© COPYRIGHT by Alejandra M. Obando-Hernández 2009 ALL RIGHTS RESERVED I dedicate this dissertation to my sons Eduardo, Sergio, Javier, and Rolando INVESTMENT IN EDUCATION IN COSTA RICA: A LADDER OUT OF POVERTY? By Alejandra M. Obando-Hernández ABSTRACT The purpose of this dissertation is to answer the question of what has prevented many Costa Ricans parents from investing in their children’s education to a level that will allow them to rise out of poverty. Research conducted here relies mainly on the 2005 Costa Rican official household survey. The first empirical analysis conducted, based on Lars Ljungqvist’s model of convexity in the monetary private returns to education when credit markets for education are missing, demonstrates that the convexity of returns plays a key role in unskilled Costa Rican parents’ low expectations regarding future benefits of their children’s education and therefore in their decision to not invest in their education. Returns to education are convex and increase sharply only after secondary education has been completed, for all sectors, for all regions and for men and women. The second empirical analysis, of the relationship between demand for schooling and returns to education, shows that the convexity of returns influences the demand for schooling differently depending on whether or not parents are liquidity constrained, which in turn depends on whether they are either both unskilled or both skilled, respectively. Unskilled parents are not responsive to increases in the returns to skilled labor and when the returns to unskilled labor increase, i.e. the type of labor these parents themselves provide, they are less likely, compared to skilled parents, to increase the demand for schooling. Hence, these unskilled labor parents trade off their children’s investment in education, their future wealth, for the current consumption needs of their families. On the other hand, skilled parents, in contrast with those who are not, settle for a different and more successful livelihood strategy, responding to the returns to education, either ii skilled or unskilled, by investing in the education of their children. Two types of citizens are being clearly created: those educated and those uneducated, a process that, if it continues like this, will be difficult to reverse. Policy recommendations include the establishment of an educational subsidy focused on secondary education, and increase the employment opportunities and earnings of the unskilled workers. iii ACKNOWLEDGEMENTS I would like to convey to my committee, Dr. Paul Winters, Dr. Laura Langbein, and Dr. María Floro, my appreciation for their guidance, the time they spent reviewing the drafts and their positive encouragement during this long process. I am thankful to Dr. Leonardo Garnier, Minister of Education of Costa Rica, for his generosity in granting me access to all the information I needed and to the personnel of his ministry, and for allowing me to use the draft of his forthcoming book. I am also thankful to those government officers and Costa Rican researchers, especially Professor Juan Diego Trejos, who gave me of their time and lent me their work. My thanks go to the Instituto Nacional de Estadística y Censos for allowing me to use the Costa Rican Household Survey 2005, indispensable tool of my research. At a more personal level, I am grateful to my sisters Lorna, Lorena and Ileana Obando and several dear friends who encouraged me in different ways just at the right moments: Drs. Mario and Diane Montano, Dr. Phil Brenner, Dr. Nicholas Onuf, Mrs. Genie Dutton, Dr. Dora Tobar and Ms. Janice Weber. This work could not have been done without the unconditional support and love of my parents, my husband and my children. My loving gratitude goes out to them. To my parents Arnoldo and Vera: it feels so good to know that they are always there for me no matter how far away, tired or occupied they are; to my children: it is such a blessing to know that they are my best fans, always patient and enthusiastic about my crazy ideas, such as embarking on this Ph. D., and to my husband, Dr. Daniel Masís: the most inquisitive, insightful and challenging interlocutor, the most faithful friend and the best editor. I love you guys! Writing a dissertation is in the end a lonely journey. It was not for me, however, because God was holding me all the time. iv TABLE OF CONTENTS ABSTRACT……………………………………………………………………..... ii ACKNOWLEDGEMENTS……………………………………………………..... iv LIST OF TABLES………………………………………………………………... ix LIST OF ILLUSTRATIONS……………………………………….…………….. xii LIST OF APPENDICES………………………………………………………….. xiv Chapter 1. INTRODUCTION………………………………………………………….. 1 1.1 Introduction…………………………………………………………… 1 1.2 The problem and the research question……………………...…....….. 2 1.3 Relevance of the study within the field’s literature………..…...…….. 7 1.3.1 Growth, education, and poverty……………………....………. 8 1.3.2 Household decision making and education investment …........ 17 1.3.3 Education and poverty traps…………………………...……... 29 1.4 Research components……………………………………………….... 35 1.5 Recent scholarly research on Costa Rica related to the research’s topic…..……………………………………………………………..... 37 1.6 Proposed contributions………………….……………….....………… 39 1.7 Research methodology…………………………………….………….. 42 2. EDUCATION POLICY AND THE EDUCATION SYSTEM…………….. 46 2.1 Introduction…………………………………………………….…….. 46 2.2 Costa Rica’s development process and its education policy….......….. 46 2.2.1 The emergence of education as a modernizing, democratic, and social mobility mechanism………………………….……. 46 v 2.2.2 Education: the anchor towards a knowledge based society....... 48 2.2.3 The present administration’s priorities in education……...…... 55 2.3 Organization of the Costa Rican education system………….…..…… 57 2.4 Financial commitment to education……………………….……..…… 62 2.4.1 Financial allocations to education and their distribution……... 62 2.4.2 School inputs: teachers and infrastructure………………..…... 71 2.4.3 The core programs to meet the challenges………….…..…….. 80 Redistribution programs………….…………………………... 80 Retention/inclusion programs……….……..…………………. 86 Technology-anchored and knowledge-based programs............ 91 The informatics program………………………………….. 91 The foreign language program………………………...…... 92 Labor market-pertinent education programs……...…….…….. 94 2.5 Conclusion……………………………………………………………. 96 3. ACCESS TO KNOWLEDGE: THE CURRENT CHALLENGE………….. 98 3.1 Introduction…………………………………………………………… 98 3.2 Coverage and efficiency of the educational system……………..……. 98 3.2.1 Education coverage……………………………….…………... 99 3.2.2 Desertion……………………………………………………… 103 3.3 Inequalities of access……………………………..…………………... 111 The educational gap…………………………………………... 111 3.4 Poverty: the trap for the uneducated………………………………….. 121 3.5 Conclusion……………………………………………………………. 130 vi 4. THE INCREASING RETURNS TO EDUCATION……………………….. 133 4.1 Introduction…………………………………………………………… 133 . 4.2 Literature review……………………………………………………… 136 4.3 Conceptual framework……………………………………………….. 144 4.4 Empirical analysis…………………………………………………….. 147 4.4.1 Data description………………………………………………. 147 4.4.2 The sample characteristics……………………………………. 150 4.4.3 Empirical model………………………………………………. 153 4.4.4 Empirical issues………………………………………………. 160 4.4.5 Regression outputs……………………………………………. 172 Returns for the country: the total sample………………… 172 Returns to education for the stratified samples: rural, urban female and male…………………………………………… 174 Returns to education for the regions………………………. 179 Returns to education: workers who reside in the same county they were born in………………………………….. 187 4.5 Conclusion……………………………………………………………. 189 5. THE DEMAND FOR EDUCATION: RETURNS TO EDUCATION 191 MATTER…………………………………………………………………… 5.1 Introduction…………………………………………………………… 191 5.2 Literature review……………………………………………………… 193 5.3 Conceptual framework……………………………………………….. 197 5.4 Empirical approach…………………………………………………… 203 5.4.1 Data description………………………………………………. 203 5.4.2 Sample characteristics………………………………………… 204 vii 5.4.3 Estimation strategy…………………………………………… 209 5.4.4 Empirical issues………………………………………………. 215 5.5 Empirical results……………………………………………………… 220 5.5.1 Calculation of the returns to education……………………….. 220 5.5.2 Construction of the wealth index…………………………… 227 5.5.3 Regression results…………………………………………… 231 5.6 Conclusion……………………………………………………………. 237 6. CONCLUSION: PURPOSE, CONTRIBUTIONS, CONCLUSION AND POLICY RECOMMENDATIONS………………………………………… 240 6.1 Purpose and contributions…………………………………………….. 240 6.2 Conclusion……………………………………………………………. 243 6.3 Policy recommendations……………………………………………… 247 APPENDICES…………………………………………………………………… 253 . Appendix to Chapter 2……………………………………………………… 253 Appendix to Chapter 3……………………………………………………… 258 Appendix to Chapter 4……………………………………………………… 261 Appendix to Chapter 5……………………………………………………… 272 REFERENCES………………………………………………………………….. 290 Bibliography………………………………………………………………... 290 Websites…………………………………………………………………….. 308 Interviews…………………………………………………………………… 309 viii LIST OF TABLES Table 2.1 Costa Rica: Enrollment, number of schools, number of teachers and pupil-teacher ratio by level of education, 1971-2004………………. 73 Table 3.1 Costa Rica: Gross and net enrollment ratio in secondary education. Formal and non-formal modalities by cycle……………………….. 102 Table 3.2 Costa Rica: Retention and exclusion by year and level of education (2000, 2002)………………………………………………………… 104 Table 3.3 Costa Rica: MEP’s educational sectors with the highest intra-annual desertion, 2005……………………………………………... 107 Table 3.4 Costa Rica: Efficiency