STUDIES ON THE AFRICAN ECONOMIES

General Editors: Paul Collier and Jan Willem Gunning Published in association with the Centre for the Study of African Economies, University of Oxford

Editorial Board: Paul Collier, Director, Development Research Group, World Bank, and Professor of Economics, University of Oxford; Jan Will em Gunning, Professor of Economics, University of Oxford, and Free University, Amsterdam, and Director, Centre for the Study of African Economies, University of Oxford; Ibrahim Elbadawi, World Bank; John Hoddinott, Research Fellow, International Food Policy Research Institute, Washington, DC; Chris Udry, Professor of Economics, Yale University

This important new series provides authoritative analyses of Africa's economies, their performance and future prospects. The focus will be on applying recent advances in economic theory to African economies to illuminate and analyse the recent processes of economic reform and future challenges facing Africa. The books, published in association with the Centre for the Study of African Economies, will bring together top scholars from universities and international organizations across the world.

Titles include:

Arne Bigsten and Steve Kayizzi-Mugerwa CRISIS, ADJUSTMENT AND GROWTH IN UGANDA A Study of Adaptation in an African Economy

Paul Collier and Cathy Pattillo (editors) REDUCING THE RISK OF INVESTMENT IN AFRICA

Paul Glewwe THE ECONOMICS OF SCHOOL QUALITY INVESTMENTS IN DEVELOPING COUNTRIES An Empirical Study of Ghana

John Knight and Carolyn Jenkins ECONOMIC POLICIES AND OUTCOMES IN ZIMBABWE Lessons for South Africa

JoAnn Paulson (editor) AFRICAN ECONOMIES IN TRANSITION Volume l: The Changing Role of the State

JoAnn Paulson (editor) AFRICAN ECONOMIES IN TRANSITION Volume 2: The Reform Experience

The Economics of School Quality Investments in Developing Countries An Empirical Study of Ghana

Paul Glewwe Senior Economist The World Bank Washington, DC

with contributions by

Jaikishan Desai, Dean Jolliffe, Raylynn Oliver and Wim Vijverberg

in association with Palgrave Macmillan

First published in Great Britain 1999 by

MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 6XS and London Companies and representatives throughout the world

A catalogue record for this book is available from the British Library.

ISBN 978-1-349-15034-2 ISBN 978-1-349-15032-8 (eBook) DOI 10.1007/978-1-349-15032-8

First published in the United States of America 1999 by

ST. MARTIN'S PRESS, INC., Scholarly and Reference Division, 175 Fifth Avenue, New York, N.Y. 10010

ISBN 978-0-312-22139-3

Library of Congress Cataloging-in-Publication Data Glewwe, Paul, 1958-The economics of school quality investments in developing countries : an empirical study of Ghana / Paul Glewwe with contributions by Jaikishan Desai ... [et al.]. p. cm. -(Studies on the African economies) Includes bibliographical references (p. ) and index. ISBN 978-0-312-22139-3

1. School improvement programs-Ghana. 2. Educational evaluation­-Ghana. 3. Human capital-Ghana. 4. Economic development-Effect of education on. I. Title. II. Series. LB2822.84.G4G54 1999 338.4'737'09667-dc21 98-33305

CIP

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10 9 8 7 6 5 4 3 2 108 07 06 05 04 03 02 01 00 99

Contents

List of Figures ............................................ ix List of Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv

Part I: Analysing Investments in Education

1. Measuring the Returns to Investments in Education: Overview and Critique . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.1 The Basic Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.2 The Human Capital Model and

Rates of Return to Education . . . . . . . . . . . . . . . . . . . . . . . . 5 1.3 The Need for an Alternative Method . . . . . . . . . . . . . . . . . . 8

2. A New Method to Analyse Investments in Education . . . . . 17 2.1 The Expanded Human Capital Model ............... 17 2.2 Using Cost-Benefit Analysis to Choose

Among Different School Quality Investments ......... 19 2.3 Evaluating School Quality Investments using

the Expanded Human Capital Model . . . . . . . . . . . . . . . . 26 2.4 Some Complicating Factors with the Method . . . . . . . . . 30 2.5 Data Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 2.6 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Part II: The Impact of Investments in School Quality on Cognitive Skills

3. A Method for Estimating the Determinants of Schooling Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 3.1 Introduction ...................................... 41 3.2 A Critique of Past Empirical Work .................. 41 3.3 A Model of Schooling Attainment and the

Accumulation of Human Capital . . . . . . . . . . . . . . . . . . . . 44 3.4 Empirical Implementation . . . . . . . . . . . . . . . . . . . . . . . . . 58

v

vi Contents

3.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Appendix 3.1: A Dynamic Model of School Attainment .... 70 Appendix 3.2: Selectivity Correction Terms . . . . . . . . . . . . . . 92

4. The Impact of Investments in School Quality on Cognitive Skills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 4.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 4.2 Education in Ghana and the GLSS Data . . . . . . . . . . . . . 100 4.3 Applying the Estimation Procedure to the

GLSS Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 4.4 Estimation Results for Middle Schools in Ghana . . . . . 113 4.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 Appendix 4.1: Description of the Tests Used ............ 155 Appendix 4.2: Additional Estimation Results . . . . . . . . . . . . 158

Part III: Cognitive Skills, Incomes and Rates of Return to School Quality Investments

5. The Impact of Cognitive Skills on Wages ............... 169 5.1 Introduction ..................................... 169 5.2 Data and Estimation Strategy . . . . . . . . . . . . . . . . . . . . . . 170 5.3 Empirical Results of the Determinants of

Wages in Ghana ................................. 174 5.4 Estimates of Returns to Improvements in

School Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184 5.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 Appendix 5.1 Additional Estimation Results ............ 203

6. The Impact of Schooling and Cognitive Skills on Income from Non-Farm Self-Employment by Wim P.M. Vijverberg ............................... 206 6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 6.2 Income from Household Non-Farm Enterprises

and the Role of Education . . . . . . . . . . . . . . . . . . . . . . . . . 207 6.3 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 6.4 The Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 6.5 Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218

Contents vii

6.6 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240 Appendix 6.1: Additional Estimation Results Using

Alternative Specifications of Enterprise Income . . . . . . 247

7. The Impact of Cognitive Skills on Income from Farming by Dean Jolliffe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253 7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253 7.2 Descriptive Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254 7.3 Estimation Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259 7.4 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263 7.5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283 Appendix 7.1: Additional Estimation Results ........... 290

Part IV: Cognitive Skills and Non-Economic Activities 8. Child Health and Mothers' Education in Ghana

by Paul Glewwe and Jaikishan Desai . . . . . . . . . . . . . . . . . . . . . . 295 8.1 Introduction ..................................... 295 8.2 How Does Mothers' Education Affect

Child Health? ................................... 296 8.3 Data and Estimation Procedure . . . . . . . . . . . . . . . . . . . . 303 8.4 Empirical Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307 8.5 Impact of School Quality Improvements on

Child Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315 8.6 Conclusion ...................................... 317 Appendix 8.1: Regressions that Control for

Sample Selectivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321

9. Fertility and Women's Schooling in Ghana by Raylynn Oliver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327 9.1 Introduction ..................................... 327 9.2 Women's Education and Fertility .................. 328 9.3 Data and Estimation .............................. 331 9.4 Empirical Results ................................ 334 9.5 Conclusion ...................................... 340 Appendix 9.1: First Stage Regression Results ............ 343

viii Contents

Part V: Findings and Recommendations

10. Summary of Findings and Recommendations for Future Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347 10.1 Summary of Findings ............................ 347 10.2 Recommendations for Future Research . . . . . . . . . . . . 350

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354

Index .................................................. 365

List of Figures

1.1. Cost and benefit of education ............................ 7 2.1. Benefit of raising quality ............................... 27 2.2 Net benefit of higher quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 3.1. Timing of human capital investments without

school fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 3.2. Timing of human capital investments with school fees . . . . . 56 4.1. Sample of all children, 11-20, GLSS .................... 104 8.1. Determinants of child health .......................... 297 8.2. Z-scores by age of child . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306

ix

List of Tables

3.1. Implications of model with no credit constraints .......... 49 3.2. Implications of model with credit constraints . . . . . . . . . . . . . 52 4.1. Mean test scores- all Ghana .......................... 103 4.2. Variable definitions .................................. 107 4.3. Ordered probit, school attainment ..................... 114 4.4. Ordered probit, delayed entry . . . . . . . . . . . . . . . . . . . . . . . . . 122 4.5. Multinomiallogit model of choice of middle school . . . . . . 128 4.6. Multinomial probit model of choice of middle school . . . . . 132 4.7. Determinants of mathematics achievement . . . . . . . . . . . . . . 137 4.8. Determinants of reading achievement .................. 142 4.9. Impact of raising middle school quality on

cognitive achievement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 4.10. Cost-effectiveness of schooling improvements .......... 149 Table A1. Determinants of score on the Raven test . . . . . . . . . . . 158 Table A2. Determinants of mathematics achievement . . . . . . . . 159 Table A3. Determinants of reading achievement . . . . . . . . . . . . . 163 5.1. Definitions and means of variables in wage regressions ... 175 5.2. Conventional estimates of wage determinants ........... 176 5.3. Conventional estimates of wage determinants,

corrected for sample selectivity ........................ 179 5.4. Estimated wage determinants using data on

cognitive skills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 5.5. Increase in log wages from three middle school

quality improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 5.6. Presented discounted value of three middle school

quality improvements ................................ 191 5.7. Present discounted value per cedi of government funds

invested ............................................ 196 5.8. Rates of return for three middle school quality

improvements ...................................... 198 Table Al. Estimates of Equations (5.3) and (5.4) . . . . . . . . . . . . . 203 6.1. Correlation between enterprise income, test scores and

years of education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215 6.2. Variable definitions and descriptive statistics ............ 216

X

List of Tables xi

6.3. Determinants of the logarithm of hourly enterprise income ............................................. 219

6.4. Summary of parameter estimates involving school and skill variables in the log of hourly enterprise income equation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223

6.5. Summary of parameter estimates involving both school and skill variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232

6.6. Marginal effects of education and test scores on log of hourly enterprise income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237

Table Al. Dependent variable: log of hourly enterprise income ............................................. 247

Table A2. Dependent variable: monthly enterprise income . . . . 249 Table A3. Dependent variable: monthly enterprise income

(alternative measure) ................................ 251 7.1. Measures of school quality in urban and rural areas of

Ghana ............................................. 256 7.2. Test scores by years of schooling and region . . . . . . . . . . . . . 258 7.3. Descriptive statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265 7.4. Restricted farm profit, structural estimates using

school levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269 7.5. First-stage OLS results, instruments for farm labour

and schooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271 7.6. Restricted farm profits, structural estimates using

cognitive skills ...................................... 274 7.7. Present discounted value of repairing leaking classrooms . 280 7.8. Present discounted value of installing blackboard . . . . . . . . 282 7.9. Present discounted value per cedi of government

expenditures on school quality . . . . . . . . . . . . . . . . . . . . . . . . 284 Table Al. Test of sample selection bias ..................... 290 8.1. Means and standard deviations for all variables .......... 304 8.2. Reduced form estimates of height-for-age Z-scores . . . . . . . 309 8.3. Reduced form estimates of weight-for-height Z-scores .... 313 8.4. Impact of school improvements on child

weight-for-height . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317 Table Al. Probit estimates for whether both parents are

in the household .................................... 321 Table A2. Height-for-age regressions . . . . . . . . . . . . . . . . . . . . . . . 323

xii List of Tables

Table A3. Weight-for-height regressions .................... 325 9.1. Variable definitions and descriptive statistics ............ 333 9.2. Regression estimates for children ever born ............. 335 9.3. Impact of school improvements on children ever born .... 338 Table Al. First-stage regressions for expenditures and

expenditure squared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343

Acknowledgements

This book could not have been written without generous assistance from a large number of people. Its origin lies in a World Bank research project that was funded in 1988. Among the people who assisted in getting the research project accepted by the World Bank, by the Ghana Statistical Service and Ghana's Ministry of Education were Nicholas Bennett, Peter Moock, Steve O'Brien, Richard Sabot, Christopher Scott and Lyn Squire. I am grateful to E.K. Oti-Boateng and Kwaku Twum-Baah of the Ghana Statistical Service, and to Vida Yeboah and Sarah Obong of Ghana's Ministry of Education, for permission to undertake data collection for the project. I have to confess that the results appeared much later than originally promised to the Ministry of Education. Wendy Addae provided enormous help, and an excellent sense of humour, in the data collection stages. Moses Awoonor-Williams of the Ghana Statistical Service made tremendous efforts to go back to areas of Ghana where data were missing or unclear to get as much information as possible long after the money for the project had run out.

In the analysis of the data I was assisted by several research assistants, at least two of whom went on to work on their own papers and/ or Ph.D. theses using these data: Dean Jolliffe, Tracy Jones, Nathalie Leboucher, and Jaikishan Desai. Dean Jolliffe worked particularly hard when the school data arrived in a form that required a huge amount of tedious work; I am glad that he was eventually able to use the data to write his Ph.D. thesis at Princeton University. Maria Paz Felix also spent a large amount of time helping with data cleaning.

Much of the analysis in this book is based on work I undertook jointly with Hanan Jacoby of the University of Rochester. I could not have written the papers we jointly authored without his help, and without those papers I could not have written this book. His modesty and sense of fair play led him to decline my offer to make him co­author of Chapters 4 and 5, which I wrote based on our joint work; he

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xiv Acknowledgements

said that he had already gotten credit for that work and thus did not see any need to get credit again.

The following three authors each contributed one chapter to this book: Wim Vijverberg, Dean Jolliffe and Raylynn Oliver. Not only did they make very valuable contributions to the book, they did so without any pay whatsoever, since all the money for the project had been spent before they made their contributions. In addition, Jaikishan Desai co-authored Chapter 7 with me, and he deserves equal credit for that chapter even though he insisted that his name be listed last.

I would also like to thank Paul Collier at Oxford University's Centre for the Study of African Economies for suggesting that I publish the book as part of this series by Macmillan Press. Sarah Smith at Oxford provided editorial assistance, and an anonymous referee read the manuscript very carefully twice and provided a large number of constructive comments that led to significant improvements in the book. Fiona Mackintosh provided very detailed and useful advice on presentation and writing style in the final stages of revising the book.

Finally, I would like to thank my wife, Mary, and our two children, Eleanor and Nathaniel, for tolerating all the time that was taken from them so I could finish this book.

Introduction This book provides a critical assessment of current methods used to calculate the returns1 to government investments in education, devises a new and more informative method for doing so, and applies this method using household survey data from Ghana. The new method calculates returns to government investments in school quality by combining estimates of the impact of school quality improvements on the acquisition of cognitive skills by students with estimates of the contribution those skills make to the incomes of workers. The book explains why estimates of the returns to investments in school quality are much more useful for guiding government investment decisions in education than are standard estimates of the return to an additional year of schooling (investing in school quantity) derived using the standard human capital model.

This new method for estimating the returns to government investments in education is applied to data from Ghana, a low­income developing country in West Africa. Ghana was chosen as a case study for two reasons. First, African countries have, on average, the lowest levels of education in the world, and most African governments are now facing severe budget constraints due to their faltering economic performance in the 1970s and 1980s. Second, the 1988-89 Ghana Living Standards Survey (GLSS) provides an unusually rich data set by developing country standards. The GLSS is a comprehensive household survey implemented by the Ghana Statistical Service on a random sample of households throughout Ghana. In the 1988-89 GLSS, about half the households interviewed participated in an exercise in which people aged 9 to 55 were given written tests covering reading (in English), mathematics and abstract thinking. In addition, information was collected on local schools, whether attended by household members or not.

While much of the material in this book is written with an academic audience in mind and, thus, involves some technical detail, it is also hoped that this book will be read by policymakers in both developed and developing countries. A serious attempt has been made to present all the material in a manner that is accessible to any

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xvi Introduction

reader who has a basic understanding of simple algebra and elementary statistical concepts. This reflects the authors' desire that the book's recommendations for evaluating specific school quality investments be used, as opposed to being merely discussed and debated. Although the methodology proposed here for assessing investments in education is in some ways expensive, both in terms of money and time, if implemented correctly it should provide long­term benefits that dwarf those costs. Thus, the application of this methodology would itself be a profitable investment.

The book is organised as follows. Chapter 1 gives an overview and critique of the standard method used to calculate rates of return to investments in education, after which Chapter 2 provides an alternative method for evaluating the returns to educational invest­ments that is based on the explicit measurement of the skills that students are expected to learn in school. Chapter 3 examines in detail how to measure the impact of improvements in school quality on student skill acquisition. The subsequent six chapters systematically apply the new method of assessing returns to education to Ghana, using data from the Ghana Living Standards Survey (GLSS). Finally, Chapter 10 summarises the results and makes suggestions for future research.

Notes

1. In this book, the word 'returns' denotes the overall benefits of an investment in education; it is not used in the sense of rates of return, which has a more precise meaning but (as will be argued later at length) can be a misleading way to analyse investments in education.