Economic and Health Efficiency of Education Funding Policy

Public spending programmes to reduce poverty, expand primary education and improve the economic status of women are recommended priorities of aid agencies and are now gradually being reflected in third world governments' policies, in response to aid conditions imposed by the World Bank and OECD countries. However outcomes fall short of aspiration. This paper shows that donors' lending policies, especially those restricting public spending on education to the primary level, (1) perpetuate poverty, (2) minimise socio-economic impact of public health programmes and (3) prevent significant improvement in the economic status of women. These effects are the result of fundamental flaws in donors' education policy model. Evidence is presented to show that health status in developing countries will be significantly enhanced by increasing the proportion of the population which has at least post-primary education. Heads of households with just primary education have much the same probability of experiencing poverty and high mortality of their children as those with no education at all. Aid donors' policies, which require governments of developing countries to limit public funding of education to the primary level, have their roots in what is contended here to be an erroneous interpretation of human capital theory. This interpretation focuses only on the declining marginal internal rates of return on public investments in successive levels of schooling and ignores the opposite message of the increasing marginal net present values of those investments. Cars do not travel fastest in their lowest gear despite its fastest acceleration, life's long journey is not most comfortable for those with only primary schooling.