How effective education spending can reduce poverty and boost earnings

The returns to education are high in most countries. An additional year of schooling increases earnings by 10 percent a year. At the same time, education is one of the most powerful instruments for reducing poverty and inequality, as well as for laying the basis for sustained growth.

Many ideas on how to realize those returns have been put forward, but the question is how to finance it. It is estimated that global education expenditure was $4.6 trillion in 2012, rising to $5.4 trillion today. Public expenditure on education is significant; on average, countries spend about 3-5 percent of GDP on education, or 10- 20 percent of public expenditures. Given the returns to education, where should one invest the marginal dollar? Or in other words, given law of diminishing returns, what’s the best value for the money spent?

The case for investing in education

Arguments for public subsidy of education have been made, even if it is not always considered a public good; the returns to schooling are largely private and students can be excluded through, for example, test requirements or limited class space.

But rather than expect all students to invest the optimal amount in their own education, there are other considerations that make public involvement necessary. Investing in education pays dividends. Available data suggests that human capital is the primary factor driving the wealth disparity between high and low-income nations, eclipsing the contributions of both natural resources and physical assets. 

Source: World Bank 2018. Capital figures control for Purchasing Power Parity.
 

Moreover, education is a basic human service, a human right, and optimal investment is often thwarted by market failures, differences in child and parent preferences, borrowing constraints, and youth perceptions. Schooling is also as a mechanism for enhancing social cohesion and nation-building, and produces numerous externalities (productivity spillovers, crime reduction, citizenship).

But merely increasing spending may not necessarily improve outcomes – especially if that spending is misallocated and misaligned, and if it does not target what works. Evidence highlights key areas to improve efficiency:

1. Prioritizing universal foundational learning and transversal skills, such as digital and socio-emotional skills.
2. Focusing on interventions that have the greatest impact on learning—for instance, teaching at the right level and providing teachers with lessons plans and coaching.
3. Using student assessments that provide diagnostic feedback.
4. Implementing reforms to strengthen budget planning, financial management, procurement, and management capacity.

Cost-effective strategies to boost returns

It is essential to focus on cost-effective approaches to maximize the effectiveness of educational spending and enhance learning outcomes. One such approach is targeting instruction by students’ learning levels rather than age or grade.

Recent publications show that incorporating technology to support this tailored instruction for a period of one year can significantly boost learning outcomes,– by about a year’s worth of schooling (or an increase of 0.27 standard deviations). This advancement not only has the potential to raise students’ future earnings by approximately 5.5 percent but also yields considerable long-term benefits, estimated at more than $1,700 in future benefits per beneficiary at a student cost per year of just $27.

Investing in youth skilling programs has also high economic returns. Recent analysis of multiple human capital investment programs indicates that the marginal value of public funds is high for investments targeting individuals between 15 and 25 years old. Since a significant share of unskilled youth is already out of the formal education system and will account for a large share of the workforce in the next decades, investments in youth skills and workforce development will render high economic returns.

Improving education financing

To realize the returns to education — and to reduce poverty and raise economic growth, while reaching the out of school population and raising the quality of education — there is a need to improve how it is financed.

Assessing the effectiveness of education spending necessitates a comprehensive analytical framework. It is essential to acknowledge that a direct link between financial investment and education outcomes is not always present. The degree to which spending influences educational achievement is contingent upon three critical dimensions: the adequacy of funding, the efficiency with which resources are utilized, and the equity of their distribution. Key questions include:  Is the level of provision of educational services adequate? Is the distribution of educational resources efficient? And how equitable is the distribution of educational resources?

We can learn from the case of South Korea for instance, which utilized strategic combination of adequate, efficient, and equitable spending to significantly enhance its education outcomes. Korea transformed its education system and, subsequently, its economy, through dedication to learning and strong policy measures. Korea’s past education policies provide a benchmark to low- and middle-income countries facing similar development challenges. Korea started with the fundamentals, utilizing a low-cost approach (large classes and double shifts in first few decades) to gradually implement six-year free and compulsory education. To achieve universal education, South Korea took a sequential approach; first ensured near universal literacy and access to quality schooling at the primary level, before expanding reforms to include secondary and tertiary education. Moreover, Korea used a mix of traditional and innovative sources of financing, and channel important household investments in education, to achieve these results.

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