CHAPTER 2: BRIEF SURVEY OF LITERATURE
2.1. Brief review of the economics of education
2.1.2. Economic principles and methods applied in education research issues
2.1.2.2. The cost-benefit analysis (CBA) studies
37 While in firms’ theory or in industrial sectors, performance is measured by inter alia firms’ profits, income earnings, surpluses, or sales value per-employee; in education, point-estimate measures are used to similarly track the performance of an educational institution (Belfield, 2000). For example, studies have estimated the effect that family background, resource endowments and institutional features have on student performance in key curricular areas (Van Den Berg and Hofman, 2005). For modelling purpose, these studies typically use years of schooling, although one year of schooling is unlikely to be uniform across different population cohorts or academic levels. Educational institutions’ quality measures are also incorporated in simple quantity estimates, particularly if the intention is to model education as an input into the production of other social outcomes. Similarly, the differences in prior ability or home endowment across population groups of students though hypothesized to be imperfectly observed were also modelled (notwithstanding value-added adjustments) in some studies. Students’ performance in HEIs is modelled using an educational production function approach and empirically tested via regression analysis (Tewari et al., 2008; Parker, 2010) or non- parametric Data Envelopment Analysis (DEA) (Kontolaimou et al., 2006, Pseiridis et al., 2006; Taylor and Harris, 2002 and 2004; Worthington, 2001; Athanassopoulos and Shale, 1997). Athanassopoulos and Shale (1997) empirically tested the relative efficiency amongst 45 universities in the UK using DEA.
38 (1) THE RATE OF RETURN6 APPRAISAL (RRA)
There is a difference between the internal (or micro-economic) and external (or macro-economic) rate of return. The internal rate of return (IRR) for funding proposed educational projects equalizes the discounted costs (bank lending rates, government discount rate) and benefits of undertaking it (Kaufman, 2010;
Kamenetz, 2006; Belfield, 2000). The IRR is specific to the proposed educational programmes only, ceteris paribus. Typically, if the estimated IRR to a proposed project of education (at the end of a financial year or after the graduation, for example) exceeds the rate of return (RR) to alternative projects or of not undertaking the project (at the beginning of the financial year or enrollment); that is, if benefits exceed the costs, then the proposed educational project should be undertaken. The external rate of return (ERR) puts the proposed educational project in a broader macro-economic context and attempts to estimates the incremental return yielded by adding up returns from the ripple effects in the economy as a whole. In comparison, the ERR is more likely to be greater than the IRR. The ERR can also be negative and the IRR positive or vice versa. The IRRs and ERRs (as defined by those who had completed any level of education:
primary, secondary or tertiary) in developing countries are normally higher for all levels of education – the sub-Saharan region having the highest of all regions – than rates of return in developed countries (De Vreyer, 2010; De Villier and Steyn, 2007; Psacharopoulos and Patrinos, 2002; Tilak, 1999).
Steyn and De Villier (2005) distinguish between the private and social rates of return of investment in education and found that on an average the world private rate of return for higher education is 8.2 percentage points higher than the social rate of return, suggesting that there is scope for individuals to pay more of the costs of higher education. However, they argue that the majority of countries in the world have almost fully subsidized higher education, which increases the private rates of return to artificially high levels, since the individual’s contribution to their own education is very small. There are no private rates of return available for South Africa but studies done in metropolitan areas in KwaZulu-Natal to calculate the profitability of investment in education suggested that the social rate of return for all levels of education is higher than the average for the world (De Villier and Steyn, 2007).
Studies have done CBA of the choice of going to higher education and the fact that job market remains grim for graduates (Kaufman, 2010; Kamenetz, 2006; Lissenburgh and Bryson, 1995). These studies opined that the costs of higher education continue to skyrocket whilst jobs remain scarce for newly-minted graduates questioning conventional wisdom that graduating in higher education is the most sensible paths toward
6 Psacharopoulos and Patrinos (2002) define this concept as the financial rewards accrued by individuals (graduates) and the tax revenues they generate.
39 success and –for those who seek it – prosperity. Measured in terms of graduating student loan debt and financial and economic challenges facing newly-minted graduates, costs of earning a degree outweigh its benefits. These studies are suggesting alternatives cheaper ways to gain job training and a liberal education (Kamenetz, 2006).
(2) THE DISCRETE CHANGES IN EDUCATION PROVISION
The aim is to estimate the change in the volume of university provision. Existing studies caution that any type of innovative restructuring of the education system or a HEI merits serious consideration and comparison against other re-organizations as empirical evidence suggests that they can increase costs by 15 to 20 percent (Makgoba and Mubangizi, 2010; Belfield, 2000). For example, lengthening the academic year as a result of a strike or an increment in the number of tutorial staff are expected to raise total expenditure in a typical HEI.
(3) THE GROWTH MODELS
The growth models are used mainly for external efficiency of educational institutions. Economic activities of educational institutions such as UKZN affect other economic entities, for good or for bad, in ways that these institutions do not usually take into account when making their own economic choices. Negative externalities are a source of market failure while positive externalities are a major source of market efficiency.
At a macro-economic or an aggregate level, with positive externalities education raises economic growth, that is, the effects of education spill over to other economic entities beyond its effect on the educated individual (World Bank, 2006). Higher education fulfills the potential of all its graduates in terms of their role in society as citizens, and also in the role that the skills, competences and knowledge acquired play in social and economic growth (CHE, 2010). Education enhances the productivity of a country through attacking ignorance, imparting knowledge, building skills, changing outdated attitudes and values, empowering the poor and raising their earnings as well as their quality of life (UNESCO-PROAP, 1997).
At a micro-economic or a more disaggregated level, UKZN is an important site of economic activities during its life span. The university attracts staff and students into a region (a province such as KwaZulu- Natal or a city such as Durban). Staff and students buy locally produced goods and services, which has
40 multiplier effects that further spill-over and ripple on the full breadth of the local economy and the economy of South Africa at large. As such, the socio-economic direct and indirect impacts assessment of UKZN’s economic activities may be estimated using a multiplier analysis, where injections into and leakages outside the region or local economy are compared through a coefficient linking the total change in economic activities of UKZN to the initial economic activities (outside UKZN) using an input-output analysis. If this coefficient is greater than one, positive multiplicative effects are evident and a net accrue in the economy of the region is unlocked from the UKZN’s economic activities (Bleaney et al., 1992).
In summary, education economists are helping to discover which types of resources and allocations have the greatest effect on outcomes, how input choice and allocative efficiency can be improved, the effects of education which spill over to other agents for economic growth, to assess the effectiveness of a university model, and to set up organizational structures and operations in a university. They are also explaining the logic behind mergers of educational institutions, estimating economies of scale, economies of scope, and the optimal sizes of educational institutions; which version of an educational programme should be funded or implemented, and assessing the effectiveness of educational interventions to improve the attainment of children from disadvantaged socioeconomic backgrounds.
South Africa’s education policies are briefly discussed in the following sub-section 2.2.