Transforming the vicious circle : the costs and savings of school inefficiency in Mexico

17826 A View from LATIIR No. 8 TRANSFORMING THE VICIOUS CIRCLE - THE COSTS AND SAVINGS OF SCHOOL INEFFICIENCY IN MEXICO by Sam Carlson Human Resources Division Technical Department Latin American and Caribbean Region The World Bank April 1991 "A View from LATHR" is a series of occasional flyers produced by the Human Resources Division of Latin America and the Caribbean Technical Department of the World Bank for the purpose of stimulating discussion among staff on key issues facing the sector. The views expressed here are those of the authors and should not be attributed to the World Bank. Summary - It is widely accepted that school repetition and dropout result in significant wastage in the educational expenditures of developing countries. Unfortunately, this assertion is rarely substantiated in financial terms which reduces its impact and the willingness of policymakers to directly address the problem. The findings of a recent study of Mexico suggest that more than 12% of total expenditures on primary education were wasted in this way in 1988, equivalent to nearly US$230 million. High wastage means less investment resources for educational improvements, which further reduces quality and efficiency - a vicious circle. Reducing high repetition and dropout rates would not only increase levels of learning and decrease fiscal spending pressures, but would also free up resources for improvements in educational quality and efficiency. The vicious circle could be transformed into a virtuous one. Policymakers need to understand both the magnitude and the consequences of this issue, and international donors should keep this issue at the forefront of education policy dialogue with government officials. Methodology - Data provided by the MOE Planning Directorate in Mexico (DGPPYP) on repetition, dropout, enrollment and unit costs in 1988 were incorporated into a model which calculated the wastage cost (in 1988 Mexican pesos, converted into 1990 US dollars) of (1) all primary students who repeated that year and (2) all students who dropped out that year before the fourth gradeY Resource wastage was then aggregated two ways: (a) combining both repetition and dropout resource costs and (b) adding only repetition costs. The model analyzed wastage on both the national and regional levels. On the national level, aggregate data on repetition and dropout rates and unit costs were used. On the regional level, data for three types of federal schools in the states of Oaxaca, Chiapas and Guerrero were collected and analyzed. Type 1: General Primary schools, which accounted for 80% of all primary students in these three states, and are found in both urban and rural areas throughout Mexico. Type 2: "Indigenous" schools, which provide primary level bilingual instruction in the native ethnic languages spoken in some Mexican states. These schools constituted 19% of total primary enrollment in Oaxaca, Chiapas and Guerrero in 1988. Type 3: "Community Schools (CONAFE), which employ secondary school graduates as instructors (one teacher for all six grades) in small rural villages with 5-29 children of primary school age. In 1988 these schools accounted for just 1% of primary enrollment in the three states examined. [Note: State and private schools were not considered because expenditure data for these schools were not available in the degree of detail required.] 1/ It is hypothesized that three-quarters of all dropouts in the first three grades did not become literate or numerate while in school, and so 75% of the resources spent on these children were wasted. More research on actual learning among dropouts would be required to verify this assumption. 2 Wastage Costs Due to Repetition and Dropout For 1988, the fiscal cost of primary level repetition and dropout nationwide is estimated at nearly US$ 230 million (1990 dollars). Clearly, this is a significant drain on Mexico's fiscal resources, equal to more than 12% of total expenditures on primary education in 1988. Furthermore, this inefficiency is a vicious circle: it reduces the government's fiscal capacity to target spending on educational quality improvements which could help decrease repetition and dropout rates. Looking at resource wastage caused by both repetition and dropout at the regional level, nearly 22% of all resources spent on primary education in the three states considered were wasted in 1988. This represented more than 94 billion Mexican pesos, equivalent to almost US$ 46 million (1990 dollars). Obviously, this combined resource wastage is an annual cost and would amount to nearly US$ 184 million over four years, about US$25 per primary student per year. Such wastage represents major foregone investments in educational materials, teacher training and facilities upgrading. It is important to point out that this is simply an estimate of the annual fiscal cost to the government, and not a calculation of the economic cost to society. Repetition excludes other children from access to school and lowers academic quality throughout the education system (because of diverted resources to repeaters); dropout means lowered productivity throughout one's lifetime, and implies a loss of other positive externalities related to primary schooling (e.g. improved health, increased agricultural productivity, lower fertility, etc.). In other words, this fiscal cost can be translated into much greater cumulative economic costs and so the resource wastage estimated above should be considered an absolute minimum. This is especially so in light of Shiefelbein's research which indicates that repetition rates are almost universally understated and in most cases are approximately double those reported. By school type, the Federal General schools accounted for the bulk of wasted resources (62% for the three states combined) because of their comparatively large enrollments. On the other hand, these schools averaged the lowest level of wastage (18.3%), while the CONAFE schools averaged the highest (54%). The indigenous schools were between these two extremes, averaging 37% wastage in the three states and accounting for 33.5% of all wasted resources. In sum, this suggests the need to address resource wastage in all three school types. Wastage Costs Due Purely to Repetition At the national level, total resource wastage in 1988 due to repetition was estimated at more than US$ 172 million (1990 dollars). On the regional level, repetition resulted in the wastage of almost 70 billion Mexican pesos in 1988, or more than US$33.5 million (1990 dollars). This is equivalent to 15.9% of all primary educational resources spent in the region in 1988. Subtracting resources wasted due to dropout thus reduced the percentage of total resources wasted by about 6%, and decreased the cost of this wastage by about US$ 12 million. 2/Shiefelbein, Repetition: The Key Issue in Lain American Primary Education, LATHR, Working Paper No.1, June 1989, p. 35. 3 By school type, the "community schools" (CONAFE) once again had the highest percentage of wastage in all three states (26% in Oaxaca, 27% in Chiapas, and 40% in Guerrero). While total expenditures on CONAFE schools were low (only 1.5% of total expenditures on primary schools in 1988), CONAFE unit costs averaged approximately twice those for federal general schools in the three states. Paradoxically, repetition inefficiency was greatest where per pupil spending is highest. This can be attributed, in part, to the fact that (a) CONAFE schools employ as teachers secondary school graduates (who receive just two months of training over the summer), and (b) CONAFE schools are strictly unitary (one teacher for six grades) and are typically located in the most remote, isolated villages which offer few other educational opportunities. Federal Indigenous primary schools had the second highest percentage of resource wastage in the three states (22% in Oaxaca, 19% in Chiapas, and 22% in Guerrero). Because of the large indigenous enrollments in these states, however, absolute wasted resources were much greater than those for CONAFE schools (more than twenty times greater in Oaxaca). Meanwhile, Federal General schools had the lowest percentage of resources wasted (16% in Oaxaca, 14% in Chiapas, 12% in Guerrero) but the greatest absolute amount of wasted resources due to their relatively large enrollments. As a percentage of each state's total wasted resources (for the three school types) Federal General schools accounted for 61% in Oaxaca, 65% in Chiapas and 71% in Guerrero. In summary, "community schools" had the highest percentage of wasted resources but the Federal General schools accounted for the bulk of those wasted resources due to their much larger enrollments. Federal Indigenous schools fell inbetween, with a relatively high percentage of resource wastage and relatively high absolute amounts of wasted resources. Repetition inefficiency must be addressed in all three school types. However, the reduction in CONAFE wastage when dropout costs were omitted suggests an urgent need to target dropout reduction efforts especially in small, rural villages where the opportunity costs of schooling may be especially high. Potential Resource Savings from Reduced Repetition and Dropout Rates The maximum potential resource savings from reduced repetition and dropout rates would be equal to the costs of repetition and dropout estimated above. However, several caveats to this appproach should be highlighted: (a) reduced repetition may simply increase cost-efficiency and the average level of schooling rather than reduce expenditures, if students continue to spend the same number of years in school; (b) reduced dropout will require the government to provide additional school years to those who otherwise would have left the system, increasing educational costs; (c) the impact of reduced wastage on actual learning (the ultimate objective) is still not clear. Repetition may or may not increase a student's learning; more research is required on the relationship between educational achievement and efficiency to address this issue. Nevertheless, reduced primary level repetition which does not result in greater demand for schooling and simply decreases the number of school years to produce a primary graduate will save money. But it is unlikely that dropout and repetition will be eliminated entirely, as the factors associated with dropout and repetition (both endogenous and exogenous to the 4 school environment) are likely to persist. Accordingly, it is more realistic to consider a range of reduced repetition and dropout rates rather than their elimination. Such sensitivity analyses were applied to the model used above to calculate potential savings. (The methodology for estimating these savings is provided in an annex.) Findings * By reducing the repetition rate by 30% and the dropout rate by 28%, nationwide, Mexico could save approximately US$71 million each year. * Each percentage drop in the repetition rate would save the government approximately US$18.5 million per year (see Figure 1), while each percentage decline in the dropout rate would save almost US$500,000.21 * By reducing repetition rates by roughly one-third in the three states, Mexico could save approximately US$ 12 million per year. Such reductions are not unrealistic if the government makes Savings From Reduced Repetition Rates the necessary investments in In 1990 US Dollars educational quality, and if teachers, Percent Reduction in Repetition Rate students and the community renew their commitments to learning. Indeed, these investments would most 4 likely pay for themselves in reduced ...... . ............ . inefficiency, increased savings and increased labor productivity down the road. Savings could conceivably be I - - re-invested in the primary education a subsector, helping to reduce wastage 18,eo a8,9ei,000 15,48,680 7,98Z110 9Z477,840 rates even more. In other words, the Savings In 1990 US Dollars vicious circle could be transformed iaduced Wastao into a virtuous one. Figure 1: Potential Fiscal Savings From Reduced Repetition Rates in Mexico 3/ This does not consider the costs of dropout in Grades 4-6 and discounts the costs of dropout in Grades 1-3 by 25% in order to account for partial learning, so the economic costs of dropout may be underestimated. 5 Policy Recommendations These findings suggest that repetition is the greatest problem, but is also the area of largest potential efficiency gains. What is missing in the equation is the initial financing to invest in improved educational quality and reduced inefficiency, and herein lies the policy implication of this analysis. While it is difficult to tie educational investments and output in a straight production function, one might say: * a well-designed, well-targeted primary education investment of up to US$ 71 million per year in Mexico (or US$14.5 million per year in the states of Oaxaca, Chiapas and Guerrero) could be justified purely on efficiency grounds, disregarding quality and equity rationales. This would represent approximately US$4.85 per student (or US$11.50 per student in the three states). These funds could go for increased supply and improved quality of didactic materials, teacher training, rehabilitated facilities and distance education. Although only a 4% increase in overall per student expenditures (11 % for the three states), this would represent a 77% increase in non-salary per student spending. One could realistically suppose that this increase could improve educational quality such that repetition rates would be reduced by 30%. Indeed, Shiefelbein has estimated that a 5% increase in spending would be enough to reduce annual resource wastage by 30%. Such a reduction in repetition rates would generate resource savings which would be greater than the costs incurred to achieve them. Moreover, just as the economic costs of inefficiency are greater than the fiscal costs (see above), so the economic returns to reducing inefficiency would be greater than the fiscal returns. This further justifies the initial investment. Alternatively, the government could simply adjust its promotion policy temporarily, administratively reducing repetition rates and generating savings which could be invested in primary educational quality. More specifically, it is estimated that an automatic promotion policy for first to second grade would save the government approximately US$80 million per year. Presumably, using these savings for quality investments would increase academic achievement such that repetition rates would decline naturally (as opposed to administratively), which would allow the government to terminate this policy within a few years. In fact, modern pedagogical theory holds that children's readiness to learn to read and write occurs at different chronological ages, and that children from impoverished environments are likely to take a longer time to become literate. This suggests that an automotic promotion policy might actually increase (rather than decrease) the learning of those students who were "administratively promoted", rather than forced to repeat thereby increasing the likelihood of dropout. Admittedly, such a policy might risk sacrificing the education of those students who were promoted beyond their capacity for learning, and might have unforeseen consequences (e.g. increased demand for secondary education, lower academic achievement among all students, etc.). But in an environment of resource scarcity, such temporary risks may be 4/Shiefelbien, p. 41 6 worthwhile if they allow the government to make investments which could break the vicious circle of inefficiency and poor educational quality. If financing is available, however, the investment option described above would be preferable. 7 ANNEX 1 - Formula for Estimating Percentage of Resource Wastage Due to Repetition and Dropout: Parameters: E = Enrollment R = Repetition Rate D = Dropout Rate U = Unit Cost g = General Primary School i = Indigenous Primary School c = CONAFE Community School w = Resource Waste in grade x W = Resource Waste X = Total Expenditures P = Percent of Total Expenditures Wasted 1. For Grade 1: [((Eg*Rg)*Ug)+((Eg*Dg)*.75*Ug)] + [((Ei*Ri)*Ui)+((Ei*Di)*.75*Ui)] + [((Ec*Rc)*Uc)+((Ec*Dc)*.75*Uc)] = w1 Repeat for Grades 2-6 and sum wastage for all grades, wl-w6 = W 2. (Eg*Ug) + (Ei*Ui) + (Ec*Uc) = X 3. W/X =P In each state, for each primary grade and for the three types of schooling, total enrollment was multiplied by the repetition rate for that grade to determine the total number of repeaters. This was multiplied by the unit cost of the type of schooling to determine the resource wastage. A similar exercise was done for the first three grades of primary school to calculate the resource cost of dropouts, discounted 25% to account for partial learning. These wasted resources were then compared to total expenditures (total enrollment times the unit cost) to determine the percent of the budget resources (for that school type) wasted in 1988. Wasted resources and total expenditures for each school type were then added to determine the total wasted resources, expenditures, and percent of wasted resources at the state level. These, in turn, were added (for the three states) to calculate the regional total of wasted resources, expenditures and percentage of resources wasted. Finally, this same exercise was done at the national level, using more general aggregate data. 8 A. Savings from Reduced Repetition and Dropout Rates Using the spreadsheet designed to calculate the resource costs of repetition and dropout in these three states, sensitivity analyses were performed to estimate the potential savings from reduced repetition rates. Several steps were necessary to accommodate the 18 specific repetition rates (one for each grade 1-6, by school type) used in the spreadsheet. Weighted averages of repetition and dropout rates were calculated for each state, with the weights determined by the percentage enrollment in each school type. These weighted averages were then used as input cells in a data table for a range of hypothetical lower repetition and dropout rates. The table calculated the (reduced) costs of the repetition and dropout rates, and these costs were subtracted from the actual costs originally calculated. The difference was then converted into 1990 US dollars and represents the potential savings from increased efficiency. This exercise was repeated for all three states, and then done at the national level using more aggregate data. Views from LATHR No. 1 "The Magnitude of Poverty in Latin America in the 1980s" September 28, 1990 No. 2 "Decentralization and Educational Bureaucracies" by Juan Prawda, November 15, 1990 No. 3 "What Should Social Funds Finance?. Portfolio Mix, Targeting, and Efficiency Criteria" by Margaret E. Grosh, December 1990 No. 4 "Financial Balance in Chile: The ISAPRES anstituciones de Salud Previsional) Health Care System and the Public Sector" by Phillip Musgrove, January 15, 1991 No. 5 "Population, Health and Nutrition Issues in the Latin American and Caribbean Region and the Agenda for the 90's" by Oscar Echeverri, January 20, 1991 No. 6 "Population and Family Planning in the 1990's: Reconciling Macro and Micro Issues" by Bruce D. Carlson, February 25, 1991 No. 7 "The Feasibility of Student Loans in Latin America: A Simulation" by Samuel Carlson and Guozhong Xie, March 10, 1991 No. 8 "Transforming the Vicious Circle - The Costs and Savings of School Inefficiency in Mexico" by Samuel Carlson, April 1990