of educational services Modes Explanation Examples Size of Market 1.Cross-border The provision of education of a Distance education; on- Currently a relatively supply service where the service crosses line education; virtual small market the border(does not require the universities Seen to have great physical movement of the potential through the consumer) use of ICT 2.Consumption Provision of service involving the To students who go to Currently represents abroad movement of the consumer to another country to study the largest share of the country of the supplier the global market for education services 3.Commercial The service provider establishes Local branch or satellite Growing interest and presence or has presence of commercial campuses strong potential for facilities in another country in Twinning future growth order to render service Partnerships Most controversial as Franchising it appears to set arrangements with local international rules on institutions foreign investment 4.Presence of Persons travelling to another Professionals, Teachers, Potentially a strong natural country on a temporary basis to researchers working market given the persons provide service abroad emphasis on mobility of professionals Note: The different modes of services trade according to the GATS classification Source: Knight (2002) The second mode of Consumption Abroad refers to a situation where a service consumer moves to another country to obtain the service in question (e.g. a student who travels abroad to study). International flows of students in higher education constitute at present by far the largest share of the global market for education services. The third mode of Commercial Presence of educational services refers to the commercial establishment of facilities abroad by education providers, e.g. "local branch campuses" or partnerships with domestic educational institutions. There is a growing interest through this mode and has a strong potential for growth. The last mode of Presence of Natural Persons consists of a natural person (e.g. professor, researcher, teacher etc.) travelling to another country on a temporary basis to provide an educational service (see Table 1.1). Under GATS, there are both conditional and unconditional obligations (see Knight, 2002). These obligations in a broader sense favor the developed nations than the developing nations. In brief, we can say that it makes a similar platform for unequal partners and hence poses many challenges for the developing nations. For instance in India, many foreign universities and institutions have been allowed to come into the country and establish franchise centers in the country, offering degrees or diplomas, which are not necessarily recognized by the parent universities in their own countries. The regulatory framework in developing countries is yet to be developed or even if exists, is yet to be strengthened. Activity 1.4 Is privatisation of education any way related to internationalization of education? In what different ways economic reforms have affected education in recent times? Write in about 150 words in the space given below. 18  Conceptual Foundations 1.7 LET US SUM UP You have learnt what is meant by Economics of Education, that it is a branch of economics evolved during 1960s, but an area growing tremendously. You also understood some key and basic concepts of the subject such as investment and consumption goods; human capital verses physical capital, and public good, merit good, etc. Further you learnt how education contributes to the economic growth under two streams of studies – one focusing on human capital theory and the recently developed endogenous growth theories. With this basic foundation knowledge, you would have appreciated the contemporary economic reform policies and their effects on education especially on privatization of education and internationalization of education. 1.8 REFERENCES/FURTHER READINGS Altbach, P. (Ed.) (1999). Private Prometheus: Private Higher Education and Development in the 21st Century. USA: Boston College Center for International Higher Education and Greenwood Publishing Co. Arrow, Kenneth (1973). Higher Education as a Filter. Journal of Public Economics, 2, 193-216. Becker, Gary S. (1964). Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education. New York: Columbia University Press. Blaug, M. (1970). An Introduction to Economics of Education. England: Penguin Books Ltd. Bowles, S. (2001). Globalisation versus Redistribution: Egalitarian Policies in a Competitive World Economy, Indian Economic Review, 36(2), 315-339. Carnoy, M. (1999). Globalisation and Educational Reform: What Planners Need to Know. Report No.63, International Institute of Educational Planning, Paris. Knight, Jane (2002). Trade in Higher Education Services: The Implications of GATS. The Observatory of Borderless Higher Education, London, UK. Mincer, J. (1974). Schooling, Experience and Earnings. New York: National Bureau of Economic Research. Romer, Paul M. (1994). The Origins of Endogenous Growth, Journal of Economic Perspectives, American Economic Association, 8(1), 3-22. Schultz, T.W. (1963). The Economic Value of Education. New York: Columbia University Press. 19 Economics of Education Spencer, M. (1973). Job Market Signaling, Quarterly Journal of Economics, 87(3), 355-374. Stewart, F. (1996). Globalisation and Education. International Journal of Educational Development, 16(4), 327-33. Stiglitz, Joseph E. (1975). The Theory of Screening, Education, and the Distribution of Income. American Economic Review, 65(3), 283-300. 1.9 MODEL ANSWERS TO ACTIVITIES Activity 1.1: i) Public good is the consumption of any good provided by any public representative for consumption by each member of the society, where such consumption by any one does not reduce the value of consumption of the same good by another. Educational facilities provided by public authorities free to all are enjoyed by each member of the society equally. ii) Investment good is one which facilitates further production of goods, and is considered as investment. Education is generally considered as investment good, i.e. higher the education higher shall be the benefits accrued to that individual. iii) Social good is such that it provides equal opportunity for each one to benefit from. Generally, social goods are merit goods which provide maximum benefits to citizens over the non-merit goods. Activity 1.2: Both the approaches find out the economic rates of return to education. The ‘Rates of Return Approach’ finds out to what extent the present value of expenditure of education per student/graduate (i.e. per unit) is equal to (or more or less than) the present value of additional learning in the whole lifetime that one will accrue due to more education – both individual rate of return, and the social rate of return. Perception of higher rate of return leads to more demand for education, and vice versa. On the other hand, unlike the human capital theory which postulates that higher the education higher is the earnings, others do believe that higher education leads to screening the best – i.e. those who get higher knowledge and skills are better or more skilled than those with lower education, and therefore are to earn higher earnings than the latter. Activity 1.3: Education is directly related to economic growth. There are two frameworks which account for this – i) growth accounting framework, and ii) endogenous growth framework. The growth accounting framework explains that over a period time, one may find out through analysis of data over that period that higher the education and training higher is the average earning per capita. In the Harrod–Domar model, given the knowledge and skill of a labour, higher capital (input) shall lead to higher output (though this model did not take into account the increase in skills during process of production). Alternatively, the Solow–Swan model suggests that due to technological progress, during the process of production, the efficiency of labour increases leading to increase in both capital input and output per worker. On the other hand, the endogenous growth framework suggests that due to technological growth, one can also innovate in the process of production. Once a novel idea or new innovation is conceived by one, other only scale it up by using that idea, thereby resulting in increasing returns to scale. Activity 1.4: Privatization of education refers to private participation in education induced largely by neo-liberal market principles. Though in early stages, private participation in education was mainly due to philanthropic reasons, of late this has been considered as an investment in education for expansion as also to meet the growing demand for good schooling and especially professional higher education. 20 Once GATS was promulgated in 1995, education was treated as a tradable service, and so greater Conceptual Foundations internationalization, including cross border delivery of education, started. Internationalization is done through four modes or mechanisms: cross border supply of education, students studying overseas, overseas students studying in a host country, and brain drain in professions, teaching and research. Due to liberalization and opening up of economy, demand for especially private education has increased; there are changes in access and equity; demand for education abroad has increased; private and international participation in education has also increased; employment opportunities in both in-country and overseas have increased; and there is increase in salary and standard of living too. 21 Economics of Education UNIT 2: EDUCATION AS INVESTMENT Structure 2.1 Introduction 2.2 Learning Objectives 2.3 Decision Making 2.3.1 Individual decisions 2.3.2 Institutional decisions 2.3.3 Collective decisions 2.4 Development of Human Resources 2.4.1 Human capital vs. physical capital 2.4.2 Human capital: dimensions and determinants 2.4.3 Education and human capital 2.4.4 Formation of human capital 2.4.5 Human capital formation: quantitative indicators 2.5 Education and Earning 2.5.1 Earning profiles 2.5.2 Earning differentials 2.5.3 Earning and productivity 2.6 Production Function in Education 2.6.1 The production function 2.6.2 Human capital and agricultural/industrial productivity 2.6.3 Level of education and output return 2.6.4 On-the-job training 2.7 Wastage in Education 2.7.1 Educational wastage 2.7.2 Measurement of wastage in education 2.7.3 Repetition and dropout 2.8 Effective Utilisation of Resources 2.9 Let Us Sum Up 2.10 Model Answers to Activities 2.1 INTRODUCTION In the last Unit, we dealt with the fundamental concepts in the study of economics of education, including the concept of investment. We defined investment as the deployment of physical and financial resources that have alternative productive uses in any activity. The benefits of such activities will accrue to the individual and to society over a period of time. The benefits of investment take the form of production of goods and services which, in effect, are treated as incomes. The use of resources for the development of education is essentially an investment, the benefits of which accrue to society for a relatively longer period of time. Therefore, education, in all countries, is regarded to a large extent as a social responsibility. The task of making provision for adequate and relevant education to suit different types and levels of learners is, therefore, largely assumed by the Government everywhere. Obviously, a great deal of caution has to be exercised in respect of planning and management of physical and financial resources devoted to education. The present Unit, broadly speaking, deals with issues related to educational investment. We talk of issues concerning the decision making for development of human resources and increase in earning, the production function in education and educational wastage, effect of the latter on the investment function of education, and 22 productive utilisation of resources for education.  Education as Investment 2.2 LEARNING OBJECTIVES After going through this Unit, you should be able to:  Describe the decision making processes in education.  Outline the theory of human capital and its relationship with economic development.  Identify and describe the ways and means of promoting the formation of human capital.  Explain the external efficiency of investments in education and training, especially its impact on productivity and earnings of educated people.  Describe the production function in education;  Describe such aspects of education system as wastage which impinge upon internal efficiency of investments in education.  Describe proper utilisation of resources for educational purposes. 2.3 DECISION MAKING Let us start with the process of making decisions for educational investment. In order to play a justifiable role in expediting the process of educational development, the Government and its constituent bodies have to take a number of sound decisions, of course, taking into account the human resources requirements of different economic and social sectors of the country. A wide spectrum of issues which always receive the attention of educational planners and decision makers encompass such areas as:  public and private uses of current resources;  public expenditure on social welfare programmes including those relating to the promotion of economic growth and the necessary provision for such services as education, health, housing and national defence;  estimation of budgetary requirements of different sectors of education, like primary, secondary, vocational, higher, general and technical education, etc.; and  determination of the combination of a set of inputs like teachers, laboratory, library, size of the classroom and other necessary equipment, keeping in view of course the desired quality of educational output. The decisions in respect of all these, however, require detailed information pertaining to: i) the identification of factors which have a significant bearing on the process of educational development, and the extent to which each factor exerts its influence in determining the course of the above process; and ii) the alternative costs or losses which a society will have to incur if the appropriate decision is not taken to initiate action for the promotion of education. Obviously, such information, as noted above, which is gathered through different means from individuals as well as institutions, forms the basis for taking decisions in respect of planning, managing and financing of the education system. As you have 23 Economics of Education seen in Unit 1, education has both consumption and investment aspects, the benefits of which accrue both to individuals and to society. Therefore, investment decisions with regard to the nature, types and levels of education as well as the extent of sharing the costs of the related educational provisions are accordingly taken by both the individual and society. Broadly, the process of decision making can be classified under three categories: i) decisions made by individuals with regard to buying or obtaining education of different kinds and levels; ii) decisions made by institutions regarding the sale or supply of education; and iii) collective decisions taken in the case of conflict of interests or objectives between individuals and institutions or society. In the following sub-sections we have discussed the different perceptions which influence and guide the decision making processes with regard to acquisition of knowledge, training and technical know-how. 2.3.1 Individual decisions The investment decisions taken by individuals for buying their dependants’ education constitute individual decisions. Individual decision making varies from person to person and from situation to situation, because the decisions are based on the individual’s perception of the social and economic gains. These gains are expected to accrue to the family as a whole, after the dependant(s) receive a particular type and level of education. For instance, if a family faces a situation in which it can either finance all the children up to an identical level of schooling or provide financial sustenance to some children for higher levels of schooling, the investment decision of the head of the family in either of the above situations would be influenced by expected gains from the alternative investment. Likewise, individual decisions in education may pertain to the type and level of education, choice of institution and other related aspects which are expected to yield somewhat higher returns from the various alternative investment choices available to individuals, especially in areas characterising purely economic activities. Obviously, for making individual decisions, it is imperative to explore all the alternative opportunities so that sound decisions can be taken for achieving the best possible results. It can thus be said that the individual investors in education seek to maximise the economic returns so that the life time earnings could be increased. 2.3.2 Institutional decisions All investment decisions taken by either individuals, private enterprises, public institutions or the State, with respect to the creation of necessary facilities for providing education to all those who are eligible and seek it, are termed as institutional decisions. Such decisions are generally subject to societal judgement and even control in one form or another. The distinction between institutional and individual decisions about investment in education is that the former pertain to those decisions for which there are private or public agents to provide education, and the latter denote those made by or for individuals for procuring their own or their dependents’ education. There is, thus, a 24 difference in the main categories of investments made by the institutions and Education as Investment individuals.  A large chunk of investment by an institution is accounted for by such items as payments of salaries to teaching and non-teaching staff, and infrastructure facilities like buildings, equipment, library, etc.  Investments by individuals are made in the form of payment of fees, maintenance expenditure, and the opportunity costs or foregone earnings. Such a distinction in the pattern of investment arises because individual decisions are influenced by considerations of private benefit whereas institutional decisions have to take into consideration the total impact of the decision on society and economy as a whole. 2.3.3 Collective decisions Unlike the individual and institutional decisions that you studied in the two sub- sections above, the social approaches to investment in education are dominated by considerations like the social and economic welfare of society. Societal judgement on investment decisions in education takes into consideration the entire investment made by individuals and private and public institutions. These societal decisions are, therefore, reflected in the policies and programmes of the Government for educational development. At times, situations do arise in which the choices made by individuals and/or institutions come into direct conflict with each other and, therefore, indicate divergent trends in human activities. These trends may satisfy the wants of the individuals and institutions concerned but the overall expected gains for the society may be somewhat lower. In such a situation, it becomes imperative to rectify the diverse and heterogeneous nature of choices of investments by way of a strong societal intervention so that the overall social gains of investments in education are maximised without unduly affecting the individual and/or institutional options for purchasing education. In this context, collective choice refers to societal investment decisions which are aimed at optimising the social rate of returns derived from investments in education. Such an objective of optimisation is realised by way of aggregating individual as well as institutional preferences, and reconciling the two different dimensions of individual and societal interests and judgements through a sound method is the process of decision making about investment in education. Activity 2.1 Distinguish between individual and institutional decision making with regard to investment in education. Answer in about 100 words. Notes: a) Space is giving below for writing your answer. b) Compare your answer with the one given at the end of the Unit. 25 Economics of Education 2.4 DEVELOPMENT OF HUMAN RESOURCES The major aim of educational investment is the development of human resources or human capital. Almost every society makes a vigorous effort for human resource development which constitutes the ultimate basis for generating the wealth of nations. Capital and natural resources are the passive factors of production, whereas human beings are the active agents who accumulate capital, exploit natural resources, and build social, economic and political organisations with a view to promoting national development. Obviously, if a country is unable to develop the skills and knowledge of its people and to utilise them effectively in various socio-economic activities, it would be unable to develop anything else. It is the development of the human resources of a nation, not its capital nor even its material resources alone, that ultimately determines the character and pace of economic and social development vitally necessary for enhancing the quality of the life of the people. Let us first distinguish human capital from physical capital. 2.4.1 Human capital vs. physical capital As you have seen in Unit 1, the term ‘investment’ refers to the expenditure on creation of capital assets which enable a country to produce a stream of goods and services (or income) in the future. On the other hand, the assets which generate income in the future are called capital. Traditionally, economic analyses of investments have tended to concentrate on physical capital, namely machinery, equipment or buildings which have productive capacity. Until the early sixties, there was, however, no worthwhile attempt to examine the economic aspect of education and training which is conducive for increasing the productive capacity of the manpower resources which has a direct relationship with that of the physical capital. Today, there is consensus among the economists and the educationists that the effective use of physical capital in itself is dependent upon the quality of human capital. If there is under-investment in human capital, especially in the form of educational and health services, the rate at which additional physical capital can the productively utilised will be limited. The market value of human capital, unlike that of physical capital, cannot be observed, largely owing to the lack of homogeneity in the human force. However, knowledge and skills embedded in human capital depreciate after a certain age. ‘Depreciation’ is defined as the negative change in capital value especially due to wear and tear. In the case of human capital, it depends upon the age of a person while in the case of physical capital it is the chronology of time that causes it. In other words, depreciation of 26 human capital occurs as a result of increased probabilities of death and gradual deterioration of mental and physical capacities with increase in age. However, in Education as Investment certain other cases like white collar jobs (i.e., office jobs), there may be ‘appreciation’ of human capital with age. Further, human capital, like physical capital, also has ‘obsolescence’, i.e., it becomes out of date over a period of time. This is so because the usefulness of the stock of knowledge and skills changes from time to time. Human capital, like physical capital, requires regular efforts to keep up the required level of knowledge and maintenance of physical vigour and mental calibre. For instance, medical care and health services are concerned with the repair and maintenance of human capital. Unlike physical capital, it deteriorates during the periods of idleness and unemployment which impair the skills and knowledge already acquired. Acquisition of knowledge, like possession of physical property, requires adequate investment of physical and financial resources, time and effort. The expenditure on education, health and other welfare programmes help not only in improving the quality of human resource but also in enhancing productivity. Human capital has many peculiarities which distinguish it from physical capital. Some of the important distinguishing features are as follows: i) No two units of human capital are homogeneous. ii) Human capital (the factor) and the individual (the agent) who employs it are not repairable; in the case of physical capital it is always so. iii) Human capital requires a longer gestation period as compared to physical capital. The term gestation period refers to the time gap between the start and the completion of training for a person. In the case of physical capital, it refers to the start of investment in the building or installation of a production unit and the period taken to complete the work of installation so that production can be started. iv) With the lapse of time and on-the-job experience, human capital adds to the built-in potential of human stock. v) Depreciation of human capital is difficult to determine as it rests on many factors including the factor of heredity. vi) Occupational and spatial mobility of human capital is influenced by socio- economic factors, besides purely commercial considerations. vii) Productivity of human capital is the function of the efficiency of the individual as well as the resourcefulness of the firm and the country where he/she is employed. viii) Development of human capital is the pre-condition of the optimal utilisation of improved technological and physical inputs, and their relationship is of a complementary nature. ix) Expenditure on human beings is non-transferable, its consumption and investment components are inseparable, and it changes the economic as well as the non-economic attributes of the individual concerned (Patel, 1969). It is obvious from the foregoing distinguishing features of human capital that it has many social advantages over physical capital. However, there are difficulties in quantifying the social indicators of change and measuring the qualitative aspects of social development in which the role of the human factor is so crucial. Therefore, it is 27 Economics of Education not easy to formulate a model approach whereby human capital could be expected to discharge its assigned role like its counterpart, i.e., physical capital. This constitutes a major weakness in the theory of human capital vis-à-vis the physical capital theory, especially in the context of its role in stimulating economic and social development. 2.4.2 Human capital: dimensions and determinants (i) Dimensions of human capital Human beings invest in themselves to acquire more education and training, and better health conditions which, in essence, form human capital, which has both quantitative and qualitative dimensions. a) By quantitative dimension we mean the number of people performing a particular task, the proportion of people who enter into the labour force or into gainful employment, and the number of hours devoted to completing a particular task. b) On the other hand, the qualitative dimension of human capital involves the acquisition of a variety of skills, extent of knowledge, abilities and other desirable attributes that affect human capabilities of undertaking productive work as well as handling it efficiently with a view to maximising the outputs. (ii) Determinants of human capital Of the various factors that determine the human capital, the following are the most important: a) Education Imparting knowledge of various types and levels like elementary, secondary and higher knowledge – which are, by and large, formally organised – is one of the most significant determinants of human capital. Upgrading of standards by way of ensuring the effectiveness of the teaching and learning process and modernisation of curricula at all stages of education, and maintaining positive links between education and the world of work, have a significant bearing on the quality of human capital. This, however, requires that due emphasis be laid on science, environment and value- oriented education, which are the basic elements of the quality of human capital. b) Health service The nature and the extent of availability of health services have both quantity and quality implications for human capital. Improvement in the standard of health of people has a direct link with population growth. Modernised health services improve life expectancy, reduce infant mortality and the incidence of diseases. All these factors improve the possibility of sustaining physical vigour and longevity of the labour force, and they are positively related to high life long earnings. Moreover, health services enhance the quality of human resources by enabling them to acquire better knowledge and benefits from the new know-how which, in turn, enhances not only the prospects of earnings but also the quality of life enjoyed by them. c) On-the-job training Almost every employer makes necessary arrangements to provide in-service training to employees as it helps the trainees to become acquainted with the efficient methods of production based on new knowledge. For instance, in-service teacher training 28 oriented towards innovative programmes in the thrust areas, such as education of the first generation learners – specially learners from the poor and deprived sections of Education as Investment the community – helps in expediting the process of educational development. Likewise, vocational and environmental education, and group specific non-formal education oriented towards skill formation, etc. contribute to the productivity of human capital. The costs of on-the-job training are recovered or neutralised by improved productivity gains due to the techniques of production newly acquired by the work force. d) Non-formal education Non-formal education, which is normally aimed at school dropouts, who cannot attend full-time schools, also contributes to the formation of human capital. Industrial workers, farm labourers and other self-employed artisans and craft persons are generally the target groups under non-formal education programmes. e) Extension programmes Study programmes are organised by various institutions, firms and organisations. They include extension programmes in agriculture and allied sectors. Such programmes are intended to improve the performance of the labour force, who are already on the job in different sectors of the economy, by way of transmitting new knowledge and skills to them. f) Housing, urban development, water supply and sanitation In fulfilling the pre-requisite condition for sound human capital, housing ranks next only to food and clothing in importance. A minimum standard of housing is obviously essential for a healthy and civilised existence. Moreover, factors like urban development, water supply and sanitation also affect the development of human capital and the quality of the life of people. g) Modernisation of technical education Modernisation of and removal of obsolescence in technical education programmes and timely facilities help in developing infrastructure for manpower training in emerging areas which, in turn, improve the quality of the human capital. h) Migration of workers Migration of individuals and families to other geographical areas help them exploit the new opportunities and equip themselves to adjust to the new environment which, in effect, enhances the ability of human beings to gainfully exploit the economic opportunities available. Activity 2.2 List and describe in about 150 words the dimensions of human capital. Summarise briefly in what way they all put together affect human capital. Notes: a) Space is given below for writing your answer. b) Compare your answer with the one given at the end of the Unit. 29 Economics of Education 2.4.3 Education as human capital Of all natural creatures, it is only human beings who have the ability and capacity to generate, disseminate and preserve knowledge and technical expertise. The acquisition and possession of knowledge by them through the educational processes turns them into human capital, which has a strong and positive correlation with the ability of human beings to use knowledge as effective means to satisfy their varied needs and wants. Let us examine how education itself may be considered human capital that further contributes to improved productivity. i) First, education and training influence the ability of the labour force to perform their jobs in a better way owing to improvement in manual skills and rational methods of handling different types of jobs. ii) Second inculcation of scientific temper and values improves the allocative ability which, in essence, refers to the worker’s ability to choose the most appropriate among the possible alternatives to reach the set objective. Such an ability presupposes judgement, cognitive ability as well as technical know-how. iii) Third the educational process alone can enhance the innovative ability of human beings, which is crucial for raising productivity and increasing the level of earnings. Though it is difficult to establish a relationship between the level of schooling and innovative ability, it is certain that for innovations a great deal of cognitive ability and knowledge is essential, which is acquired mainly through the process of formal and non-formal education. The above-mentioned three points suggest that an educated person embodies better human capital than an uneducated one. Can you, at this stage, think of the attributes of human capital? Some of the distinctive attributes of this capital are given below. i) An individual’s stock of human capital cannot be sold, nor can it be given to someone else. It goes with the individual wherever he or she may go. If an individual were to migrate to another country, the government cannot confiscate that person’s human capital. ii) To take advantage of the human capital, an individual must employ it in person. iii) The duration of the value of an individual’s human capital cannot exceed his or her life span. 30 iv) In acquiring human capital the individual must invest some of his or her time Education as Investment along with other resources. v) It is productive to invest in human capital at a young age, because the value of time is less than it is when the individual grows older. Human capital depreciates over time as does physical capital. Some aspects of human capital become obsolete in a short time because of changing circumstances, while others have a long life even if the circumstances change (Schultz, 1963). Therefore, human capital must be updated and upgraded from time to time. With the advancement of knowledge, an individual must renovate his/her human capital. For example, new technologies have to be studied and new advances in medicine have to be studied by doctors. Obviously, education and training of people affect positively most of these attributes of human capital. This fact leads us to know more about how human capital is formed— education is human capital! 2.4.4 Formation of human capital The term ‘human capital formation’ refers to the level and extent of acquisition of new knowledge, technical know-how, skills and experience by the work force. Such human capital formation is important because the productive capacity of a country depends not only on its endowment of industrial plants, machine tools and natural resources, but also on the level and types of education and training embodied in its labour force. The human capital formation is, therefore, an essential but not a sufficient condition for accelerating the pace of development as skilled labour force, entrepreneurs, managers and administrators are needed for the development of institutions as well as for directing critically the needed manpower into productive channels. For instance, a machine by itself can do nothing, but when handled by a technician it becomes productive, and when handled by a better technician, it becomes more productive. Thus, without the formation of better and still better human capital, it is not possible to promote and sustain a high rate of economic growth. Human capital formation is a time consuming and continuous process. To train a person, for instance, as an engineer, doctor or teacher, requires a period of one and a half to two decades. And this process is influenced by various important factors ranging from the availability of adequate food and health facilities to on-the-job training, through formally organised education at the elementary, secondary and higher levels, study programmes for adults, extension programmes, etc. There are certain factors which slow down the process of human capital formation. Poverty, defined as deprivation of basic material needs for survival, is the major bottleneck which hampers this process. Although all people have a creative spark that is inborn in them, poverty and the consequent poor health, tension, anxiety, worry, etc., can sap that creativity and, thus, impinge upon the learning abilities. Poverty does not permit people to get nutritious food, education, recreation, etc., and therefore, imposes restrictions on the human capital formation. Also added to this limitation are wide-spread illiteracy, low education, status of workers, etc., that dampen the level of the human capital formation. And if the investments in human capital are lop-sided, unscientific notions and social factors like superstition, social taboos, caste system, unchecked population, etc., continue to hamper this process further. Every country, therefore, plans its educational, health and other social 31 Economics of Education services in such a way that they become conducive to expediting the process of human capital formation. 2.4.5 Human capital formation: quantitative indicators Human capital constitutes the most important of all the resources, and with skilful management and scientific planning, it can go a long way in taking a country from a lower to a higher stage of development or from poverty to prosperity. In order to realise the socio-economic objectives, a number of quantitative indicators are evolved which assist in the task of assessing and evaluating the nature and degree of human capital development. These indi