A large number of rate-of-return studies have now been carried out in relation to Third World countries. Psacharopoulos (1985) tabulated the results from such studies, as given in the table reproduced in Appendix 2 (Earlier comparative reviews had been given in Psacharopoulos (1973) and Psacharopoulos (1981) and a review of returns to higher education was given in Psacharopoulos (1982)).
Those rates-of-return vary considerably, from extremes of 66.0 to 4.0 (social) and 99.0 to 6.5 (private). However, given that they cover the different levels of education, as indicated by the column headings, and encompass the differing circumstances found in the many countries listed, and date from very different periods (some estimates relating to the 1950s when education was much less widespread in developing countries than to-day), the variations are perhaps no more than might have been expected.
Indeed, once the findings are summarised by level of education and region/country type (including also intermediate and advanced countries, giving a total of 61 countries in all), as below, relatively clear patterns emerge:
|
Region/Country Type |
Social |
Private |
||||
|
Prim. |
Sec. |
Higher. |
Prim. |
Sec. |
Higher |
|
|
Africa |
26 |
17 |
13 |
45 |
26 |
32 |
|
Asia |
27 |
15 |
13 |
31 |
15 |
18 |
|
Latin America |
26 |
18 |
16 |
32 |
23 |
23 |
|
Intermediate |
13 |
10 |
8 |
17 |
13 |
13 |
|
Advanced |
NA |
11 |
9 |
NA |
12 |
12 |
Source: Psacharopoulos (1985)
Thus:
(i) private rates-of-return are always higher than social,(ii) rates-of-return are always highest at the lowest, primary, level of education,
(iii) social rates-of-return to higher education are always lower than those to secondary education, but this is not always the case with private returns,
(iv) all the private returns, and the great majority of the social ones, show education to be very profitable, with almost all the figures above the notional 10% cut-off level which is often used for comparative purposes (and thus there is clear evidence of underinvestment in education),
(v) private rates-of-return to primary education in African countries are quite exceptionally high, averaging 45 %.
(vi) public subsidies (i.e, the differences between private and social rates-of-return) are particularly high in the case of higher education, leading to a case for the reallocation of such funds (Psacharopoulos, 1985).
(vii) where time series data on earnings exist, there appears to be a decline in rates of return over time.
Psacharopoulos also notes that returns are higher for general curricula rather than for vocational education (due to the latter's higher unit cost), for the education of women (due to the latter's low alternative earnings) rather than men and highest in those countries with the lowest per capita income. The differences between private and social rates-of-return, i.e. the extent of public subsidization of education, are greatest in the poorest countries and at the higher levels of education.
To compare the results of rate-of-return studies in this way across countries and across levels of education is not an easy matter. Some of the studies, especially the older ones, use the traditional method, some, especially more recent ones, the Mincer method. Psacharopoulos comments that researchers do not always state explicitly the nature of the sample used (for example, urban, rural, national) or the methodology according to which the estimates are made (especially what adjustments have been made on the benefits side).
Further, more recent studies have increasingly been based on the earnings of those employed in the competitive sector of the economy where the benefits of education should better reflect the worker's productivity: where returns have been given differentiated by economic sector, the returns in the competitive setting exceed those in the noncompetitive sector by three percentage points. This means that previous estimates based on the earnings of workers in all sectors have underestimated the returns to education. On the other hand, the proportion of workers employed in the modern, competitive, sector in many developing countries is low, so that a rate of return based only on earnings in this may overstate the average returns.
Despite all the above caveats, to undertake such cross-country comparisons does seem valid. Overall, it would seem that any corrections required would not significantly alter the principal conclusions outlined above; it is at least plausible, in the absence of any evidence to the contrary, that any resulting pluses and minuses would approximately offset each other.
