HUMAN CAPITAL THEORY AND THE FINANCING OF HIGHER EDUCATION IN OMAN Amur Sultan AI-hajry A thesis submitted for the degree of Doctor of Philosophy in the Department of Economics, the University of Sheffield. January 2002 Abstract The current and future level of demand for higher education in Oman far outweighs the ability of the economy to satisfy it under current financing arrangements. Oman's economy is based on oil and thus there is no guarantee that it will be able to sustain the current level of resourcing for higher education in the future. About half of the population is under the age of 15 and therefore future demand is likely to grow rapidly and the option of buying higher education abroad becomes less attractive in these circumstances. The economy needs an educated workforce in order to grow and to maintain its position in the modem world, not least if it is to cease to rely on expatriate professionals and to expand education in general. Reliance on foreign governments for higher education leaves Oman vulnerable to foreign education policies and to the vagaries of the foreign exchange markets. The Omani Government has responded to these problems by founding the first university in Oman and by encouraging private higher education. However, thought also needs to be given to the nature of funding arrangements. The main aim of this research is to review alternative funding mechanisms for the future development of higher education by evaluating and analyzing social and private rates of return to investment. The study is based on the human capital concept which views education as a form of economic investment. The main motive assumed for public and private investments is the expectation of higher returns (benefits). Cost-benefit and rates of return analysis are used in order to achieve an efficient utilization of resources. To achieve. maximum benefits it is also necessary for the system to be equitable, i. e. to maximize access to higher education irrespective income of and social class. The results indicate that the public cost of higher education in Oman is much higher than the cost to the individual. This is explained by the fact that most of the direct cost in public higher education (the Sultan Qaboos University) is fully subsidized by the Government, and that individual students do not incur any direct cost. Consequently, the estimates of public rates of return to investment are low in comparison to the private rates. Accordingly, the allocation of additional public resources for higher education is not justified economically, and a form of private (contribution) towards the cost of education is required to reduce public cost and improve social rates of return. A practical mechanism to enable individual students to contribute towards the cost of their education without affecting their access to higher education has to be established. After analyzing and evaluating several policy instruments, it was found that the most appropriate mechanism of funding would be to recover the cost of education by deducting from the individual's income after graduation and during the first twenty years of employment. This might be seen as a first step towards a graduate income tax method of funding. It is emphasized that the funding of higher education is a complex business which is not susceptible to solution by using a single policy instrument. The present analysis should be seen as a first step towards achieving a different approach to the funding of higher education in Oman. Acknowledgements I would like to thank many people and institutions in my beloved Country, the Sultanate of Oman, and here at the University of Sheffield for their generous help to me and valuable contributions to my research. They are many and I am forever grateful to all of them. First, I am very grateful to my supervisor, Professor RK Wilkinson, Professor of Economics at Sheffield University for his excellent supervision. His wisdom, knowledge, and kindness were an inspiration to me. He started advising and guiding me before I formally start this research and he was with me all the way. Without his constructive comments and excellent support, and continuous encouragement and motivations I would not be able to complete this work. He gave me a lot of his time and contributed so much to my knowledge. I thank him very much and / will always have every respect for him. I also appreciate all the help and support I received from staff and colleagues at the Department of Economics at Sheffield"University, especially those who advised me and commented on my work which I presented three times in the Department. Personal thanks are dedicated to my friend Dr lshaq Yussof from Malaysia who came to do his PhD at the same time as me and in a similar subject. The discussions I had with him on our work and his useful comments and advices were of great support to me. My Special thanks are dedicated to His Majesty Sultan Qaboos bin Said the Sultan of Oman who gave me the chance to go to schools and universities free of charge. Without him I would not be able to read and write. I also thank His Excellency Dr Yahya bin Mahfood Al-Manthary the Minister of Higher Education in Oman and His Excellency Shaik Salim bin Mustahail Al-Mashani the Advisor in the Diwan of the Royal Court for their great help and support to me with all means. My appreciation goes to all my colleagues and friends at work at the Ministry of Higher Education in Oman for their valuable support and encouragement to me to complete this research. I also thank the staff at the Sultan Qaboos University and the Ministry of Civil Service who provided me with the data I needed in my empirical study. My deepest gratefulness is to my dear Mother Raya bint Hilal AI-hajry and my dear father Sultan bin Amur Al-hajry who worked hard and struggled and suffered a lot to give me everything I want and to show me the best examples in this life. 1 also thank my brother Salim and my sisters Najeyah, Yasah, and Salmah for their family support and motivations to me. I dedicate this work to my beloved wife Samirah biet Salim Al-hairy and my adored children Abdullah, Mohammad, and Ali. They motivated and inspired me to do this work. They suffered a lot while I was away for moths at Sheffield University and they struggled by themselves to face all the daily problems. I love them, / thank them, / respect them a lot, and I dedicate this study to them. Abstract ....................................................................................................... uº Acknowledgement ..................................................................................... iv Table of contentes ..................................................................................... list tables x of ................................................................................................ list figures xii of ............................................................................................. Abr xi i viations............................................................................................... Page number Table of contents ............................................... CHAPTER ONE THE RESEARCH BACKGROUND 1.1. Introduction 1 ........................................................................................... The for this its 4 1.2. need research and objectives ...................................... 1.3. Theoretical framework 8 ......................................................................... 1.4. The 11 empirical analysis ....................................................................... The limitations this 12 1.5. contributions and of research.............................. 1.6. Conclusions 14 ....................................................................................... CHAPTER TWO THE SOCIO-ECONOMIC DEVELOPMENT OF OMAN 2.1. Introduction 16 ........................................................................................ 2.2. Socio- indicators 17 economic ................................................................ training, 22 2.3. Population, education and and employment ........................ 2.3.1. Population 22 structure ..................................................................... 2.3.2 Education training 27 and .................................................................. 2.3.3. Employment the labour 29 and market ............................................. 2.4. Public finance 36 .................................................................................... Oil 40 2.5. production and export .................................................................. 2.6. Conclusions 43 ....................................................................................... iv CHAPTER THREE THE DEVELOPMENT OF HIGHER EDUCATION IN OMAN 3.1. Introduction 46 ........................................................................................ 3.2. The development higher in Oman 47 of education ................................. 3.2.1. The system of higher 47 current education ...................................... 3.3. The Institutional 51 structure .................................................................. 3.3.1. The Higher Education Council 52 ..................................................... 3.3.2. The second and third levels 55 ......................................................... 3.3.2.1. Scholarships 67 ............................................................................. 3.3.2.2. The Sultan Qaboos University 68 .................................................