Making education in China equitable and efficient

POLICY RESEARCH WORKING PAPER 1814 Making Education in ChinaWhtrChabcoe competitive internationally Equitable and Efficient on the- quafity of 't human re.ources. The governh ent: priorities should be to improve the equity, Shaikh IL Hossain efficiency, and quality of socal serKices, as well as their financing. The World Bank China and Mongolia Department Rural and Social Development Division August 1997  POLICY RESEARCH WORKING PAPER 1814 Summary findings As China consolidates its rapid economic gains and Progress in human resource development has steadily continues its drive toward a market-oriented slowed in recent years, however, because of two broad environment, the country's international competitiveness problems. First, the distribution of education services will depend greatly on the quality of its human continues to discriminate against the poor, largely resources. because they have not benefited from recent gains in China has made impressive gains in human resource economic growth and are being choked off from access development in the past two decades, and continuing to to services. do so will help reduce poverty in two ways: indirectly, by Second, some mechanisms and arrangements for increasing the productivity and efficiency of its labor delivering services have created targeting inefficiencies. force, and directly, by fostering the earning capacity of Hossain argues that the government's priorities the poor. Eventually, improving human resources will should be to improve the equity, efficiency, and quality spur economic growth and enhance welfare. of social services, as well as their financing. This paper - a product of the Rural and Social Development Division, China and Mongolia Department - is a revised version of chapter 1 of the World Bank report "China: Social Sector Expenditure Review, 1996," China and Mongolia Department, Washington, D.C., 1996. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Clydina Anbiah, room T7-015, telephone 202-458-1275, fax 202-522-1778, Internet address shossain@worldbank.org. August 1997. (32 pages) The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Produced by the Policy Research Dissemination Center  Making Education in China Equitable and Efficient by Shaikh I. Hossain This is a revised version of Chapter 1 of World Bank Report, "China: Social Sector Expenditure Review, 1996" I would like to thank Jere Behrman, Tamar Manuelyan and Carl Jayarajah for helpful comments. Comments from Mr Sun Ping Sheng, State Education Commission Beijing, and Mr Diao Yu Hua Provincial Education Commission, Zheng Zhou, Henan Province during a seminar held in Beijing were very helpful.  ::~ ~~~ ~~~~ ~~~ ~~~ ~~~ ~~~ ~~~ ~~~ ~~~ ~~~ ~~~ ~~~ ~~~ ~~~ ~~~ ~~~ ~~~ ~~~ ~~~ ~~~ ~~~ ~~~ ~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~  - 2 - INTRODUCTION The stage is set for China to begin making significant strides in educational development. First, China's economy is buoyant, with a projected annual growth rate of 8 to 10 percent over the next twenty years. As such, additional resources should readily be available from both public and private sources. Second, demographic profile is favorable to the education sector, in particular, the size of the school-age population is declining, reflecting that financial burden both on the government and on working adults will be reduced (Fig 1). Third, shifts in the structure of the economy-rapid employment growth in the industrial and service sectors as well as an increase in the number of workers with post-primary education-mean that China's education sector will assume an increasingly prominent role in the economic growth. (Table 1, Annex 1). To take advantage of these opportunities, however, China must confront major challenges at each level of its educational system. At the primary level, for example, only two-thirds of primary school students currently complete their entire primary cycle, completion rates are particularly low among poor regions and female students at the secondary level, many families lack the incentive to send their children in school, due largely to both economic and cultural factors. And at the higher level, coverage is extremely low, and the subsector has been slow to respond to the emerging labor market demand inspired by China's growing economy. The purpose of this paper is threefold: to assess the current status of education in China with a regional perspective, to examine the main challenges, and to propose strategic directions for creating an externally efficient education system that enables the country to enter the 21st century on a sound footing. Overall Development Educational development in China has been quite impressive. The adult literacy rate, an outcome of past cumulative investment in education, grew from 60 percent in 1960 to 74 percent in 1994. By the early 1960s, China had also achieved virtually universal enrollment in primary education, a coverage rate that still outpaces the rates found in several Asian counterparts. But, China does lag behind other countries regarding other dimensions of educational progress. For instance, its rate of enrollment particularly in higher education is below both the average among all Asian countries and the rates found in low-income countries, let alone its close comparators. Key outcome indicators, such as average grade attainment of the current school-age population and cohort survival rate, although showing steady progress, are modest when compared with those of Malaysia, Korea, Thailand and Sri Lanka (Table 2, Annex 1). For instance, average grade attainment is 5.6 years in China, which is close only to India but significantly lower than its close comparators. Likewise, cohort survival rate is 68 percent, quite lower than its close comparators and similar only to the Philippines. Yet, when income level is accounted for, the level of educational attainment in China is moderately high relative to other countries (Fig 2) . Part of the difference can be explained by how the three levels of education--primary, secondary and tertiary-- are  Fi-ure 1 China: School-age Dependency Ratio by Year Percent 50 40 30- 1995 20O- 2010 2020 Source: Table 1. Annex 1. Male 2 Female Figure 2 Relationship Between Average Grade Attainment (Year) and Income (1993) Average grade attainment 12 11 10 -Sn Lanka 9 O Philippines O Malaysia 8 Olndonesba 7 OVid Nam *Thailand , 5myanmar 6 _ * Mongoia *,China 5 -OL la *Papua New Guinea 4 VBang lades h NepalOPakistan 3 - 2 *Bhutan 1_ O . I I I I II 0 0 200 400 600 800 1,000 2,000 3,000 GNP per capita (US$)  - 3 - affected by budgetary allocations, private-public sector demand, and level of economic development in China. Thus, the pace of improvements in qualitative indicators in China would depend on the choice of investments and sectoral policies, especially those affecting the development of primary and secondary education in needy areas. There may be little scope for improving quantity but there is room for quality enhancement in schooling, which may infact generate more significant gains in educational attainment. Evidence from several developing countries suggest that the rate of return to improving the quality of schooling is high compared to improving quantity of schooling of a given quality 1. Access to Education and Equity within the system (a) Access to Education. Gross enrollment rates at the primary level had been higher overtime, but the enrollment growth compared to other levels is slow because the coverage at this level was already extensive for a long time (Fig 3). Slower growth in enrollment in primary education also stems from declines in birth rates since 1970s and a reduction in dropout and repetation rates that reduced the proportion of students in the primary school-age range. In secondary level, gross enrollment rates rose progressively but at the higher level, both enrollment rates and growth remained low based on the overall experience among Asian countries (Table 1, Annex 1). Although populist policies during the Great Leap Forward period created greater higher educational opportunities for working class and peasants, femine and social conflict in the early 1960s thwarted that momentum, and all universities were closed in the early 1970s in favor of several short- 2 term training courses. Regular enrollments were restored in 1976, but China had already lagged behind Korea, Malaysia, Thailand and other Asian countries in terms of age cohort participation rates in higher education. Moreover, the urban focussed short-cycle courses in vocational universities, supported by municipal governments became more popular than provincial universities' 4-year academic programs that typically lead to prefecture and county level jobs. (b) Structural Equity: In Table 1, the data show the shape of the enrollment pyramid which reflects the access to various levels of education and determines the distribution of educational attainment of a generation. While public expenditure by level of education is another structural dimension of equity as it influences the distribution of resources in the sector. But, structural equity alone does not necessarily imply that people from all socio-economic backgrounds and from all geographic regions have equal access to schooling. Therefore, accessibility to education and educational achievements by different income groups and across all provinces are examined on the basis of both time-series and survey data later. For empirical evidence in a number of countries see, Jere Behrman and Nancy Birdsall,"The Quality of Schooling: Quantity Alone is Misleading" American Economic Review, 1983. Jere behrman, Donald Ross and Richard Sabot, "Inproving the Quality Versus Increasing Quantity of Schooling" 1992, Colby College (Mimeo), Waterville, MA 2 Higher education was perceived very inegalitarian, creating an exclusive elite group. See Julia Kwong,"Chinese Education in Transition: Prelude to the Cultural Revolution" Montreal: McGill Queens University Press, 1979.  Figure 3 China: Gross Enrollment Rate (%) Gross enrollment rate (%) 160 140- 120 - 100 80 60- Secondary 404- 20- Higher 1975 1980 1985 1990 1994 Source: Table 1. Annex 1. Figure 4 CHINA Distribution of Cumulative Educatioin Spending: 1994 Percentage cumulative education spending 100 80 60 40 / o 0 / / / _ ~~~~~~~~~Gini =0.395 20 0 I I 0 10 20 30 40 50 60 70 80 90 100 Percentage of school age population ksr/c5/w70300f  -4 - At least three important characteristics have shaped a structurally equitable educational system in China; a flatter enrollment pyramid--nearly universal entry into primary education and lower enrollments in higher education; and, more instructive, a pattern of government spending by educational level that conforms equitable distribution of resources. From 1982 to 1993, more than 60 percent of public educational spending was allocated to basic education--primary and junior secondary levels--so that the poor can get wider access to it. Another feature, although not yet very significant, is the growing private enrollments in higher education, suggesting that the proportion of fees being used to finance post-primary levels of education is increasing, allowing greater subsidies to basic education.  Table 1: Structure of Enrollment and Public Expenditure on Education 1980 1985 1993 Gross enrollment ratio (percentage) Primary 148.0 126.0 104.0 Secondary 32.0 39.0 48.0 1.1 1.6 2.0 Higher Public expenditure on education As a percentage of GNP Primary 0.95 0.79 0.75 Secondary 1.00 0.79 0.74 Higher 0.55 0.58 0.51 As a percentage of public expenditure Primary 3.4 3.6 4.7 Secondary 3.6 3.5 4.3 Higher 1.9 2.8 3.1 As a percentage of education expenditure Primary 38 36 40 Secondary 40 36 39 Higher 22 27 21 Percentage of cumulative public spending 29 27 received by best educated decile a/ a/ Staff estimates Source: State Education Commission and SSB. A single summary indicator of structural equity is provided by the share of cumulative public expenditure received by the best educated decile in a generation. Overall, 10 percent get 27 percent of cohort resources and 90 percent receives the balance, reflecting an egalitarian distribution of public subsidy in education. This is also well below the regional Asian average of 39 percent. Normally, the best educated decile in developing countries receives more than its population share of the cumulative public expenditure on education. The cutoff at 10 percent is an arbitrary one, but it  -6 - provides an indicator of the concentration of public resources on education.3 The relative extent of structural equity is captured by a Lorenz curve and the corresponding gini concentration ratio (fig 4). The Lorenz curve for China is close to the line of equality and the gini coefficient is quite low (0.39). It is useful to note that the gini coefficient is smaller than it was in 1985 (0.43), reflecting that the distribution of public spending on education has become much more equitable in the past seven years. Table 2: Gross Enrollment Rates by Quintile of Provincial Per Capita Income 1993 Age group of children 7-11 years old 12-14 years old 14 and above Quintile Male Female Total Male Female Total Male Female Total I 90.2 83.2 86.7 28.5 24.0 26.2 3.8 1.9 2.8 II 92.0 90.3 91.1 38.1 33.0 35.5 5.2 2.3 3.7 m 93.1 91.0 92.0 39.2 37.1 76.3 6.8 3.0 4.9 IV 95.1 94.8 94.9 66.3 71.4 68.8 7.9 3.3 5.6 V 97.6 97.2 97.4 72.9 78.6 75.8 9.2 3.8 6.5 Rural 92.3 87.6 90.1 34.8 31.0 32.9 Urban 96.8 96.6 96.7 70.2 75.0 72.5 Source: Staff estimates from SSB and State Education Commission data. This trend owes much to the increasing enrollments in private universities and introduction of user fees in public higher education. However, the differences in the rates of cost recovery and unit costs within higher education are not captured here. But, it is very unlikely that a more sophisticated calculation would reverse the finding that Chinese system of education is fairly egalitarian in its global structure of access and public expenditure. Yet, the structural equity has not translated into equitable educational benefits across provinces. While primary education are relatively targeted to poor provinces, accessibility to post-primary education shows marked interprovincial variance. When provinces are ranked by per capita income from poor to rich, the avowed policy of the government to ensure an egalitarian distribution of educational expenditure increasingly vanishes (Fig 5). Per-pupil expenditures are disproportionately higher in rich provinces compared to those in poor provinces. The richest quintile of provinces Shanghai, 3 Cumulative public spending on education refers to the total amount of public resources appropriated to a generation of people passing through their schooling years. It captures the distribution of cumulative benefits (education) among people with different school careers, rather than the distribution of single period benefits at a given level of education. For details on calculation, see Alain Mingat and Jee-Peng Tan," On Equity in Education Again: An International Comparison" Journal of Human Resources, no 2, 1985  Figure 5 Per pupil expenditure by province 1993 1200 1000 800 600 + ~~~~~~~~~~Secondaryi 400 200 1 2 3 4 5 6 7 8 9 10 12 13 14 15 16 17 18 19 20 2122 23 24 25 26 27 28 29 Poorest province Richest  - 7 - Beijing, Tianjin, Guangdong and Liaoning spent almost 1.5 times more than the poorest provinces such as Guizhou, Guangxi, or Henan. Table 3 Drop out Rates by Area and by Gender, 1992 Rural Urban Grade Male Female Total Male Female Total Primary level 1 37.8 31.9 33.8 21.7 42.1 31.0 2 21.1 22.7 22.2 8.7 10.5 9.5 3 17.4 21.4 20.1 43.5 15.8 31.0 4 13.4 13.5 13.4 17.4 21.1 19.0 5 9.4 8.6 8.8 8.7 5.3 7.1 6 1.0 1.9 1.6 0.0 5.3 5.3 Secondary level 7 29.5 33.4 31.8 23.5 22.5 23.1 8 55.1 53.7 54.3 47.1 65.0 53.7 9 15.4 12.9 13.9 29.4 12.5 23.1 Source: SSB: Situation of Children, 1992. (c) Access to education by provinces. The foregoing is substantiated by the differences in enrollment rates for primary, secondary and higher education by quintile of provinces in Table 2. The attendance rates at the primary level are, by and large, similar irrespective of poor or rich area, confirming the earlier observation from national data of universal entry at this level of education. But the enrollment-rate disparity between rich and poor provinces grows as students move on to secondary and higher levels. Such disparity is particularly acute among the 12-14 and 14 and older age groups-- corresponding to post-primary education--than among the 7-11 age group. Urban-rural differentials are also pronounced, and this can be attributable to differences in income and quality. Primary education that corresponds to age range 7-11 is compulsory in China, but attendance is not universal in rural area particularly among the females. Urban children and those from high-income provinces are much more likely to attend secondary school (about 2.2 times) compared to children from rural area and low-income provinces. In the absence of compulsion in the subsequent age groups the gap in attendance rates widens steadily. Higher education is mostly received by households in richer provinces.  -8 - What has happened to the access to education by provinces in other years? Similar household surveys are not available, but enrollment rates by provinces, ranked by per capita income from poor to rich, indicate that the importance of income as a correlate of school enrollment has not changed, the richer the province the higher the enrollment rate in post-primary education. (d) Social selectivity. Chinese educational system suffers from social selectivity. Disparities in drop-out rates at the secondary education level are quite pronounced . Male-female differences in primary education are modest but very significant in secondary education. Drop-out rates also widely vary according to geographic location and level of education: high in poor provinces and secondary education, and vice versa. In secondary education, in rural areas, more females tend to drop out of school than do males (Table 3). The reason is that due to obvious economic difficulties, females from poor families leave the schools earlier to start working at home or to help their families. Inadequate learning environment in poorer provinces is another reason for early exit from school system. (e) Affordablity and Quality. Private costs incurred by the poor are high enough to prevent them from attending schools. The main components of out-of-pocket educational expenditure are tuition, textbooks, stationaries and contribution to schools (Table 9, Annex 1). The figure 6 shows that as a percentage of non-food household expenditure, the poorest quintile spend three times more on education (14.2%) than those in the top quintile (5.5%). The full private cost of school attendance would raise the cost-nonfood expenditure ratio--a measure of affordability--further if the opportunity cost of time in school is considered. For rural area, total private educational expenditures are examined by provinces, ranked by per capita income from poor to rich (Fig 7), and similar conclusion holds--that the prices faced by families in poorest rural provinces are high enough to create an obstacle to raising enrollment rates than those in the wealthy provinces. Infact, figure 8 shows that economic conditions prevent nearly 40 percent of children among the 7-14 age group, corresponding to primary and junior secondary education, from attending schools in the poorest province (quintile I) compared to 14 percent in the wealthiest province (quintile V). Moreover, regarding quality of schooling, one direct measure of the quality gap is the availability of textbooks and teaching materials in schools. The same data confirm that more than 35 percent of the children living in the poorest provinces reported either inadequate supplies of textbooks or other teaching materials as the main reason for not attending schools; corresponding figure for children in the richest province is 21 percent. In higher education, a simple regression with province-level data show that graduation rates are influenced by the  China: Affordability of Public Schooling Urban Area Figure 6 Pnvate cost/non food expenditure (%) 16 14.2 14 12 10~~~~~~1. 8 656 4 2 0 I I III IV V Poorest Household quintile 1992 (Urban) Richest China: Affordability of Public Schooling Rural Area Figure 7 Private cost/non food expenditure (%) 20 P qi 1892 16ercent of children aged 7-14) 1 4 1 2 10 8 6 4 2 I 11 lil IV III IV v Poorest Provincial quintile 1992 (Rural) Richest China: Reasons for Not Attending School, 1992 (percent of children aged 7-14) Percent Figure 3 100 3.. 20 38. 01 II III IV V Average Poorest Quintile of Provinces Richest *Econoreic 0Poor condition 0Lack of supplies U Incapable 0) Other ksr/05tw7O300abd  -9 - availability of qualified faculty. But the poor provinces are deprived of more qualified faculty. Based on relative faculty ratio (RFR) the richest quintile of provinces--Beijing, Shanghai, Zhejiang, Liaoning clearly have an oversupply of professor and assistant professor, as the value of RFR far exceeds one (1.60 and 1.20); conversely, the poorest quintile of provinces--Guizhou, Xinjiang, Anhui, Henan, Guangxi and Sichuan --have an undersupply of such more qualified faculty (Table 12, Annex 1). Outcomes and Efficiency This section focuses on outcomes that are internal to the educational system-- specifically, cohort survival rates and transition rates, and outcomes that are external to the system, such as private and social rates of return to educational investments. Both sets of outcomes are critical, since together they help determine the global efficiency of the educational system. Yet, few efforts are made to assess the impact of public policy on these outcomes in China. The dearth of such assessments is due in part to the scarcity of appropriate data and in part to the fact that these outcomes were not important to policymakers under the command economy. (a) Internal efficiency. Conventionally, an education system is internally efficient if it generates the maximum output at minimum cost. Outputs are measured by such indicators as transition rates and cohort survival rates or the proportion of students who start grade 1 and complete each subsequent cycle, students' cognitive and technical skills, scientific knowledge, improved and the like. Ideally, a combination of individual survey and time-series data are used for this analysis. However, in the context of the present study, readily compiled provincial-level time-series data are used to provide results that would be helpfuil for policy interventions for improving system's internal efficiency which also improves quality. At the aggregate level, educational outcomes vary directly with income. The transition rates from primary to secondary and secondary to higher level of education are higher in higher income provinces us compared with those in lower income provinces. Other eclectic statistical analysis strengthen the conclusion that public expenditures are important determinants of transition from one level to another. A regression is done in which transition rates are explained on the basis of per capita income, per student educational expenditure and agricultural wages. Agricultural wages are used to measure the opportunity cost of children's' time and to the extend possible the expected value of education. The results clearly suggest that both income and educational spending tend to increase transition rates (Table 4). But more importantly, the results indicate that keeping budgetary allocation to primary education at a high enough level will compensate for the negative effect of low income by making the likelihood of transition to secondary and higher levels of schooling more equal throughout the country.  - 10- The transition from junior to senior secondary education is negatively associated with the transition from primary to secondary levels. This reflects that some of the less qualified students from the high-income provinces where transition rates are high, fail to survive the next level or perhaps they go out to work with families or in the labor market due to higher opportunity costs. This is reflected by the opposite signs of income and education expenditure variables and higher negative value of agricultural wage variable in equation (2). Primary education is compulsory and supply-driven, while at post-primary levels, the household choice for extending education can be predicated on the opportunity costs to parents of pupils' time. Transition rates to secondary education are low in poor and more agricultural provinces than in rich provinces that are less agricultural. Thus, equity and better educational outcomes well justify public expenditure at primary education. It is also important to assess if low transition rates to secondary schooling are a concomitant of poor schooling conditions in primary education or of weak private demand for secondary education. Empirical evidence in several countries suggest that schooling conditions in primary education is critical because they create learning environment for students and motivate them to continue education at post-primary levels. The regression results in Table 4 suggest that the demand for post-primary education is not weak, as transition rate is positively associated with per capita household income--a measure of the strength of private demand. Moreover, mean achievement test score--an indicator of the quality of education--is strongly associated with higher transition rates. Thus, improving the quality of primary schools--an outcome that can be influenced by the government budgetary decisions--would enhance continuation of education to post- primary levels. Another piece of evidence is the differences in cohort survival rates at the end of primary school by provinces. Higher cohort survival rates are associated with lower per- pupil costs in wealthy provinces relative to low-income provinces, reflecting that the rich provinces have more internally efficient educational systems than their poorer counterparts. Students in high-income provinces including Beijing, Shanghai, Tianjin, Guangdong and Liaoning survive until the end of primary cycle. While in poorer provinces like Guizhou, Guangxi or Anhui about 20 to 25 percent of students do not persist to the end of primary cycle. (Fig 9)  Fig. 9 Cohort Survival Rate and Unit Cost, 1993 Poor Guizhou T - Guangxi I -. Anhui Henan . -. Gansu Sichuan Jiangxi i Yunnan Shaanxi - Hunan Tibet ---. . .- . - Ningxia Qinghai Shanxi U Inner Mongolia Hubei I Hebei Jilin .........3 X injiang -_____ _____ _____ _____ _____ Fujian Heilongjiang Shandong Jiangsu . Zhejiang U , .: Liaoning u Guangdong Tianjin ' Beijing Shanghai Rich 120 100 80 60 40 20 0 5 10 15 20 25 30 35 40 U CSR 1. Unit cost Note: Provinces are ranked by per capita income. CSR = Cohort Survival Rate at the end of primary cycle. Unit cost = per-pupil government expenditure in primary educat!r. as a percentage of provincial GNP per capita. Fig. 10: Rate Of Return to Education ROR (%) o 5 10 15 20 E .0: E~~~~~~~~~~~~~~~~~ PRVT ROR I-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~  - 11 - Table 4 Regression Results for Transition Rate, 1992 Dependent Variable = Transition rate, 1992 Primary Junior Secondary Right hand to to side variables Secondary Senior Secondary constant -86.4* -0.17 (-9.23) (-0.77) log Income per capita 12.91* -0.571* (2.02) (-2.49) log Expenditure per pupil 10.33* -0.077 (3.05) (-0.56) log Agricultural income 1.69 -0.106 (0.95) (-1.74) Deviation of Grade 6 Achievement Score 0.112* -NA- From National Mean (2.55) N 29 29 Adj. R 0.655 0.305 Note: The T-statistics are in parenthesis. (*) Significant at 5 % level. (b) External Efficiency. Ascertaining a closer match between the education system's future output and the demand for educated labor requires rate of return analysis. Such analysis also assesses whether educational investment had any impact on household welfare, and where should resources be allocated in the sector so as to make it more externally efficient? A summary of economic rates of return to three levels of education, based on "elaborate" or "complete" method with the data from 1993 Labor Survey by the Ministry of Labor, is presented in Table 5. Both the private and social returns to each level of education were high in 1993, making investments in education socially profitable in China.  - 12 - The social rates of return is the highest for primary education (14.4%), followed by secondary education (12.9%), implying that investment in these levels of schooling will promote both equity and efficiency objectives. These findings are consistent with those elsewhere that additional years of primary education will increase productivity and income among the poor 4. In secondary and higher education, the social rates of return are not very high due partly to higher government subsidy in terms of increased operating budget and teachers' salaries. This is also reflected in the index of subsidization particularly for higher education, which indicates the degree to which costs are borne out by the public sector compared to the private sector. In China, the index is only 4 percent for secondary education and 31 percent for higher education . The high private returns to secondary and higher education imply that investment in these levels lead to high wage- paying jobs, an important paradigm in a rapidly growing economy such as China. But, high wages may also reflect institutional pressures (minimum wages) rather than augmented productivity resulting from human capital formation by these levels of education'. Table 5: Rates of Return to Education (Percent), 1993 Private Social Index of Rate of Return Rate of Return Subsidization (a) Primary 18.0 14.4 1.25 Secondary 13.4 12.9 1.04 Higher 15.1 11.3 1.31 Note: see Technical Annex A for detail (a) The ratio of private to social rates of return. Source: Staff calculations from MOL Survey 1993 Table 6 reports the basic Mincerian earnings functions, showing that the overall marginal private rate of return to one year of extra schooling, irrespective of education level, is around 12.5 percent. The marginal returns to education for three levels of education are displayed in the last column. These rates are consistent with the earlier 4See for example, Lockheed, Jamison and Lau, 1980,"Farmer Education and Farm Efficiency: A Survey in Education and Income" World Bank Staff Working Paper No 402. Authors found that on average, farmers with four years or more of primary education were at least 7 percent more productive than those with no primary schooling. 5 Labor productivity improved slowly until 1987. See I.J. Singh,"Industrial productivity in Socialist Economies", 1991.  - 13 - findings as they are close to those based on the "complete" method in Table 5. One exception to findings found in other developing countries is the positive coefficient on the squared term for schooling (S2). Thus, contrary to the common pattern of diminishing returns to spending in additional years of schooling, there is slightly increasing return in China. The results perhaps reflect the changing economy in which large agricultural sector is utilizing labor inputs of mostly less educated workers, and a rapidly growing modern sector that is demanding more highly educated and qualified labor. Overall, three important conclusions emerge from foregoing analysis. First, the high social rates of return to primary and secondary education suggest that the demand for labor with these educational levels still exists. The government may allocate more resources to these levels of education in order produce more graduates, but such allocations should be selective at the secondary level; since costs vary significantly by fields of study, as does the demand. Second, the social rate of return to higher education investments is below the returns to investment in alternative forms of capital, casting doubt whether further public expenditures in this subsector are justifiable. But if externalities are considered then social ROR to tertiary education would be much higher than the quoted social ROR and reducing expenditures may jeopardize the already very narrow access to higher education, particularly among the poor. The attendance rates in higher education are very low, capturing only one fifth of secondary school graduates. The students who exit from education system create an oversupply of labor with senior secondary schooling, thereby affecting their wages and eventually dampening returns on investment. It would be prudent to target governmental resources to those fields of study where the demand in labor market is high. Third, the access to higher education should be enhanced by introducing alternate methods of financing higher education, such as scholarships and student loans that eventually would help reduce the differences in rates of return.  - 14 - Table 6: Returns to Education (Mincenan Earning Function), 1993 Rate of Return Basic Dummry (Percent) constant 10.12 12.03 Schooling(s) 12.20 Schooling (S2) 0.005 squared Experience (E) 0.031 0.034 Experience squared (E2) -0.0002 -0.0001 No education (Base) 0.000 Primary 0.303 18.2 Secondary 0.517 13.6 University 1.488 18.9 R2 0.274 0.268 Note: See Technical Annex A for detail. Source: Staff calculations from MOL survey 1993. Finally, one important issue concerning the social rate of return is that it is based on monetary earnings (or productivity) and excludes any "externalities" associated with education. These are benefits of education that go beyond what the individual investor realizes in terms of increasing earnings, such as effects on others by having more literate people around, or better nourished and health children if a mother is educated. However, this is not really a critique of the rate of return analysis. It is a possible addition to education benefits that are unmeasured, as for any other investment in a country.6. Assessing education system's future output goals also need tracking labor market development that are not captured by the ROR analysis. Table 13 (Annex 1) presents some relevant market signals, such as job vacancy rates by educational qualification . From 1990 to 1995, while the demand for all types of labor has increased, but the growth in the demand for secondary and university graduates is particularly high, justifying expansion of these subsectors. 6For recent attempts to quantify education externalities, see P. Romer, "Increasing Returns and Long Run Growth" Journal of Political Economy 94, 1986, and R. Lucas, "On the Mechanics of Economic Development" Journal of Monetary Economics 21, 1988.  - 15 - Strategic Direction: Education China's demographic and economic conditions appear remarkably conducive to future educational development, and preceding analyses reinforce the justification for further investments and policy changes in basic education--primary and secondary -- mainly to improve its capacity to enroll and retain poor students in economically disadvantaged areas, and in higher education mainly for diversifying its structure in tune with labor market signals . As such, the following strategies deserve urgent attention. Basic Education: One emerging problem that may become critical in the education system is its weak capacity to retain students in primary and secondary levels. Significant selection occurs within cycles of education through dropping out in several poor provinces, particularly among the girls. This results in adverse selectivity in the sector. To prevent the emergence of a disenfranchised social underclass, fundamentally policies should aim to lower the private costs by reforming prices, and raise the private benefits by fostering quality of education. Most of the costs are determined by public expenditure policies---the volume of recurrent subsidies determines how much individuals are asked to pay, and investment expenditures determine the density of school placement. The benefit side is influenced by how much the government spends on subsidizing such inputs as training for teachers, textbooks, equipment and classroom supplies. Pricing Refonns: To reduce the private cost of education for the poor children the government should adopt pricing reform. Lessons of three successful measures can be adopted to increase affordability depending on area and household characteristics in China. First, elimination of tuition and fees, second, introduction of voucher, covering fees plus costs related to school attendance, and third, introduction of augmented subsidy that covers fees, related costs for school attendance plus opportunity costs foregone. The third measure will improve enrollment prospects among the poor the most. In Asia, augmented subsidy was first introduced in Sri Lanka by the government, and later became popular in other countries. Recently, through World Bank projects, such subsidy has been introduced in Bangladesh and Guatemala for girls only, while vouchers were introduced in Colombia and Pakistan. In each project, students must maintain a certain grade average to continue to receive both subsidy and voucher. Another step involves food for education in primary and secondary schools only for the poor children as done in Bangladesh. So far, these measures have proved successful at enhancing enrollment and  - 16 - retention rates among poor as well as female students?. Since disparity in enrollment and survival in basic education occurs across region, gender and ethnic minority, the means of targeting above subsidies should be based on geographic region that is the so-called 8- 7 poverty counties, gender and ethnic minority. Improving Quality: To increase the private benefits of basic education among the poor its quality must be improved. One indication of quality gap is the variation across income levels in the amount of private spending on public schooling, much of which is devoted to such quality-enhancing inputs as textbooks. Given our regression analysis finding that government expenditure tends to improve survival prospects among students the central government should seek to allocate more resources for teachers' training, textbooks and other classroom materials in poorer areas. In this respect, schools should be targeted, because high dropouts, repetition and low achievement scores are more prevalent in poorer regions, serving low-income households. Special Measures: The government should also consider relocating schools closer to communities, changing the content of curricula, and recruiting more female teachers from local community to augment girls' participation and enable them to continue successive grades in a particular education cycle. Cross-country evidence of a strong and positive association between girls' enrollment and female teachers are abound, and evidence for China will be available when Bank- financed projects are completed.8 Secondary Education: Enrollment and survival rates in secondary education are lower in China than in other Asian countries at similar income levels. Our analysis suggest that this is mainly due to the lack of demand stemming from cultural factors rather than the lack of spaces. But the dynamics of China's new labor market should increase demand for secondary school graduates, necessitating some forms of governmental interventions. Although the present policy of 9-year compulsory education that extends the junior secondary level does enhance coverage, yet additional intervention via financial incentives for school attendance covering direct and foregone earnings particularly in less developed areas would be needed with the caveat that this incentive could be reversed when further justification no longer applies 9. Currently, the underlying assumption for such intervention is not inconsistent with the empirical findings of transition rates from primary to junior secondary education. But empirical support for higher government subsidy for senior secondary education to promote attendance and stimulate survival prospects is apparently weak. However, this conclusion does not nullify the case for more narrowly targeted subsidy and financial incentives such as scholarships for poor but meritorious students in senior secondary education. 7See, Shaikh I. Hossain, "Education Finance: Public Private Interface" (mimeo), Paper Presented at the National Institute of Educational Policy, New Delhi, India, 1995 8G. Psacharopoulos and H.A. Tzannatos 1992, "Case Studies on Women's Employment and Pay in Latin America" Regional and Sectoral Study, World Bank, Washington D.C 9Malaysia and Sri Lanka incorporated reversibility in their compensation design. The specific circumstances justifying their initial introduction did not continue when attendance and cohort survival rates improved markedly.  - 17 - Higher Education: In higher education the transition from the existing highly elite system catering only 2 percent of the age cohort to a mass system has been slow relative to its several East Asian comparators, and the system is projected to cover only 5 percent of the age cohort in 200010. Although social rate of return from higher education is low, yet future demand in China's expanding labor market argues for finding ways to enable universities to expand current enrollments. Once the demand for secondary school graduates rises, which is a likely prospect in itself, this pool will be enlarged from which only an expanded tertiary Adequate. but not excessive vocational: and technical education. Vocational and Techni.calEducation (V ) plays a:majo 'role dnprepa young Chinese to be producive .labor market entrants, and thereby, t . contribute o 'sustained mtional economic growth. But calculations from the.1993- Labor Force.Sure data. .yield very low private rates. of retum to.. vocational and technical edco- an 9.9 percent respectively. Suchlo6w.retur's canbe ascribed ,to highuniutcosts ratherthan tto a lack of demand: for. technicall skilled. labor. Since VTE is highlife . ,d tid aro s specialization-an.pri n ces in China,. future.skill m demanded by employers canot be predicte.. precisely.Therefore,.the issue of VTEplann'ing is hwbest to. frame 'a strategy f'r the 21 st. eMnty that t.provid.es. adequate.butnot texcessive,' c y fr. .trii'ng young labor market .ntrants. .Owing to the need for. trai.nabl QWo rs- ab.l -t -acquire new skils as technology chanesand .S restructured, t gv measures are advisable.: au gmentg inter fficiency.main by improving use of teachers' time, training- for trainers, :and utiizing physical facilities more intensivYe, a.nd modifying govnernm,ent'sr cognition,process-topromote greater institutioal . flexibility and elective otions forstudes These- m s wud-rduceun cos, foster mobbility. and eventually ae retu-rn ,s to invest ts -in .VT.: Augmented Subsidy, Vouchers-an.d Sc hlar asicEdution. .. . - . - - . . - . - - . - -....-... . . . .-. .-----. -. Enabling the poor to b eoe ed ucated, reqires not onl that they have access to, basic.. eduation, but also that they survive through pri mareducwation andmae tetansition to.post-primary education.' Results. frm several studies and B'akf-fiancedp 'jects find. that elimination of fees in.B.angladesh a,nd .Guatala,, intoduction ofvouchers in. Colombia and-Pakistan, have increased students' partiction and transition to-the next cycle:of education. Vou chershave en abledthpoor gain access tose]e prite schools, that have excess capacity. To retain these fi ial, c t h W .u pmary or secondary cycles sdes dwer requiedto it certain radepoint 10 State Issues New Development Program, no 1, Beijing, Xinhua Domestic Services in Chinese, in Foreign Broadcast Information Service (March 3, 1993)  / 05 0 {:: :::: :::: :::::::::::: ::::: :::: !:: ::: Fu~j 5 . . .. .gEiA .... fl00: fffF g W>::X0;idd;;~~4: ti:::: x'2: Wli: ................... .....C...S!i EijiEEEi .. ? vg-t E:S:-; w:::: _:: :: ::::.... . ..ce ..g ,000f. .......$ } 0. , kg....0 .-* - : -i:: i... r : iEEf.::.::ii::;E0 3 ::4g.:i:.E :FEifg ii'i::::f aES#E-E :: .I''^''-I ',,,;;:;:> tf'g:tS ,: ' ' C)..,.jE :: ES. : :::E.t.jQi::'s:'v f ~ ~ ~ C 0*S ' i''.'.t'SS.''',:000'.ff-n, ''''