Economic Analysis of

Education Projects
Concepts and Applications in
Bank Work

Foundational Training
December, 1998
 Training Program Elements
Hands-on Modules
February 24 “Incorporating Indigenous Peoples and Other
Cultural Minorities in Human Development Project
Design: A Joint Technical Workshop”
February 25 “Girls Education: Foundations for Sound
Analysis”
April 6 “Student Loans”
May 12 “Impact Evaluation of Education Projects”

Lectures/Seminars
December 18 “Market Forces and Education,” Nicholas Barr,
London School of Economics

Contact: Education Training

http://lnts012.worldbank.org/html/edutrain.nsf
Objectives and Policy
Context

Nicholas Burnett
AFTH2
 Objectives of Foundational
Training

Increase your understanding of the need for

economic analysis
Broaden or refresh your knowledge of the key
dimensions of economic analysis in
education
Improve your skills in conceptualizing economic
analysis in education sector and project
work
 Agenda
INTRODUCTION
SESSION A: Objectives and Policy Context
SESSION B: Human Capital Theory and Benefit-Cost
Analysis in Education
BREAK
SESSION C: Beyond Rate of Return Analysis: The Roles of
the Public and Private Sectors and the Importance
of Fiscal Analysis
LUNCH
SESSION D: Comparing Investment Options in Education
SESSION E: Bringing it All Together: Economic Analysis
for the Indonesia Junior Secondary Education
Project
SESSION F: Workshop on Participants’ Projects
 Policy Context

Changing Bank Norms

Key Topics
Economic Analysis in Education

Policy Context

Changing Bank Norms

Economic analysis in the Bank in general
Economic analysis in education sector
Education lending
 Changing Bank Norms
(General)

Reviews of Economic Analysis 1993,

1995, 1996, 1997, 1998
Board Paper 1995
Handbook 1996
Devarajan, Squire & Suthiwart-Narueput
1996
Good Economic Analysis Makes A Difference
Probability of Failure as a Function of the Quality of
Economic Analysis 1996
(Development Objective Ratings)

Quality of Economic Percentage of Projects

Analysis in the SAR Rated U or HU

Good 12
Acceptable 21
Marginal 13
Poor 31
Comparison between ECON II, ECON III and
ECON IV A of Projects in the Social Sectors
Overall Ranking
60%
ECON II
50% ECON III
ECON IVA
40%

30%

20%

10%

0%
Good (1) Acceptable (2) Marginal (3) Poor (4)
 Overall Ranking of Projects in the Education
Sector has Improved

60% ECON II

ECON III
50%
ECON IV
40% FY98 Projects

30%

20%

10%

0%
Good (1) Acceptable (2) Marginal (3) Poor (4)
 Probability of obtaining an unsatisfactory or
highly unsatisfactory rating as a function of
the quality of the economic analysis
(development objective rating)

Quality of Economic Analysis Third Year Fourth Year

Estimated Actual

Good 5 2 0
Acceptable 9 5 5
Marginal 18 14 16
Poor 33 33 30

Source: SAR Review 1996.

 The “Ten Commandments” of
Economic Analysis

1. Linkage with ESW

2. Quantitative analysis of alternatives
- public or private sector
- within public sector
3. Financial & fiscal impact assessment
4. Cost-benefit and cost-effectiveness analysis
- comprehensiveness
- quality
5. Sensitivity analysis
 The “Ten Commandments” of
Economic Analysis

6. Institutional analysis
7. Poverty impact analysis
8. Environmental assessment
9. Performance Criteria
- For M & E
10. Overall project justification
Economic Analysis in Education

Changing Norms
Economic analysis in the Bank in general
Economic analysis in education sector
Education lending
 Changing Bank Norms
(Education)
“Not applicable”
- poor outcome specification
- rare to find unit costs or alternatives
- SAR Reviews: 1993, 1995, 1996,1997, 1998
Change is happening
- “Priorities and Strategies for Education”
- “Getting Results in the Social Sectors”
- Recent SARs/PADs
- Education Sector Strategy Paper
 Education Projects - Rating by Criteria
SAR Review 1993

Criteria 1 2 3 4 Total
Overall Rating 8 12 6 1 27
Linkage to ESW 10 0 0 17 27
Alternatives considered 1 0 0 26 27
Fiscal analysis & cost recovery 8 11 2 6 27
Clarity of price and
9 10 8 0 27
quantity assumptions
Institutional analysis 7 14 6 0 27
Poverty analysis 13 7 3 4 27
Testing for learning performance 7 0 0 20 27
Midterm review 24 0 0 3 27
 Education Projects - Rating by Criteria
PAD Review 1998

Criteria 1 2 3 4 Total

Overall Rating 14 20 2 1 37
Linkage to ESW 33 2 1 1 37
Quantitative analysis 14 18 5 0 37
of alternatives considered
Fiscal analysis & cost recovery 25 7 3 2 37
Clarity of price and 7 16 14 0 37
quantity assumptions
Institutional analysis 12 21 3 1 37
Beneficiary assessment 23 11 3 0 37
and poverty analysis
Testing for learning performance 17 5 10 0 32
DEVELOPMENT IN PRACTICE
Priorities and Strategies
for Education
A World Bank Review
Economic Analysis of Education Projects

Presence of Economic Analysis in Education

Projects, FY97 and FY98
40

30

20

10

0
FY97 FY98
Economic Analysis in Education

Changing Norms
Economic analysis in the Bank in general
Economic analysis in education sector
Education lending
Overall Lending for Education
Focus on basic education:
mid - 1980s
Shift away from vocational
education
Priorities and Strategies for
Education: 1995 Sector
review paper
Education Sector Strategy
Paper: FY99
All explicitly based on
economic analysis:
human capital theory
Spending on education is
investment in human
capital
Focus on access to
quality teaching and
learning
World Bank Education Lending
by Selected Sub-Sector, 1963-98
50

40

30

20

10

0
1963-69 1975-79 1985-89 1995-98
1970-74 1980-84 1990-94

Primary Sec. General Vocational Higher

Economic Analysis in Education

Key Topics
Cost and benefit identification
Coherently set in ESW
Public and private
Fiscal impact analysis
Outcome indicators
Project design alternatives
 Cost and Benefit Identification
Do at both sector and project level
Costs relatively easy Benefits harder
Public costs Direct quantifiable
- capital - productivity
- recurrent - learning
Private costs External, hard to
- direct quantify
- indirect - spillover effects
- fertility
- health
Comparison of Costs and Benefits

Standardize benefits and compare costs

Value benefits and costs: Rates of return
- typically sum of discounted stream of future
earnings compared to sum of discounted
stream of costs
- “private” and “social” returns; confusing
terminology cf. other sectors
Specification of benefits that cannot be valued,
quantification where possible
 The Returns to Investment in
Education (Developing Countries)
35
30
25
20
15
10
5
0
Primary Secondary Higher

Private Social
Economic Analysis in Education

Key Topics
Cost and benefit identification
Coherently set in ESW
Public and private
Fiscal impact analysis
Outcome indicators
Project design alternatives
 Coherently set in ESW
Importance of ESW
Education and other sectors
Resource misallocation within education
- Across subsectors
- Within subsectors
- For quality
Inequitable public spending
- Poverty incidence
- Gender incidence
 Importance of ESW

Macroeconomic Sector work and

framework and project success
project success (Schneider)
(Kaufmann)
 Economic Policies and the Performance of Projects

% Unsatisfactory
Average (Social Sector
Policy Distortions ERR Projects)

Trade Restrictions
Highly restrictive 13 28
Nonrestrictive 19 0
Exchange Rate
8 37
Highly overvalued 18 17
Slightly overvalued
Real Interest Rate
15 29
Negative 17 18
Positive
Fiscal Deficit 13 29
High 18 11
Low
Price Distortions of Tradables
High distortions 16 26
Low distortions 17 15

Source: Kaufmann (1991): Kaufmann and Wang (1993)

Economic and Sector Work (ESW) and Project Success
Percent of Successful Projects

100%
100
89
80%
77 79
60% 66

40%

20%

0%
0 1 2 3 4 or
more
Number of ESW Reports in Country/Sector in 3 years Preceding Project
Source: Schneider, “Economic Sector Work and Results on the Ground.”
 ESW in Education over Time
Staff Time Charged to Education Sector
and Project Work

1989
1998
ESW Lending ESW
10% Lending
17% Preparation
Preparation
53%
41%

Supervision
30% Supervision
49%
 ESW in Education over Time
Ratio of No. of ESW Reports Produced / No. of
Projects Approved

Period All Sectors Education

FY80-84 0.6 0.7
FY85-89 0.7 0.6

FY90-94 1.1 0.4

FY95-98 0.8 0.4
 Rates of Return to Investment in
Different Sectors of the Economy (%)

Item 1974-82 1983-92 1974-92

Education Investments
Primary 20
Secondary 14
Higher 11
World Bank Projects
Agriculture 14 11
Industry 15 12
Infrastructure 18 16
All projects 17 15

Source: Psacharopoulos 1994; World Bank 1994n;

World Bank Operations Evaluation Department database.
 Misallocations across
subsectors

Typically high returns to investments in basic

education compared to other levels
Importance of country specific calculations
Unit costs
Distinction between private and social rates of
return: implications for cost recovery
 Rates of Return to Investment in Education
by Region and Level of Schooling
Social Private
Region Primary Secondary Higher Primary Secondary Higher

Low and middle

income countries
Sub-Sahara Africa 24 18 11 41 27 28
Asia 20 13 12 39 19 20
Europe, Middle East, 16 11 11 17 16 22
and North Africa
Latin America and 18 13 12 26 17 20
the Caribbean

OECD Countries n.a. 10 9 n.a. 12 12

n.a. Not applicable. Source: Psacharopoulos 1994.

 Public Spending on Education and Gross
Enrollment Ratio for Population Ages 6 - 23, 1990

GER 80
Jordan
70 Ecuador Syrian Arab Egypt
Philippines Republic Tunisia
60 El Salvador Bolivia
Jamaica
Paraguay Cameroon Honduras
50 Colombia
Thailand
40 Guatemala
Morocco
30 Senegal
20 Mauritania

10
0
0 1 2 3 4 5 6 7

Spending as a percent of GNP

 Misallocations within
subsectors

Student: teacher ratios

Non-salary inputs
Building costs
Repetition
Dropout
 Achievement Scores & Public Spending
600

Korea Japan Finland

550 United States
France Italy
Singapore New Zealand Switzerland
Iceland
Spain Ireland
Hungary Canada
500 Greece Poland
Netherlands
Cyprus Portugal
Achievement score Trinidad-Tobago
Philippines
450

Nigeria

400 Indonesia
Venezuela

350
5 10 15 20 25
Unit Cost (% per capita GNP)
 Inequitable Public Spending
Subsidies for Education in Indonesia, 1989

100 Primary
subsidy

80 Junior
secondary
subsidy
60 Senior
secondary
ge of expenditure or subsidy subsidy
Tertiary
40 subsidy

All education
20 subsidy

Income/expen
0 diture

0 10 20 30 40 50 60 70 80 90 100

Percentage of population
 Public Spending on Education
Gender Incidence of Public Spending on Education in Cote d’Ivoire

100
primf

80 primm
secf
60 secm
expenditure on education terf
40 term
allf
20 allm
45 degree
0
0 20 40 60 80 100
Percent of population by income group
Economic Analysis in Education

Key Topics
Cost and benefit identification
Coherently set in ESW
Public and private
Fiscal impact analysis
Outcome indicators
Project design alternatives
 Public and Private

ESW Crowding Out

Alternatives Public Goods
Fiscal Impact Externalities
Equity
Economic Analysis in Education

Key Topics
Cost and benefit identification
Coherently set in ESW
Public and private
Fiscal impact analysis
Outcome indicators
Project design alternatives
 Fiscal impact analysis

Recurrent cost magnitudes

Fiscal sustainability: growing issue with
education expansion and fiscal
tightness
Cost recovery policies
Economic Analysis in Education

Key Topics
Cost and benefit identification
Coherently set in ESW
Public and private
Fiscal impact analysis
Outcome indicators
Project design alternatives
 Project Design Alternatives

Specify objectives in terms of outcomes

Compare alternatives, by determining if costs
are affordable and are worth the benefits:
- Cost-feasibility analysis
- Cost-benefit analysis
- Cost-effectiveness analysis
- (weighted cost-effectiveness analysis)
 Three Key Messages

Economic Analysis has many dimensions

Do analysis at both sector and project level
The process is at least as important as the
numerical result:
- define objectives in outcome terms
- consider alternatives