THE WORLD BANK Public Disclosure Authorized RESEARCHI !OBSERVER ! Public Disclosure Authorized EFFEfsvWOF SERVICEQUALrrY AND COSTON EDUCATONAND ) Introduction Lyn Squire HouseholdResponses to PublicHealth Services: Cost and Quality Tradeoffs HaroldAlderman and Victor Lavy Public Disclosure Authorized The Impactof Health and Nutrition on Education Jere R. Behrman MacroeconomicAdjustment and Povertyin Africa: An EmergingPicture Lionel Demeryand Lyn Squire MacroeconomicAdjustment to Capital Inflows: Les%.fiimfrom RecentLatin Americanand East AsianExperience Vittorio Corbo and Leonardo Herndndez Savingand Investment:Paradigms, Puzzles, Policies r"4t'PfSchmidt-Hebbel, Luis Servdn,and Andres Solimano Valuingand Accountingfor Loan Guarantees Public Disclosure Authorized Asboka Mody and Dilip K. Patro "lEer- Dangersof Decentralization"According to Prud'homme: SomeFurther Aspects David 0. Sewell THE WORLD BANK RESEARCH OBSERVER EDITOR MosheSyrq uin COFDITORS Shatiravatiall Dcvarajan,Shiihid Yisiif CONSULI ING ED)ITORFlinor Berg EDIT()RIAI BOARD ( laire t[ilksila (IinreritationalNlonetars Fuiid); W'illell Rirer CamnbridgeUniversirst; Aniguis Dneaton(I'rincetoi lin iversityvHoward Pack i isveers itvf Petinslaniai!;Is Gregi,re K. Ingrain (GeorgePsacha ropoUloss joarnneSalop. Williami Tvler tWorldBank . Ther Wiirld BmkiRe5earch (Obseti',e is inltCnded tor tyiteite w ht Iass primtessional itlterest itl develtopinent. I )bsei'er articlesare writtenito be accessibilto iio[iispecialistreiders: contrirtbn rs txamlinekev iSLesiTl developtillelit etonoitscs, sLirventhe literature aid thelatest World Bainkresearch, .ind dcehateis5Ues (If develOpiCTnttpoiLV. Articles ire revieswed b) an editorialboard drawtt frontacroiss the Barikand the initernatitialcttt untittits'ot ecoitomists.Incottsistcncv with Batik policv is ttorgroLitids tor rejectttiT. 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P'ntdiltclt )ir7etiur'.s AIui/IN.IIF,mis the tlidex toi Iitrinittimtil Sitrtisti-, Ill Plji , Aff.airs Ihiorin.tltit lervicc, tIc.. tshc Sicitl sciences (iraiti hidexn indrh. itic hs tlFs citit IutieI iteTilttire hides atidd IttI\1t )(.. 1U tViIilhlC ill Illictitori-i trhrooigh lUlriersirt Microfihilts Iisc. 'i(h North Zeeb Riid,d. Aii)s Atholsit. MliJlttiti 48 1l6, L S.A. THE WORLD BANK RESEARCH OBSERVER VOI-UME I I NUMBER I FEBRUARY 1996 EFFECTS OF SERVICE QUALITY- AND COST ON EDUCATION AND HEALTH Introduction Lyn Squire 1 Household Responses to Public Health Services: Cost and Quality Tradeoffs Harold Alderman and Victor Lavy 3 The Impact of Health and Nutrition on Education Jere R. Behrman 23 Macroeconomic Adjustment and Poverty in Africa: An Emerging Picture Lionel Demery and Lyn Squire 39 Macroeconomic Adjustment to Capital Inflows: Lessons From Recent Latin American and East Asian Experience Vittorio Corbo and Leonardo Herndndez 61 Saving and Investment: Paradigms, Puzzles, Policies Klaus Schmidt-Hebbel, Luis Serven, and Andres Solimano 87 Valuing and Accounting for Loan Guarantees Ashoka Mody and Dilip K. Patro 119 "The Dangers of Decentralization" According to Prud'homme: Some Further Aspects David 0. Sewell 143 EFFECTS OF SERVICE QUALITY AND COST ON EDUCATION AND HEALTH INTRODUCTION Lyn Squire R ecent years have seen a rapid increase in social sector investment by governments throughout the world. This trend is also apparent in the World Bank where lending for the social sectors increased from about 5 percent between 1981-83 to about 16 percent in 1995. Social sector lending for the poorest countries has increased even more rapidly, reaching 26 percent of all lending between 1991-94. Is this the right level of investment? The answer depends on how the money is spent. Research shows that the results in such critical areas as student perfor- mance, dropout rates, and improvements in health care are highly sensitive to a number of factors. These include the quality of the service (and the response to that quality), the response of private sector suppliers to government programs, and the incentive structure governing service delivery in the public sector. If these factors are really critical to the effectiveness of social sector pro- grams, and if they have not been adequately accounted for in project design, then neither policymakers nor the intended beneficiaries will realize the full ben- efits of these investments. Two articles in this volume, by Alderman and Lavy and by Behrman, and two in the previous issue, Hanushek's and Kremer's, are drawn from papers presented earlier in a symposium aimed at understanding what factors affect the quality of investments in health and education and what accounts for their impact. A paper by Ainsworth summarizing four studies on fertility choices in Africa was also presented at the symposium. Two of these studies-Ainsworth, Beegle, and Nyamete, and Feyisetan and Ainsworth-ap- pear in the January 1996 issue of The World Bank Economic Review. Two themes run through these papers. First, readily available measures of success are very often misleading. Behrman demonstrates that factors that we do not-and often cannot-mea- sure are likely to be important in explaining outcomes; in addition, he shows that it is difficult to assume the direction of error in measuring program performance without careful analysis. Similarly, Alderman and Lavy remind The World Bank Research Observer, vol. 11, ic). I (February 1996), pp. 1-2 C) 1996 The International Bank for Reconstruction and Development/ THE WORLD BANK1 us that it is possible to misrepresent the impact of user fees at health facili- ties if what appears to be a costly program is in fact justified by the quality of the service provided. Moreover, studies that fail to take into account the criteria for the location of a program may not consider that factors other than the program could influence the outcome, and thus the studies may not be valid. Second, despite the difficulties in separating out the effects of the project from preexisting community and household characteristics, the studies imply that we know more about how households respond to improvements in quality than about what investments in health and education bring about desired out- comes. Thus Hanushek argues that a strategy calling for investments in educa- tion based on designating basic inputs is misplaced. What is needed instead is to change incentives and allow schools or local governments to determine the most effective means to achieve a desired outcome. While Kremer disputes some of Hanushek's analysis and places more emphasis on increasing the number of schools and the amount of inputs, he shares the view that decentralization will guide the choice of expenditures on schooling more effectively than general and centralized allocation decisions. Alderman and Lavy