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The Political Economy of Public Spending on Education, Inequality and Growth

Author: Mark Gradstein
Date: 2003
Size: 16 pages (210 KB)

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Summary

This paper from the World Bank examines data on public spending on education in developing countries, revealing significant inequality in the distribution of resources between rich and poor groups. While current donor policy is to alleviate poverty through the universal provision of public services in developing countries, the evidence suggests that political dynamics within these countries often distort these goals to the disadvantage of the poor. Personal rent-seeking, in the form of political pressure from richer households, skews resource allocation, often resulting in both increased inequality and social exclusion.

Universal public provision of goods and services, such as health and education, is widely viewed to be the principal vehicle for reducing inequality and improving development outcomes in poor countries. This common belief persists in spite of recent evidence that public spending is often skewed in favour of more influential populations. In the UK, for example, research has shown that the middle class and the rich benefit disproportionately from public spending on education, health, and transportation.

The situation is more glaring in developing countries, where public spending distortions often mirror existing high levels of income inequality. Examination of data on public spending on education in 21 developing countries reveals that in some instances public spending on education for the richest quintile of the population is over three times that spent on the poorest quintile. Employing a political economy framework to this data helps to explain some of the underlying causes of these biases:

• Resource allocation for education is ultimately a political determination
• Because of credit market imperfections, richer households are able to exert more political pressure through rent-seeking, thus securing themselves a larger share of the pie than poorer ones
• This incidence bias, or social exclusion, may lead to a feedback mechanism whereby inequality in public spending on education breeds higher income inequality, generating multiple equilibria - with social exclusion and high inequality and with social inclusion and relatively low inequality.

Social inclusion reduces income inequality and enhances intergenerational mobility in future generations. Moreover, in the long-run, countries with social inclusion have higher levels of economic growth. Yet, political support for social inclusion is more difficult to achieve than may be imagined. In certain political contexts, poor households may favour social exclusion as a means of gaining some political power. In cases of multiple groups differentiated by factors such as race, ethnicity, and religion, spill-over effects among the groups may reinforce support for social exclusion.

Resource allocation is ultimately a political determination, and development policymakers must accept this reality and adapt their policies accordingly. Some lessons for donors seeking to promote a more egalitarian provision of public services are:

• Political bias induced by extreme income inequality is a major obstacle in the reform of existing programmes
• Any reform proposal toward social inclusion must take into consideration the political opposition that is likely to mobilise against such a move.

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Source: Gradstein M., 2003, 'The Political Economy of Public Spending on Education, Inequality and Growth', Policy Research Working Paper Series, no. 3162, World Bank, Washington DC
Organisation: World Bank, http://www.worldbank.org/