There is a long-standing debate about whether development assistance should finance tertiary education. The debate largely revolves around the impact of public subsidies for university students on income distribution and equity.

Using a methodology developed by Jacob Mincer, economists are able to calculate the rates of return to an investment in education. Current estimates show that globally the private returns to tertiary education are around 15 percent. In large part, this reflects the high level of subsidies students receive in public universities.
For many, tertiary education has a very low cost and potential to lead to high wages, especially in developing countries. Since only a few students, primarily from wealthier households, can graduate the secondary level, universities largely exclude the poor.

Most donors have decided that aid should not be spent on the tertiary level – and by the 1980s, most had curtailed or ended their support. The World Bank, one of the few donor organisations that remain active in this space, identified tertiary education as primarily of interest to middle-income countries in its 2009 strategy. For its part, the Asian Development Bank (ADB) has largely focused its post-secondary support at technical and vocational education.

The debate is far from over. In recent years, there has been resurgent interest in the tertiary level. Many donors—including ADB—that had de-prioritized the sector are slowly ramping up investment.

Supporters of higher education argue that the current thinking substantially undervalues the public value of graduate study. They point out that donors currently finance projects that do not directly benefit the poor such as highways, the banking sector or urban infrastructure. Proponents assert that tertiary education is an essential element of economic growth that helps to remove poverty traps.

Economic theory places knowledge, innovation and skills as the primary driver in increasing productivity and economic growth. This is an implicit in the Solow-Swan growth model, first developed in 1956 and considered the basis of modern economic growth theory.

While innovation is an abstract concept, it is related to the kind of activities that universities do and it requires a core of university graduates.

More recent thinking explicitly places innovation and knowledge at the centre of growth and development. They complement and augment other factors, such as capital and labour. Some have identified the lack of a highly educated workforce as the source of poverty traps, with economies brought down by their weakest links.
From a policy perspective, studies on competitiveness also emphasize the importance of skills and innovation. As economies evolve, they move away from reliance on cheap labour and natural resources to focus first on productivity gains and eventually on innovation.

Higher education plays a central role in this process. While universities can provide substantial private benefits to individual students, they also make a significant contribution to the public good by supplying the human capital to nurture innovation and make an economy competitive.

Since it is relatively straightforward to calculate the private rates of return, many policymakers focus on this aspect alone. However, studies of the economic benefit of a tertiary education show that it has a strong and positive effect on economic growth.

More tellingly, many studies show that private returns to education have been increasing over time. This means that the contribution of education increases disproportionately, with growth spurred by higher levels of education. Higher education also creates an important public good in the form of research, as well as many other positive externalities.

Most people associate higher education with teaching, as this is its primary mission. But for poor students, a university degree can be transformational, opening up opportunities for better employment and access to the formal sector of the economy. They are less aware of its contribution to research.

Likewise, while few tertiary graduates become researchers, they are an essential to innovation. The highly educated tend to be the main innovators in a modern economy.

Many policymakers worry about the equity impact of public subsidies. While these concerns are real and justified, there are clear benefits to public subsidies to research. A country also benefits from having many tertiary graduates, so at least some subsidies—especially for poorer students—may also be appropriate.
Equity is a complicated issue. While public subsidies do benefit wealthier students and offer them greater opportunity, they also have a transformative effect on the economy.

An economy caught in a poverty trap will rely on natural resources and low-value exports. This will lead to a higher level of poverty and depending on the economy’s structure, greater inequity.

The case for supporting graduate study is clear. Since higher education has significant externalities, public subsidies are justified. This applies to all types of countries, regardless of their income level.

Rather than keeping subsidies for tertiary education low as they privately benefit only elite students, we should rather ramp up this investment to bolster equity. However, more analysis is needed to quantify the value of innovation and tertiary education before we can fully understand the social returns to higher education.
(Erik Bloom is Senior Social Sector Specialist, South Asia Regional Department, the Asian Development Bank)