Education, Productivity and Inequality: the East African Natural Experiment
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DOCUMENT RESUME ED 330 627 SO 030 340 AUTHOR Knight, John B.; Sabot, Richard H. TITLE Education, Productivity and Inequality: The East African Natural Experiment. INSTITUTION World Bank, Washington, D. C. REPORT NO ISBN-0-19-520804-8 PUB DATE 90 NOTE 449p. AVAILABLE FROM World Bank, 1818 H St., N.W., Washington, DC 20433 ($39.95). PUB TYPE Books (010) EDRS PRICE MF01 Plus Postage. PC Not Available from EDRS. DESCRIPTORS *Developing Nations; *Economic Development; Economic Research; Educational Development; *Educational Economics; Educational Opportunities; *Educational Policy; Foreign Countries; International Education; Secondary Education; Social Science Research IDENTIFIERS Africa (East); *Kenya; *Tanzania ABSTRACT The relationship between resources devoted to education and the economy of developing nations is explored. The research seeks to understand if and how investment in education translates into increased economic growth and labor productivity. Additionally, the function of education in reducing various dimensions of economic inequality is examined. The two East African nations that are the study's focus, Kenya and Tanzania, have similar levels of income, but they differ markedly in their public policy toward the provision of secondary education and thus in the educational attainment of the labor force. The research findings provide strong backing for the human capital paradigm: educational expansion is shown to raise labor productivity. The results also show that making education less scarce diminishes inequality in access to education and in income. Numerous figures and tables of data appear throughout this volume; a list or 170 references is included. (DB) *********************************************************************** Reproductions supplied by EDRS are the best that can be made from the original document. *********************************************************************** ;YZ U S DEPARTMENT OF EDUCATION Offff r. of F do( alio 'Al PP (e,d( h and trnprov,tment FOUCAIIONAL PE sounCL ,,, INIORMATION Cr WIER IFRIC) IS..4T tw,dot 1, (nen!ha.; tteen rept000ced at 'I MPlf from Ihp porton or organ Zdtr011 ortcprwtrnq ,1 Minor I hancrt hAsp been madet to improve reproduction duality Purril'. OfVW'sor01)101,,Osslated i(i this docu rnint do n,., npf v .,drtly wormer)! official Of tO ooytion ot()oh( y -14 "PERMISSION 10 REPRODUCE THIS MA1 ERIAL HAS BEEN GRANT ED BY BEFT, COPY AVAILABLE TO T HE E DUCATIONAL Hi SOURCLS INFORMATION CENTER (ERIC) Education, Productivity, and Inequality The East African NaturalExperiment John B. Knight Richard H. Sabot Published for the World Bank Oxford University Press 3 1111M11.,-1 Oxford University Press OXFORD NEW YORK TORONTO DELHI BOM3AY CALCUTTA MADRAS KARACHI PETALING JAYA SINGAPORE HONG KONG TOKYO NAIROBI DAR ES SALAAM CAPE TOWN MELBOURNE AUCKLAND and associated companies in BERLIN IBADAN 0 1990 The International Bank for keconstruction and Development / THE WORLD BANK 1818 H Street, N.W., Washington, D.C.20433, U.S.A. All rights reserved. No part of :hispublication may be reproduced,stored in a retrieval system, or transmitted in anyform or by any means. ele;tronic, mechanical, photocopying,recording, or otherwise, withoutthe prior permission of Oxford University Press. Manufactured in the United States of America First printiag ji,ly 1990 The fiudings, interpretations, and ;.00clusions expressedin this study arc the results of country economicanalysis or reseal-kb done by the World Bank, but they are entirdvthose of the authors and should not be attrlbuted in any manner to thc World Bank, to its affiiiated organizations, or co members of its Board of Executive Directors or th,: countries they represent. The Worki Bank does not guaranteethe accuracy of tiy: data included inthis publication and accepts no responsibility whatsoever for any consequences of their use. LibraryofCongressCataloging-in-Putlicationanti Knight, John B. Educanon, productivity, and Otequality : the Ft African natural experiment / John B. Knight, Richard IA, Sabot. p. cm. Includes bibliographical references. ISBN0-19-520804-8 : $39.95 I. Edueation--Economic aspectsKenya.2. Educatin,-Iconomic aspectsTanzania.3. Educaticn and stateKenya.4. Education and stawTanzania.I. Sabot, R. H.II. Title. L'.-:67.K4K.58 1990 338.4'737'09,"78dc20 90-30198 CIP 4 Foreword IN Patterns of Development, 1950-1970 Moises Syrquin and I wrote, "In most cleveloping countries the volume of resources devoted to educa- tion in the early 1950s was much below the optimum on almost any test. The period 1950-70 was one in which countries generally tried to catch up to some educational norm as rapidly as possible. Although the extent of this upward shift can be measured over the twenty-year period, there is no way to determine whether this adjustment process has run its course." Since then educational expansion has continued, with the encourage- ment and assistance of the World Bank. Today developing countries spend more than $50,000 million a year on education. The normative question is now more pressing. Competition for scarce resources has in- creased, as has the academic controversy about the benefits from invest- ment in education. Conventional cost-benefit assessments of these ex- penditures are open to ambiguous interpretation, are unable to refute theoretical challenges to the human capital paradigm, and ignore the dis- tributional consequences of educational expansion. In this book John Knight and Richard Sabot successfully employ an innovative approach to these issues. International comparisons such as those in Patterns of Development have established a relationship between educational enrollment ratios and per capita income. Knight and Sabot focus on two countries in East Africa with similar levels of income to isolate the consequences of different education policy regimes. Their de- sign of rich and comparable macroeconomic data sets permits a more detailed quantitative analysis than is normally seen in international com- parisons and a deeper examination of the consequences of educational expansion than can be obtained from conventional cost-benefit methods. Knight and Sabot set out the competing hypotheses clearly, along with the means of testing them. Econometric modeling is thus used in a cre- ative and convincing way. The authors deal with virtually every problem in human capital analysis and, moreover, are willing to consider insti- tutional factors that are often ignored. They steer a fine course-- acknowledging the uncertainties in the data and the constraints imposed by the modeling, yet coming to forceful conclusions. A comprehensive overview helps make the book accessible to the generalist as well as to the specialist. Although the authors are properly cautious in assessing their results, their conclusions support the hopes of those who have placed their faith in educational investment. The findings provide strong backing for the Vi FOREWORD human capital paradigm: educational expansion is shown to raise labor productivity. The results also show that making education less scarce di- minishes inequality in access to education and in income. At the same time, the authors challenge some of the conventional wisdom regarding educational policyfor example, with respect to the relative returns to investment in primary and secondary education. This pioneering book points the way for future work on the contribu- tion of human capital to economic development and, more generally, on the "natural experiment" approach to economic comparisons. Hollis Chenery Harvard University Contents Preface Part I. Introduction and Overview 1 1. The Issues, the Lit African Natural Experiment, and the Surveys3 The Issues Research Design: The Natural Experiment The Surveys Note 2. Overview: Findings and Implications for Policy 15. Educational Expansion and Labor Productivity Educational Expansion, Government Policy, and the Structure and Dispersion of Pay Educational Expansion and Equality of Opportunity Cost-Benefit Analysis of Secondary Education: Methodological and Policy Issues Policy Implications Part II. Educational Expaasion and Labor Productivity53 3. Earnings, Schooling, Ability, and Cognitive Skill55 The Model The Appropriateness of the Data The Expanded Human Capital Earnings Function The Educational Production and Attainment Functions and Indirect Effects on Earnings Conclusions Notes 4. Why the Returns to Experience Increase with Education80 Earnings-Experience Profiles Competing Hypotheses Differences in Profiles and Social Returns to Schooling The Test of Competing Hypotheses Conclusions Notes vii 11 7 Ulu CONTENTS 5. Education Policy and Labor Productivity: An Output Accounting Exercise98 The Setting The Recursive Model of Cognitive Acquisition and Earnings Determination, Revisited Education Policy and Differences in Cognitive Achievement The Simulation Methodology Cross-Country Policy Simulations Conclusions Notes Part Ill. Educational Expansion, Government Policy, and the Structure and Dispersion of Pay113 6. Education, Occupation, and the Operation of the Labor Market115 Why Occupation Could Matter Occupational Earnings Functions Occupational Attainment Functions Conclusions Notes 7. Educational Expansion, Government Pay Policy, and Wage Compression141 The Probkm and Two Hypotheses Government Pay Policy in Kenya and Tanzania The Wage Distortion Hypothesis: Empirical Specification The Structure of Wages in the Market and Nonmarket Sectors: Testing the Hypothesis Conclusions Notes 8. Educational Expansion, Relative Demand,