By Atanu Dey

Education is one of India’s biggest challenges. It is not about building the best schools – though that will help. It is about creating a platform to educate 200 million of our young. If India is to to benefit from the demographic dividend, then we need to get our education system in order – quickly. My colleague, Atanu Dey, looks at how we can get education right. -- Rajesh

The fractal nature of the generalization that education matters holds across time and space. Irrespective of the granularity of analysis, education aids development through the intermediate step of economic growth. At the finest level of detail, an educated individual anywhere in the world is more productive than an uneducated one. At the broadest level of analysis, the modern world is more productive arguably because it is more educated compared to the world that existed before. A cross-sectional study of the world today, or at any earlier time, reveals that the general level of education of the population is a good predictor of the success of the population.

The observed positive correlation between the macroeconomic variables of the level of general education and economic well-being has microeconomic foundations. There are two avenues, private and public. An educated person is simply more likely to make better-informed private choices regarding his or her production and consumption. Aggregated over the lifetime of the individual, that translates into greater individual production and therefore individual income. Individual incomes aggregated over the entire population determine the macroeconomic health of the economy. At the public level, an individual indirectly contributes to greater economic development by making informed choice among various public policies. An educated population is more likely to endorse enlightened public policy.

India’s present economic standing – both in its limited successes and its myriad failures – is to a large extent a reflection of its education system. It takes justifiable pride in the successes of its handful of elite institutions of higher education in turning out world-class super-achievers. But that exceptional success of the few is overshadowed by the dismal failure of the educational system as a whole. At the primary level, the enrollment is around 90 percent but studies have revealed that even after five years of schooling, around 50 percent of the students fail basic reading tests and are unable to perform single-digit subtractions. Ninety percent of Indian children drop out by the time they reach high school.

Of the ten percent who do get post-secondary education in India’s around 300 universities (comprising of 17,000 colleges), their results are disheartening. India produces around two and a half million college graduates, including 400 thousand engineers annually. But the quality is so poor that only a quarter of them are actually employable. Stark statistics reveal the oversupply of raw graduates and the undersupply of employable graduates. Infosys, an IT giant, last year sorted through 1.3 million applicants only to find around two percent were qualified for jobs, according to a recent report in The New Yorker.

That India is not an economic success today is significantly attributable to its failed education system. More importantly, its prospects of even moderate economic success in the future are bleak unless the educational system is urgently fixed. The fatal flaw in the system most likely arises from its near-complete government monopoly control. Practically all aspects of the system suffer from political and bureaucratic meddling. Who can run schools and colleges, what is to be taught, who is going to teach, how much they are to be paid, who is going to learn, how much fees must they be charged, what will be tested and how—every minute detail of the enterprise is rigidly defined and mindlessly enforced. Consequently the system has degenerated to become ineffective, inefficient, and irrelevant.

In this series of brief articles, I present a personal perspective on what is wrong with the Indian educational system, and why. I believe that if we have to fix the system, we have to necessarily first understand the system and what ails it. To the extent that the problem is understood, it is tractable. I hope to present the broad outlines of a solution as well.

Write to atanudey at gmail.com if you have questions or comments.

Tomorrow: China Comparison

By Atanu Dey

Education matters immensely when it comes to the health of an economy. There is a positive correlation between years of schooling and the GDP per capita. Let’s look at the numbers that are indicative of the generalization. In 2001, “school-life expectancy” and the ppp GDP per capita for Ethiopia were (4.3 years, and $675); for Indonesia (10, and $2,844), for China (12.4, and $4,065), for South Korea (14.6, and $17,048), Japan (14.3, and $25,559), and the US (15.2, and $32,764).

Not just that, there is a correlation between growth and educational attainment. Consider one measure of the educational level of an economy, the literacy rate of adults (defined as those above the age of 15 years). In 1970, adult literacy rate in China was 54 percent, compared to India’s 34 percent. The ppp GDP per capita income of India in 1970 was $1,034, nearly double that of China’s $571. Yet, twenty years later, China surpassed India’s annual per capita income: India $1,587, China $1,617. The adult literacy rates in 1990: China 78 percent, India 49 percent. By 2001, China had 86 percent adult literacy rate and a ppp GDP per capita of $4,065, and India languished at 58 percent and $2,319.

There are many reasons for modern China’s meteoritic rise from its humble beginnings. But one of the most important factors must be their youth literacy rate, which is defined for the population between 15 and 24 years of age. In 1970, China’s youth literacy rate was a whopping 83 percent, compared to India’s 46 percent. It is more than a little depressing to note that more than half of India’s youth were illiterate, leave alone educated, as late as 1970. By 2000, India was just at 73 percent, not even at the level at which China was 30 years before. Now China has achieved nearly universal youth literacy. The lesson is unavoidable: compared to China, India’s prospects are dim if education has anything to do with economic prosperity and potential.

It is important to note the sequence of development. Literacy preceded economic growth for China, as it does for every successful development story. Note that China was more literate than India in 1970 even though it was poorer than India. Thus poverty does not automatically condemn a population to illiteracy. It is a matter of choice: like individuals, countries can also choose to invest in education.

I deliberately chose China as a counterpoint to India in this narrative. I can tell the same story of how Singapore transformed itself from a mosquito infested swamp to a developed economy within a single generation. But then the usual objection is that Singapore is a tiny city-state and a behemoth like India cannot transform itself. It is a just-so argument, supposed to be compelling enough that no reason has to be advanced why the Singapore’s tiny size in the context of development is relevant.

But another just-so argument is introduced when India and China are compared. It says that China cannot be compared to India because India is a democracy. Again, no reason is provided why democracy prevents policy makers from choosing to invest in education. However, one can argue that India’s political structure has something – naturally – to do with India’s dismal failure in educating its population. I describe India as a “pseudo-democracy,” something that has the superficial trappings of democracy but just below the surface it is anything but.

Democracy, if it means anything at all, is more than mere head-counting. It has something to do with informed choice of the population at large, which in turn depends on the population’s ability to understand the issues, which finally rests on the ability to read, write, and carefully consider the alternatives that confront them. As it happened, when India achieved political freedom from the British, the population was told that their emancipator knew best and all they had to do was vote for them, and the government so constituted would magically take care of their every wish. How that transformed India from being the darling candidate for becoming a developed economy in the 1950s to actually being a laggard in economic development we shall briefly note the next time.

Write to atanudey at gmail.com if you have questions or comments.

Tomorrow: Changing Objectives

By Atanu Dey

The education system is embedded in the bigger socio-political order of the economy. To a large degree, the larger system dictates the characteristics of its subsystems. In its broadest terms, the government of India is an extractive and exploitative system created specifically for that purpose during the hundred years of its existence as a British colony before it became politically independent. The British, as a colonial power, created a system designed to control every aspect of the economy to maximize their extraction. The challenge of administering such a large population required a certain small percentage of the native population to be educated in a very specific way. Therefore the total and absolute control of the education system was a necessity.

Even after British left, the structures they had created for controlling the economy in general, and the educational system more specifically, remained intact. The new political leaders saw it was beneficial for them not to deviate from the old colonial goal of imposing an extractive and exploitative government on the people. By continuing to control the education system, they were able to impose a degree of control over the population that would be unthinkable in a free society.

Universal primary education was especially neglected because it would have given rise to universal literacy. Universal literacy is not a good thing if the status quo is to be maintained in a regime which allows freedom of the press. It is safe to allow a free press if two out of three people cannot read. Freedom of the press is not meaningful in a society of illiterates. We should note in passing that whether literate or not, people can hear and speak. So while the press was allowed freedom in a largely illiterate society, radio was absolutely government controlled, consistent with the aim of an exploitative and extractive system.

To be perfectly clear, whether a system is judged to be a failure or not depends on the objective that the system was created to serve. The Indian education system is definitely successful because it does meet the objectives that the British created it for, and which the successive Indian governments have implicitly endorsed: control the supply of education and dictate to the finest detail the nature of the education provided and to whom. Universal primary education, or even universal literacy, was never its goal. To fault the current educational system on its inability to meet the needs of a developing society is to miss the point that it was meant as an instrument for extractive purposes.

If the preceding picture painted hastily with broad brush strokes is reasonably accurate, then it implies that for the education system to serve the needs of a developing nation, the objectives of the system will have to change. Since the same structure cannot serve an orthogonal set of objectives, the whole system will have to be redesigned. If there is one thing I would like to convey in this brief series, it is this: change the system radically if it has to serve a different objective. It should be evident that anything less than a radical re-thinking of the system would be a pointless waste of time.

The current educational system has an objective dictated by the British and which the governments of independent India inherited: To choose from within the huge population a small subset and educate them so that they will serve the needs of the government. That objective should have been replaced with something like this: To develop the human potential of every citizen in the broadest sense, so that the individual is best able to serve his own interests and the interests of the world he lives in. In other words, the citizens are not seen as serving the interests of the government but instead the government’s objective is to serve the people.

The alternate objective would require liberalizing the education sector from government control. We will go into some specifics of the liberalization of the sector later in the series.

Write to atanudey at gmail.com if you have questions or comments.

Tomorrow: Thinking ROI

By Atanu Dey

The absence of universal basic literacy and education is a constraint on present economic performance and future growth. Doubtless, education is costly but the opportunity cost of not having an education is even higher. The old adage about a stitch in time saving nine holds with special force in the case of basic literacy. Here’s the argument. At most one generation requires help in becoming literate; the children of literate parents are overwhelmingly literate; and the children of illiterate parents are more likely to be illiterate compared to those of literate parents.

Therefore, the earlier an intervention is made in ensuring universal literacy, the cheaper it is, for a growing population. At India’s independence, of the 350 million about 240 million were illiterate. If a big bang approach had been taken and the entire population were made literate within three or four years, it would have perhaps cost (in today’s terms) around US$24 billion, and the problem of literacy would have been solved half a century ago. By going at it half-heartedly and piece meal, many multiples of that sum has been spent over the last half century, and yet the number of illiterates has increased to 350 million. We are forever falling behind by not putting enough resources to solve the problem.

If India had solved the basic literacy issue by the mid-50s, it would have developed more rapidly. It would have had a lower population (population of developed nations grow less rapidly), the aggregate wealth of the country would have been higher, and per capita incomes and wealth would have placed India in the running. Even now it is not too late and it is quite possible to make India fully literate within three years, provided the political will is there. The returns on that investment would have been staggering.

Both at the micro and at the macro level, return on investment (ROI) in education is positive. In other words, the net present value of the increase in the lifetime income of the person is greater than the cost incurred in educating the person. National spending on education is akin to investing in productive assets such as roads, ports, factories and power plants.

One immediate implication of the positive ROI in education is that it makes sense to borrow the money required for education as long as the ROI on education is lower than the interest rate – which in most cases it is if the labor markets are not distorted and if there are no information failures.

The other implication is that higher education does not require public financing if the credit market is complete. In the case of a person whose parents can afford to pay for his college education, clearly the credit market is complete: the person implicitly “borrows” from the parents for the education and the returns accrue to the family. It is easy to see that the ROI must be positive, because it is universally true that people systematically educate their children.

That has an important public policy impact: public financing of higher education is not required; all that is needed is to make credit available to those who face a credit constraint. Give loans to all those who seek, and qualify for, higher education, and which loans are repayable over a suitable period upon employment. Thus, for example, IITs and IIMs can be entirely self-funded instead of being subsidized by the public. More importantly, by removing the subsidies and allowing the capital markets to provide the credit required, the market for education will efficiently provide adequate supply to meet the demand.

Which brings us to the question: if the market can solve a severely supply-constrained education system, why is the market not allowed to function in the education sector? Let’s look at that the next time.

Write to atanudey at gmail.com if you have questions or comments.

Tomorrow: The Rent-Seekers

By Atanu Dey

One underhanded way to scare a neoclassical economist out of his wits is to creep up on him and shout “monopoly power.” Economists regard monopolies with the same mixture of dread, contempt and fascination as biologists regard cancer. They recognize the awesome virulent power of monopolies to wreak havoc on their world of mutually beneficial voluntary exchanges. Monopolies, whether public or private, lead to social welfare losses. At the other extreme, perfect competition leads to maximization of social welfare, subject to some reasonable conditions often approximated in the real world.

In a competitive market, a large number of firms compete amongst themselves to supply the stuff that consumers demand. Each firm strives to reduce its own costs to increase profits, while at the same time reducing prices to lure buyers away from its competitors, and in the resultant shuffle, prices are bid down to the level of costs, thus competing all profits away. Unlike in a competitive market where firms make no economic profits (they make only accounting profits), a monopolist makes economic profits because they are able to dictate the price by controlling the quantity it supplies. By sufficiently restricting supply, a monopoly can charge prices that are way above costs, and thus extract what is called “rents,” or economic profits.

One feature of the Darwinian world we live in is that there is always competition. It is good to be the king because the king has power. But the more power the king has, the greater is the competition to be the king. Sure, the monopolist is the king in the market, extracting rents and imposing social welfare losses. But somewhere along the way, the monopolist has to pay the king-makers. There is a competition for the market as if to compensate for the lack of competition in the market. The competition for the market leads to welfare losses, a sort of negative image of the social welfare gains from competition within the market.

One parsimonious explanation for not allowing free entry into the market for education is that by retaining monopoly control of the education sector, the government acts as a monopolist. By requiring licensing from the government, and by restricting the licenses, the government encourages competition for the right to serve the market and thus reduces the competition within the market. Restricting the licenses increases their price. This is the rent collected by the government. The licensed firms (schools and colleges) have to recover the costs incurred in obtaining the licenses. They in turn, given the legal protection from reduced competition, have the means to dictate price and the outcome is predictably low quantities (shortages abound), high prices, and rampant corruption.

This is purely anecdotal but is useful in clothing the bare outlines of what I conjectured above. Some institution wants to start a medical college somewhere in India. It applies for a license and is told off the record that the price is Rs 20 lakhs (approximately US$ 50,000) per seat. For the 200-seat license applied for the price is Rs 4,000 lakhs, to be delivered in unmarked bills in a large plain brown envelope. That “fee” is routed through the licensing bureaucracy with appropriate payoffs to different people—the lion’s share ending up in the appropriate political hands. After all, securing top positions at the bureaucracy is not cheap; and running elections is a costly business.

The firm having paid the whopping fee to operate a medical college, now has to recover its costs. Perhaps its actual cost of training a medical student is Rs 5 lakhs per year. It adds on a “special college entry fee” of say Rs 10 lakhs (remember to bring in unmarked bills in a plain brown envelope) to the normal tuition fees. The hapless students are forced to pay because seats are limited. The four year medical training which should have cost only Rs 20 lakhs if free entry were allowed into the field now has to pay Rs 30 lakhs, and perhaps gets substandard training. Further down the line, doctors are in short supply and therefore they command some market power and thus are able to recover their costs. The patients suffer but that is why they are patients—they suffer.

What needs to be done will occupy our attention the next week.

Write to atanudey at gmail.com if you have questions or comments.

Next Week: Doing Education Right (continued)

By Atanu Dey

Alistair Cooke in his weekly radio broadcast on BBC Radio 4, A Letter from America, once explained the theory of public choice to his listeners as “the homely but important truth that the politicians are after all just the same as the rest of us.” It is an accessible, though incomplete, definition of what public choice is about. You could read James Buchanan, who in 1986 won the “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel” (popularly known as the Nobel Prize in Economics) "for his development of the contractual and constitutional bases for the theory of economic and political decision-making.” But Cook’s version is adequate for our needs to explain why the Indian educational system is a disaster.

Politicians and bureaucrats are motivated by self-interest, and the will to power and control is deeply ingrained in them, perhaps more so than in the average person. Monopoly control of any market or institution is heady power. Controlling the educational sector is gives them an enormously powerful lever for controlling the economy. It is therefore quite understandable that the opposition to relinquishing that power would be formidable. The greatest challenge that India faces in reforming its educational system arises from this, not perhaps so much from a lack of understanding of what needs to be done, or how it is to be done. It is hard to overestimate the power of vested interests amassed against doing what is rational in education.

Here we look into what needs to be done, and leave aside for the moment the question whether it will be done, and if so how it is to be done. What needs to be done can be stated in one word: liberalization. The system is in chains.

In a socialistic economy, the state controls everything with the stated objective to reach the commanding heights of the economy, as the Indian leaders have always loftily boasted of achieving. What actually happens is that the state commands and controls and flies the economy into a very deep ditch. Remember USSR? It’s gone. A land lavishly gifted with natural resources and industrious smart people reduced to rubble. We have not fully learnt from their failures of the shackling of their economy. But there is a small possibility that we could learn from the successes of the limited unshackling of our own economy.

It is of course possible for governments to efficiently produce goods and services. The question rather is whether it is probable. The evidence is strong – at least in the case of the Indian government – that it is highly improbable. The list of government failures is too lengthy to list here. But a few instructive examples which illustrate the general idea are worth considering.

Telecommunications was the government’s sole preserve. The waiting times were measured in years, the prices were high, the quality poor. When the private sector was allowed entry, the prices dropped, quality improved, demand soared, supply expanded, and best of all, the public sector incumbents started performing as well. The same story can be told about the air transportation sector.

It is important to stress that the problem is one of government control of the sector, not whether it is served by private firms or not. Even if there are no public firms in a sector, government can control the sector by restricting entry (think license) of firms into the sector, thus limiting competition. The resulting low quantities (think permits and quotas) support high prices – therefore high profits. The competition for acquiring licenses is part of the rent-seeking game that is played by the politicians, bureaucrats and private sector firms. It is a nice little game (racket?) where all the players win, and the only losers are the poor consumers and the economy.

Let’s look at the education sector against this backdrop.

Write to atanudey at gmail.com if you have questions or comments.

Tomorrow: Markets Work

By Atanu Dey

Imagine for a bit what it would be like if education were provided by private sector firms. Can it be done? Would a socially optimal amount, variety, and quality of education be provided? Would there be market failures? If so, how can those market failures be corrected? Can one devise mechanisms to correct those failures?

The answer to whether the private sector can provide education is clearly ‘yes’ because around the world for a very long time private firms have provided education very successfully. Both private sector for-profit and not-for-profit business models exist. Education, at some level of description, is a service like any of a very large variety of goods and services provided very efficiently by the market. The generalization that markets work holds quite meaningfully in the specific case of education broadly.

It may be worthwhile to briefly expand on what “markets work” means, say, in the context of a good such as computers (both hardware and software.) Basically, there is a demand for computers, or in other words, people are willing to buy them. Firms supply to the market to make a profit. They innovate to increase the variety of the goods to increase their revenues, and figure out ways to reduce their costs so that they have greater profits. Like the large number of profit-seeking firms on the supply side, on the demand side, a very large number of consumers also enter the market with the generalized desire to get the most bang for their buck. The competition that arises from the self-interested behavior of consumers and producers ruthlessly forces unfit computers (and therefore the firms that make them) out of the market and relentlessly drives up the quality and variety, while prices constantly fall.

It is a Schumpeterian world out there – red in tooth and claw. But out of the dance of creative destruction, emerges things that no one—however smart or wise—could have ever predicted. Let me stress that: no one knows what amazing stuff the market will deliver, who will make it, how it will be made, how much it will cost, how it will be improved upon and by whom. Nobody knows, and that includes government bureaucrats or politicians, regardless of how strenuously they claim to know. The inescapable fact is that every innovation, every object that you use, every service that you enjoy, arose overwhelmingly in the private sector, through the risk-taking, imaginative, innovative, entrepreneurial spirit of individuals driven by a basic desire to make a buck.

So is there no role for the government? Yes there is. First, it has to ensure what is called a “level playing field,” to set the rules, to resolve disputes, and maintain such institutions that are necessary for supporting the functioning of the market. Second, in case of market failures (which we will not go into here as this is not a text book on basic economics), to do what it can reasonably do without making the problem any worse. If the government cannot do better than the imperfect markets can, then it is better for us to live with the results of the market failures.

Here then is the basic recommendation that one is forced to make: let the private sector supply educational services in India. The government must not be in the business of providing education at any level. Let the market have a go at it. The government of India is not capable of providing education. It has demonstrated its incapacity over decades, and there is no reason to believe that it is even theoretically up to the job. Education is too critically important for the future of India for it to be left to the government. In today’s world, more than ever, education is a dynamic service. It requires innovation, creativity, entrepreneurial talent, risk-taking ability and human resources—all of which are sorely missing in the government. It is government control of the sector which has had the unfortunate consequence of Indian education to resemble what Keynes’ characterization of education as "the inculcation of the incomprehensible into the indifferent by the incompetent."

Let’s imagine what would happen if private sector firms were allowed to provide education, next.

Write to atanudey at gmail.com if you have questions or comments.

Tomorrow: Scarcity

By Atanu Dey

Consider this list: cars, scooters, telephone service, airline ticket, seats in schools and colleges, electricity, and railway tickets. Think of the year 1980. Notice the common feature of the list: shortages. Now consider the list in the year 2007. Notice some things on the list are no longer scarce. It cannot be mere coincidence that only those items which the government has released it stranglehold on are no longer scarce. Could it be possible that if the government lets go of its vise-like grip of schools and colleges, that shortage of educational services will also be a thing of the past?

Given sufficient time, shortages have a way of entering into our worldview so that we simply start considering them as normal and acceptable. Today the power supply where I live in Pune failed for over two hours. It is remarkable that I have accepted that power in India is unreliable and don’t work up a sweat (only figuratively speaking, though.) It is part of our survival mechanism. We adjust to unreasonable situations. That’s how it is, we explain, and cope with it. We have become inured to the mad struggle that people go through to get their children into schools and colleges. We forget how astonishingly unnatural it is that something as basic as a good education involves almost superhuman effort.

Chronic shortages do not occur naturally. You can have acute sporadic shortages due to shocks to the system. But chronic shortages have to be carefully engineered and the machinery that creates shortages has to be kept in good working order. Otherwise the natural tendency for a market is to close the gap between the quantity demanded and the quantity supplied. This is a fundamental truth about the world of humans.

One effect of persistent shortage is low quality. Lacking the discipline enforced by the customer’s freedom of choice, suppliers don’t have an incentive to ensure quality. The consumer is happy to receive even shoddy goods and services because it is a struggle to get anything at all. Take it or leave it, is the basic attitude of the producers in a sellers’ market.

In summary, it is misguided government policy that lies at the root of our dismal education system. The policy change required is to allow the private sector unfettered access to the education market. Will the private sector supply educational services? An unqualified yes because there is money to be made. Currently around 10 percent of GDP is spent on education, which amounts to around US$60 billion. Half of India’s population is below 25 years of age. That defines the addressable market for educational services. If the supply of educational services were to meet the suppressed demand, the annual spending on education will be many multiple times the current level.

Which brings up one of the most important matter associated with education. There is an implicit ban against for-profit educational institutions in India. Why this is so is hard to understand. For-profit producers of other goods and services are not banned. Indeed, it is clear to see that for-profit organizations produce most of the critically important goods and services. The only caveat is that these for-profit firms have to face competition. That’s the bottom line: allow all firms to enter the market, regardless of whether they are for profit or not. The market forces will regulate the firms so that the supply rises to meet the demand, the quality improves, and the prices reflect the underlying costs.

One final point: what about the poor? First, for education up to the secondary level, those who are unable to pay for their education should be publicly supported through vouchers which are redeemable at private schools of choice. Second, for post secondary education, those who are unable to pay should be given loans. Recall that post secondary education has a short payback period and the return on investment in education is positive. So the loan recovery with interest is not a problem.

In the remaining two pieces, I will explore the consequences of liberalizing education in India.

Write to atanudey at gmail.com if you have questions or comments.

By Atanu Dey

By liberalizing the education sector I mean that it has to be made totally free of government control and involvement. Whoever wants to provide educational services must be free to do so, be it domestic or international, for profit or not for profit, at the primary, secondary, or tertiary level. What would be the expected benefits of doing so?

The supply of educational services will increase, the quality will improve, and prices will come down. These are all everyday first-order efficiency effects of letting markets work. The second-order effects will be increased productivity, increased production, and better allocative efficiency within the sector. The third-order effects will arise from the increasing returns to scale associated with the production of education. Finally, there are very important forward and backward linkages that bind the sector with the overall economy. One of them is the use of information and communications technology (ICT) tools. It will give a boost to the IT sector in a way that is unthinkable in any other endeavor.

Increase in the supply of education is a natural outcome of removing all barriers to entry. Domestic and foreign institutions will invest in educational institutions. One can imagine corporations such as Tata, Reliance, Harvard, and Stanford opening shops in India, all eager to make a profit. This is no different from a large number of automotive companies starting manufacturing in India to supply the domestic market. The effect is predictable: an increase in the variety and therefore expanded choice for the consumers.

No longer will one have to fight to get into a good school or college. Instead of a sellers’ market, we would have a buyers’ market where the consumer is king and therefore the producers will be ever eager to reduce their costs and deliver a quality product. The best part is that with competition, even the incumbents – the public sector institutions – will wake up from their “lack of competition” induced slumber. Competition for students will force institutions to be nimble on their feet and therefore provide education that is relevant. No longer will the education system be producing graduates the majority of whom are unemployable.

Think about the waste of resources that accompanies the current supply-constrained system. Just one example: each year hundreds of thousands of students spend incredible amounts preparing for the entrance exam for IITs. That is directly unproductive use of time and money. That spending would be sufficient to fund a dozen IITs every year. Or think of the estimated US$10 billion that Indians spend in getting an education abroad.

In today’s world, an educated population is more valuable than any natural resource. Yes, India has a large population with favorable demographics. But only the private sector has the resources to provide the investment required for educating them. The operative word is “investment.” Firms don’t invest unless they expect to make a profit. And yes, there is profit to be made from providing education because education itself has positive returns and therefore people will pay for education.

Servicing such a large domestic population necessarily implies a very large installed base. That results in the industry learning by doing, and the economy gains what is called a comparative advantage in producing educational services. Which means that education in India will have a quality/price ratio that would attract foreign students. That would make India the education capital of the world, if India plays its cards properly. India’s income from producing education could dwarf what it earns from IT and IT enabled services today.

Which brings us to a very important point. Producing education will be massively dependent on the use of IT to reduce costs and improve quality. Private firms will use it intensively and effectively to produce education. Meaning that instead of a few computers sitting around in a dusty room in your average school, you will find the best technologies being used in schools and colleges. Students will be learning to use the IT tools while learning other things. More importantly, one will not have to worry about the much lamented digital divide: whoever attends an educational institution will become a digital native.

And who, you may ask, will be attending schools and colleges? My answer is: everyone. If India liberalizes the education sector, then everyone – rich poor, minority, majority, this caste, that caste, this religion, that religion, you name it – will be able to get an education. Only problem will be: the politicians will have to figure out some other way of dividing the country. But that is their problem, not ours.

In the next bit, I will explore why everyone will be able to attend school if they so wish.

Write to atanudey at gmail.com if you have questions or comments.

By Atanu Dey

The liberalization of the education sector in India, that is, by allowing free entry – especially for-profit firms – will result in increased supply of educational services. Here I will explore the predictable consequences of this. We begin by recognizing that education is not an undifferentiated homogeneous good; there are distinct levels within it, from basic primary education to post-secondary and tertiary levels. Each level has different pay-back periods for the “return on investment.” Furthermore, different people have different abilities to pay for the various levels of education.

Let’s graph the ability to pay along the x-axis, with the very poor at the left and the very rich on the right. On the y-axis, let’s graph the level of education, with basic primary at the bottom and specialized tertiary (Ph.D level) at the top. The top right quadrant of this diagram represents rich people and higher education, the lower left quadrant poor people and basic education. Recall that higher education has a short payback period and the payback is both private and social, that is, it has positive externalities. So the rich will pay for both higher and basic education if the capacity increases. Basic education, however, has long payback periods and most of the returns are social, and therefore poor people will under-invest in basic education given their shorter planning horizons.

Firms will profitably supply to the two right quadrants because the demand and the ability to pay, both, exist. The left top quadrant is also served by the for-profit firms. For the poor, who have basic education but are unable to pay for higher education they desire, if credit (educational loans) were available them, they would be able to pay for higher education and firms will supply to that need. That leaves the left lower quadrant: if the poor have public support (grants), they would be able to pay for basic education and thus the for-profit firms will supply to that market as well.

By allowing the private sector firms into education, the capacity for greater human capital increases and thus the economy itself grows larger and the growth rate increases. This increases the revenue base for the needed public support of basic education for the poor. Universal primary education can be a reality if the government raises the resources from a larger economy and allows the private sector to efficiently provide the education. Note that the funding is public but the provisioning is left to firms that compete in the market.

Guaranteeing universal basic education is a must for ensuring equality of opportunity. Even the poor, if given the opportunity, will be adequately prepared to continue on to higher education if they so wish. While for basic education the poor needed a grant, for higher education the poor will need a loan. Banks can easily enough provide these if the funds are efficiently spent on acquiring suitable higher education – which again depends on the availability of wide range of choices. And the choices will exist if the education sector is liberalized.

India is stuck in a low-level equilibrium: a US$50 billion education market and a GDP of US$500 billion. It is possible to move to a higher-level: a US$150 billion education market and a US$1.5 trillion GDP, if education were freed. But those who extract their annual US$100 million today from the low-level equilibrium by controlling the education sector, will not allow the liberalization of the education sector for then they will lose the rent. Year after year, they extract the rent but keep the economy effectively shackled.

Let me stress this: education is an amplifying mechanism for economic growth and development. If we fix our education system, what we will get for our efforts is going to be far greater than what we put in it. In today’s dynamic world economy, the returns to education are staggering, and so also are the losses that accumulate from a dysfunctional educational system. If need be, we should even borrow – money, people, ideas – from others to fix our system.

If I were a billionaire industrialist, here’s what I would do. I would get a few of my fellow billionaires to create a corpus of funds – say US$200 million – for a “Golden Goose” strategy. With the money, I would simultaneously buy out all the politicians of every party so that they will en masse vote to liberalize the education sector. It will be a one-time cost for us billionaires. But that would lay the foundation for an India with such formidable growth that we would recover our “investment” in short order.

But alas I am not a billionaire and nor are you. We, as the saying goes, are up a creek without a paddle.

Write to atanudey at gmail.com if you have questions or comments.