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Private costs and the rate of return toprimary education

PATRICK J. McEWANStanford University, Stanford, CA 94305-3096 USA.

Received 18 February 1998

The paper suggests that typical estimates of returns to primary education are over-estimated, because import costs to individuals are excluded. In calculations withHonduran data, private returns are found to drop signicantly when private costsare included. It is suggested that lower private rates of return are consistent withlow

educational attainment in many developing countries.

I. INTRODUCTION

A large literature is devoted to calculating social and pri-vate rates of return to education in developing countries.Authors consistently nd returns to primary education tobe high, relative to a discount rate and to returns to higherlevels of education.

In a representative study, Psacharopoulos and Ng (1994)analyse 18 household surveys in Latin American coun-

tries.1 They apply a standard methodology, calculatingthe internal rate of return which equalizes the discountedstream of benets and costs to additional primary educa-tion. Social and private benets include the income accru-ing to additional years of education, derived from ageearnings proles. Social and private costs include theincome foregone while pursuing that education. Socialcosts also include government expenditures on education.

While not criticizing the conceptual underpinnings oftheir methodology, this paper does criticize its principalingredients. It suggests that their conclusions are sensitiveto two critical assumptions: (1) that there are no privatedirect costs to education (e.g., uniforms and schoolmaterials); and (2) that primary school students foregoonly two years of income. they acknowledge the restrictive-ness of these assumptions, suggesting that `ndings . . .should be considered indicative regarding educationalinvestment priorities in the region, pending more detailedcountry-specic work (Psacharopoulos and Ng, 1994:188).Nevertheless, it is likely that returns are consistently over-

stated across countries, which inevitably aects judgeon spending priorities.

The paper rst reviews some studies of private educosts in developingcountries. It then replicates the anof Psacharopoulos and Ng in one country, Honduraderives estimates under alternative cost assumptions

II. PRIVATE COSTS IN PRIMARYEDUCATION

Families with children in public primary schools of oping countries face direct and indirect costs. Directinclude uniforms, school supplies, books, transportcontribution to parent groups, and even tuition. Incosts include the foregone income of the childs worklabour market, the foregone contribution of the chhome or farm production, and the value of parentscontributed to school activities (Tsang, 1988).

Bray (1996) surveys educational cost studies in nineAsian countries. He nds that direct private costspercentage of total costs in public primary schools fromless than 10% inLaoPDR toover70% in CambMost hover around 20% . Carnoy and Tores (1994that parents assume about 30% of the total cost of pprimary education in Costa Rica. Carnoy and Mc(1997) carry out a simular study in Honduras. Restrtheir attention to uniforms, school supplies, and matr

Applied Economics Letters ISSN13504851 print/ISSN14664291 online 1999 Taylor &Francis Ltd

Applied Economics Letters, 1999, 6, 759760

1 See Psacharopoulos (1994) for a comprehensive survey.

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tion fees, they nd that direct costs account for 43.5% oftotal costs; under more conservative assumptions, thegure is still 27.4% (see Table 1).

There are also indirect costs, which may be substantial,though dicult to measure. In Honduras, for example,parents volunteered time as school watchmen, as cooksfor school meals, or in agricultural work to produce foodfor such meals (Carnoy and McEwan, 1997). Some

donatedarable land or use of a well; many attended parentmeetings. Rural children participated extensively in familyagricultural activities, doing so as young as age eight.

III. NEW ESTIMATES OF RETURNS INHONDURAS

Psacharopoulos and Ng (1994) derive estimates of the pri-vate and social return to primary education of 20.8 and18.2% , respectively, in 1989. Again, they assume no directprivate costs and two years of income foregone for school-

children. That is, the time of children is only consideredvaluable at ages 11 and 12. Using the 1990 household sur-vey and a simulir methodology, this study nds private andsocial returns of 22.5 and 15.1% , respectively.

Returns arecalculatedunder alternative scenarios, utiliz-ing the high and low estimates of private direct costs from

Table 1, as well as the addition of another year of inforegone at age 10.2 With the addition of another yeincome foregone and the high estimate of direct social returns drop three percentage points to 12.1%private returns drop 7.9 points to 14.6% . Though reespecially private, decline with the additon of these cthe new estimates are probably an upper bound. Theexclude, for example, a valuation of parents time o

home or farm production of children. In rural areasmortality rates may lower rates further by reducinbenet stream.

In Honduras and other developing countries of America, educational attainment is low, while droand repetition rates in primary school are high. seems at odds with high private returns to primary etion, and indicates that merely constructing new prschools will not increase educational attainment. authors (Jacoby, 1994) have attributed poor attainto the existence of borrowing constraints. Evidence igestive that the answer may be simpler. Typical ra

return exclude important costs and therefore overestthe attractiveness to families of sending their childrprimary schools.

ACKNOWLEDGEMENTS

I thank the Honduran Ministry of Education for pring the data.

REFERENCESBray, M. (1996) Counting the Full Cost: Parental and Comm

Financing of Education in East Asia, The World Washington, DC.

Carnoy, M. and McEwan, P. (1997) La Educacion y el MeLaboral en Honduras, Ministry of Education of HonTegucigalpa.

Carnoy, M. and Torres, C. A. (1994) Educational changstructural adjustment: A case study of Costa RiCoping with Crisis: Austerity, Adjustment and HResources, J. Samo (ed.), Cassell, London, pp. 6499

Jacoby, H. G. (1994) Borrowing constraints andprogress thschool: evidence from Peru, The Review of EconomiStatistics, 76, 15160.

Psacharopoulos, G. (1994) Returns to investments in educaglobal update, World Development, 22, 132543.

Psacharopoulos, G. and Ng, Y. C. (1994) Earnings andeduin Latin America, Education Economics, 2, 187207.

Tsang, M. (1998) Cost analysis for educational policymakreview of cost studies in education in developing couReview of Educational Research, 58, 181230.

760 P. J. McE

2 The household survey collects employment data for ages 10 and above. As much child labour, especially on farms, does not receive moremuneration, and because of underreporting, these estimates are lower bounds to the true opportunity cost of time.

Table 1. Costs per student of primary education in Honduras(1990 lempiras)

(a) Government (b) Private (c) Socialcosts direct costs direct costs (b)/(c)

Low estimate 297 112 409 27.4%High estimate 297 229 526 43.5%

Source: Carnoy and McEwan (1997)The high estimate includes estimated annual expenditures on uniforms,school supplies, and marticulation fees. The low estimate eliminates thematriculation fee and halves estimates of other expenditures.

Table 2. Estimates of social and private returns to primary educa-tion in Honduras

Year of estimate

1989 1990

Direct private cost None None Low High Low HighassumptionIncome foregone 2 years 2 years 2 years 2 years 3 years 3 yearsassumptionSocial return 18.2 15.1 13.9 12.8 12.9 12.1Private return 20.8 22.5 18.4 16.1 16.3 14.6

Source: Estimates for 1989 are takenfromPsacharopoulos and Ng (1994),Tables 10 and 12. Other estimates are based on the authors calculations.

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