Education, Corruption and Growth*Vivekananda Mukherjee

Department of Economics, Jadavpur University, Kolkata 700032

E-mail: mukherjeevivek@hotmail.com

Abstract

The paper explores the relation between education, corruption and growth. It develops a micro-economic model to discuss the efficacy alternative policies related to “Right to education” program like subsidizing the cost of sending the child to school and improving the quality of education.

1. Introduction

At scholastic tradition education has been widely recognized as an essential ingredient for

facilitating income-growth and development in economies around the world. While the skill

acquired through education greases the wheel of growth, the higher level of awareness which

comes along with education generates positive externalities to improve all other social indicators.

The improved social indicators in turn have positive feed-back effect on growth of the economies.

“Reduced corruption” is one of these indicators. The “Right to Education” program aims to

implement this idea of growth and development.

This paper explores the relation between education, corruption and income-growth in

details. The next section briefly discusses the existing literature on the relation between these

three variables both at the macro and micro level. Section 3 describes the analytical model we use

to derive the results. Section 4 derives the results by comparing alternative instruments for

making “Right to Education” program successful. The section following concludes.

*Paper prepared for UGC Sponsored National Seminar on “Right to Education” organized by

Department of Economics, Kaliyaganj College, Uttar Dinajpur, West Bengal. The paper has been

benefited by the comments received from the seminar participants. The usual disclaimer applies.

2. Literature

The positive relation between education (the stock of human capital) and the income-growth

rate of different countries around the world has earlier been emphasized most predominantly by

Lucas (1988), Barro (1991), Mankiw, Romer and Weil (1992). Ray (1998) argues that all other

social indicators are positively correlated with income growth.

In a cross-country study Mauro (1995) first drew our attention to the fact that corruption and

income-growth are negatively related with each other. However, this generalized conclusion did

not explain why countries at the same income level were observed to have different levels of

corruption. The researchers afterwards have tried to identify the factors which can explain the

above-mentioned variation in the cross-country corruption data. Svensson (2005) points out that

education (measured as years of schooling of the total population aged over 25) is the single

major important factor that explains this variation. He explains that the higher level of education

increases bargaining power of the people which leads to higher political and economic freedom:

countries with greater political and economic freedom usually have lower level of corruption.

The intuition behind Svensson’s conclusion receives support even in some micro-level case

studies. The most prominent among them is the study by Reinikka and Svensson (2004) of the

disbursement of capitation (non-wage) grant to the schools located in different districts of Uganda

for the years 1991-95. They found that due to capture by the local officials, on average, only 13

per cent of the central disbursement actually reached the schools. It was also discovered that

there were substantial variation in the amount of grant received by the schools. The variation was

explained by the bargaining strength of communities associated with the school: the schools

located at the better off communities received higher share of their entitlements. So the actual

education spending was regressive though it intended to be equitable. In a follow-up study,

Reinikka and Svensson (2011) report that a newspaper campaign conducted in Uganda by the

World Bank starting 1997 about the amount of central disbursement, substantially lowered the

extent of local capture. The data collected in 2002 shows that due to “reduced corruption”, the

schools on average received higher amount of capitation grant from the Centre. But since the

newspaper campaign is an education-intensive activity, we can easily imagine that the actual

education-spending still remains regressive in Uganda.

What is the effect of increased educational spending in schools on enrollment and

learning outcomes? Reinikka and Svensson (2011) reported that the increased spending of the

capitation grant led to higher enrollment. However they also report that its effect on learning

outcomes (measured by cognitive skill and mathematical ability) was positive, but insignificant.

In a similar exercise on Zambian data Das et al (2004) found no effect of increased educational

grant on learning outcomes. On an explanatory note Das et al (2004) emphasized that their result

depends on households’ response to the increased grant and the response can be different for

different programs in which the grant is spent. Therefore to know whether “reduced corruption”

may indeed lead to higher school enrollment and learning outcomes in a particular situation, it is

important to know how the increased flow of fund is spent. In this paper, we are going to develop

an analytical model of household decision making to focus on this issue and conclude that

outcome of the empirical research depend on the particular society in which the study is

conducted. So the results derived either by Reinikka and Svensson (2011) or by Das et al (2004)

cannot be generalized in all possible situations. Also, we conclude “reduced corruption” may not

always lead to higher income-growth.

The analytical model adopts the framework discussed by Glewwe (2002) and derives its

results. Glewwe’s framework follows the ideas of Gary Becker, Jacob Mincer and T.W. Schultz.

In the next section we discuss the model.

3. The Model

Consider a household where parents take decision on behalf of their child about the

number of years of schooling of the child. Everyone lives for two periods. Only in the first period

one goes to school. In the school the child acquires some skill: given the ability of the student the

amount of skill acquired by him/her depends independently on the number of years spent by

him/her in the school and the quality of education imparted at the school. The acquired skill helps

him/her earn income at the rate determined by the market. As the years of schooling increases,

one additional year of schooling increases the skill at a reduced rate. Similarly, an additional

increment of quality also has diminishing return. The parents sending their child to school derive

benefits from two different sources: (1) the schooling imparts skill in the child which makes

him/her able to earn higher income for the family both in the first and second period of the life in

the way described above; (2) the parents derive altruistic pleasure in seeing their child to acquire

the skill. We will call the type 1 benefit the selfish benefit and the type 2 benefit the altruistic

benefit. The total benefit from sending the child to school is the sum of the above two benefits.

Since as the years of schooling increases one additional year of schooling increases the skill and

the earnings at a reduced rate, marginal benefit of sending the child to the school for one

additional year decreases.

Sending the child to the school is costly for the parents too: otherwise every parent would

have sent their child to the school for the maximum possible number of years and the need for a

program like “Right to Education” could have been preempted. In particular, there are two

different types of costs are involved in this: (1) the cost of books, uniform, food etc. ; (2) had the

child not been in school, the child could work and earn some income for the family, which have

been sacrificed by sending the child to the school. We will call the type 1 cost the direct cost and

the type 2 cost the opportunity cost of sending the child to the school. Both the types of cost

increase as the years of schooling increases. We assume the direct cost increases at a constant

rate. However, since longer years in school impart higher level of skill in the student, the

opportunity cost increases at an increasing rate. Therefore, the total cost of sending the child to

school, which is the sum of the above two costs, increases at an increasing rate. In other words,

the marginal cost of sending the child to school for one additional year increases in the number of

years the child goes to school.

The net marginal benefit from sending the child to school is defined as (total marginal

benefit – total marginal cost). While parents take their decision about years of schooling of their

child, they go through a cost benefit calculation of the following nature: given the number of

years the child has attended the school, if we keep our child for one more year at the school what

is our marginal benefit and what is our marginal cost: if the net marginal benefit is positive they

decide to keep the child in the school for one more year. The child drops out from the school if

the net marginal benefit is negative. The equilibrium is arrived about the choice of years of

schooling if the net marginal benefit is zero i.e. if the marginal benefit and the marginal cost

exactly match each other.

We assume such an initial equilibrium exists and derive the results of the model by

analyzing the equilibrium choice of the parents under alternative policy instruments related to the

“Right to Education” program.

4. The results

Proposition 1: (Effect of reducing the cost of sending the child to school) If the cost of sending

the child to school is reduced by subsidizing the cost of books, uniform, food etc., all other things

remaining the same, the number of years the parents keep their child in the school increases.

Proof: As the cost of sending the child to school is reduced by subsidizing the cost of books,

uniform, food etc., the direct cost of schooling falls. Given the initial choice of schooling by the

parents, since the marginal cost of sending the child to the school falls and marginal benefit

remains the same, net marginal benefit increases. So, the parents decide to keep their child in

school for greater number years. This completes the proof.

Proposition 1 confirms that some of the features of “Right to Education” programs like providing

mid-day meal at the school, buying uniform and books for the students are likely to yield desired

results out of such programs.

Proposition 2: (Effect of improving the quality of education) All other things remaining the same

if the quality of education that imparts more skill in the child, improves, its effect on the years of

schooling remains ambiguous.

Proof: If the quality of education that imparts more skill in the child, improves, on the one hand

the total benefit from sending the child to the school increases. On the other, the opportunity cost

of sending the child to school for more number of years increases as well. Given the initial choice

of schooling by the parents, since both the marginal benefit and marginal cost of sending the child

to school increase, the effect of improvement in education quality on the value of net marginal

benefit becomes ambiguous. This completes the proof of the proposition.

Proposition 2 is clearly skeptical about the success of the initiatives for improving quality of

education at the schools. Such initiatives include reducing teacher-student ratio, use of own-

language text books, use of improved learning materials, mother-education program etc (all of

these have been tried in different randomized control trials performed at different parts of the

world with mixed success; see Glewwe (2002) for details). Unlike proposition 1, proposition 2

does not conform to many of the initiatives taken under “Right to Education” program and

therefore, is very much counterintuitive in its implication. So we will describe some situations

where the use of improved educational quality may bring down the years of schooling.

Situation 1: The years of schooling have low impact on skill formation and the parents derive low

altruistic benefit from skill formation.

Since years of schooling have low impact on skill formation and the parents derive low

altruistic benefit from skill formation, even if quality of education improves it fails to

significantly raise the marginal benefit from sending the child to school. So, at the initial choice

of schooling by the parents, net marginal benefit from sending the child to school becomes

negative: the years of schooling falls.

Situation 2: The years of schooling have low impact on skill formation, the initial choice of

schooling by the parents is low and market return to skill is low.

This combination of factors again keeps the marginal benefit from sending the child to

school at a low level as in the earlier situation even if the quality of education improves. So, the

net marginal benefit from sending the child to school at the initial choice of schooling by the

parents becomes negative: the years of schooling falls.

The propositions make a clear distinction between impacts of the alternative policies pursued in

the context of “Right to Education” program. They show us that the policies like reducing the

cost of sending child to school unambiguously increases the schooling years: therefore enriches

the stock of skill of an economy which in turn promotes growth. However, the policies that aim to

improve the quality of education may not have these desirable effects. If years of schooling fall as

a result of improved quality of education, its effect on skill formation becomes ambiguous. If the

stock of skill depletes, it casts a negative impact on the income-growth of the economy. So if

increased entitlement of funds from “reduced corruption” is not properly utilized according to the

characteristics of the society where it applies, the “reduced corruption” may not lead to income-

growth in an economy.

5. Conclusions

The paper tries to explore the link between education, corruption and income-growth through

a micro-economic model. It shows that while the information campaign on behalf of the

government and peer pressure on behalf of the community where the school is located can

increase the flow of fund to the schools by checking the local capture, its impact on the years of

schooling, skill formation and income growth crucially depends on the how the fund is utilized.

Although subsidization of cost of sending child to school has all the desired effects from the

“Right to Education” program, an improvement of education-quality may have ambiguous

effects. In some situations, years of schooling, skill formation and income growth may even fall.

We must also be aware of the limitation of the model and therefore the results. First, the

model assumes that parents cannot choose between schools where to send their child: while this

assumption is valid for the schools located in the remote areas, may not be valid in other regions.

Second, in the model the decision of sending the child to school is independent of family-income

of the child which can be unrealistic. Third, we also assume the policy of subsidizing the cost and

that of improving the quality of education are independent of each other. But this may not be true

in reality: allegations are there that quality of education falls as teachers spend their time for

arranging mid-day meal for the students. Accommodating these features in a more generalized

model remains as future research agenda.

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