Owen Barder and Andrew Rogerson critique a proposal to use donor guarantees to increase the supply of loans to finance education investments by developing country governments. They question the supply-side response and argue for the need to increase the demand for education finance. They propose the use of outcomes-based financing in this regard.
They posit three factors a limiting education finance,
- long time horizons for at least some of the benefits of education;
- lack of certainty about fiscal returns; and
- lack of certainty that more money will result in better education outcomes.
Now there are two very distinct issues here that need to be disentangled. One, governments realising the value of spending more on education. Two, governments being able to spend more on education.
The former is a necessary but not sufficient condition for the latter. Even if governments strongly believe in the former, it is very unlikely to have any impact on the latter. In fact, there are hard fiscal constraints that limit the ability of governments to spend more on education. And these constraints are unlikely to go away anytime for these countries at their current stage of development.
Government budgets, are for most part, contrary to conventional wisdom, an exercise in tinkering at the margins. The major lines of spending are already pre-defined, irrespective of governments on items like salaries and establishment costs, defence, interest payments, and allocations for ongoing programs. This leaves governments in developing countries with hardly anything to make meaningful enough choices, including on new capital expenditures etc. When faced with choices of allocating this money, governments invariably prefer areas where the political market is higher - infrastructure, populist welfare, and so on. Services like health and education come much behind in the political market choices.
For example, the Government of India has perhaps little more than a percentage of GDP available each year (from the 12-13% of GDP revenues) for discretionary spending. In the circumstances, all talk of increasing the spending on health, education, agriculture etc by 2-3 percentage points of GDP each is just that, mere talk.
So the main constraint limiting greater expenditure on education is simple - governments just don't have the money to be able to spend more on education. Neither making loans available at cheaper cost nor making education financing outcomes-based will help governments spend more on education. The fact remains that only so much fiscal space is available for all kinds of spending. Financial engineering of any kind, including monetisation of education outcomes and quicker fiscal returns, cannot make "education more investible for governments".
In the circumstances, not only do we need to improve the quality of aid spending but also need more aid spending.
The only benefit with outcomes-based financing of education is that it can theoretically help governments realise greater value for money from ongoing expenditures. But as I have written here and here, this too is deeply questionable with the case of student learning outcomes. However, it undoubtedly has its value in many areas.
It is logically appealing for armchair thinkers to think of addressing complex development challenges (like poor student learning outcomes) by using the disciplining force of finance to overcome weak state capacity constraints. Unfortunately, finance can only do so much. In case of such intractable challenges like poor student learning outcomes, we need to address more directly the underlying problems. Outcomes financing can help, but at the margins.
At a meta-level, these arguments are coming from a particular world view - hey, we've tried everything to address this problem; we just don't know what works; we've no way to know what works; so give them money, tied to outcomes, and let them figure out what works and spend accordingly; and we hold them accountable for agreed outcomes!
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