EDUCATION NOTES February 2012 67647 Education FinancE: It’s How, Not sImply How mucH, tHat couNts Why is Education Finance What are the Core Areas of an Important? Education Finance System? The precise relationship between spending and learning Education finance systems provide funding to schools so that, outcomes in education is unknown, which leads some ultimately, all students can learn. To discern what matters in researchers and policy makers to question whether the amount this complex process, it is important to understand the five of spending in education matters at all (Hanushek 1986). Among core areas of an education finance system (Figure 1): countries with similar levels of income, those that spend more on education do not necessarily score higher on international • School conditions and resources. Funding helps assessments such as the Programme for International Student schools meet minimum quality standards—including Assessment (PISA). Even within an education system, student essential teaching inputs, instructional conditions, and achievement varies among localities that spend comparable other basic resources—that attract students and teachers amounts (Wagstaff and Wang 2011). The observation that and also provide an adequate learning environment. learning outcomes are seemingly unrelated to spending levels supports the argument that how money is spent, not simply how • Allocation mechanisms. Every education finance much, matters in education finance. system has informal or formal rules that determine the size of the budget, distribution of resources across Although the availability of financial resources does not guarantee levels of government and schools, and in some cases, quality education, it is impossible to achieve this goal without the nature of spending among different inputs, such as adequate resources (Reschovsky and Imazeki 2001). Education capital and current needs. spending comprises a large share of government budgets— particularly in low-income countries, where 18 percent of public • Revenue sources. The composition and amount of expenditures, on average, is devoted to education (EdStats 2011). revenue may differ across systems, but an appropriate Governments are responsible for using these public funds in a balance among possible public, private, and way that promotes the highest possible learning levels, especially international revenue sources is necessary, especially given the shrinking budgets produced by the recent economic when the capacity to generate revenue varies among crisis. Understanding how to use resources for education wisely subnational or local divisions, which may create wide should thus be a top priority for all education policy makers. disparities in resources available for learning. What matters in education finance is how money is spent, not simply how much. Research shows that learning outcomes are seemingly unrelated to spending levels. EDUCATION NOTES Figure 1. Core Areas of an Education Finance System What are the Key Policy Goals of an Education Finance System? Education finance systems should strive to achieve three essential policy goals: (i) ensuring adequacy; (ii) promoting equity; and (iii) performing efficiently (Figure 2). The World Bank SABER-Finance team targets these policy goals because they are widely shared across countries and allow education finance systems to promote learning. Adequacy and equity are foundational concepts that compel education systems to provide the minimum resources necessary for all students to learn, regardless of their backgrounds (Underwood 1995). Efficiency in education finance involves a close look at how these resources are allocated, distributed, and monitored. Ensuring adequacy Do education finance systems provide adequate resources Source: SABER-Finance Team, World Bank. for all students to receive a high-quality basic education? At a minimum, finance systems should put policies in place that ensure the provision of essential inputs to all students • Education spending. Education spending represents and then monitor access to these inputs. Ideally, these the point at which monetary resources begin to systems should provide inputs to all students at a minimally promote learning outcomes. National, subnational, and acceptable level. The precise mix of desired inputs is hard local governments; the private sector; and sometimes to identify; it is also difficult to demonstrate how individual even international actors may spend money on public inputs contribute to student learning (Hanushek 1986). education. However, findings show that some school inputs and, therefore, some educational investments, positively impact • Fiscal control and capacity. Fiscal control school outcomes, if used effectively (Pritchett and Filmer mechanisms are crucial for understanding education 1999; Glewwe and others 2011). This is particularly true in finance systems; they are used to plan, monitor, and low-income settings or where enrollment is not yet universal execute a country’s education budget. If resources (Heyneman and Loxley 1983; Harbison and Hanushek are not used for their intended purpose, it is unlikely 1992). In addition, governments must make adequate efforts that education services will be of adequate quality. to commit appropriate funding to education based on their ability to spend—and do so over time in a way that reflects increases in national wealth. What are the Challenges of an Promoting equity Education Finance System? Do education finance systems seek to improve the education Recently, many countries have begun to realign their outcomes of students from disadvantaged backgrounds education finance systems to respond to a new emphasis and reduce outcome gaps among students? Equity in this on educational quality. Some developing countries sense means that students with different educational needs are struggling to finance quality improvements while receive different and commensurate levels of resources. simultaneously expanding access. As access increases to Socioeconomic background is often the largest determinant include students who were less likely to attend school in of whether a student has difficulty in completing his or the past, improving learning outcomes becomes difficult on her education, but ethnicity, gender, native language, and the basis of a similar composition of resources. Education urban or rural residence also influence attainment (Filmer finance systems also face the challenge of assuring that 2008). Special needs (e.g., physical disabilities and learning resources are used for their intended purpose at the school difficulties) also require differentiated funding. Students’ level. Some countries are accordingly making more of an contributions to their schooling should, moreover, not effort to improve the accountability of education finance represent a burden, especially for the poorest households. through better governance. Private expenditures supplement public funding for education February 2012 in many developing countries, where governments may in spending was the result of previous school-funding be unable to generate sufficient resources to provide methods, based on a simple adjustment of historic levels, quality basic education. In some cases, however, required bargaining, and discretionary decisions. To increase household payments for schooling represent a substantial efficiency, Armenia shifted the responsibility for managing portion of the earnings of low-income households, which education resources to administrators at the subnational often discourages enrollment, especially of girls (Kattan level through decentralization, and to schools through 2006; Oosterbeek and Patrinos 2009). school-based management reforms. In addition, a per capita formula made funding more transparent. Resources are now allocated on a per student basis and adjusted for Performing efficiently rural location, level of schooling, and special needs. These Do education finance systems promote the effective use structural reforms, first piloted in 1999 and implemented of resources in a transparent and accountable manner? throughout the system by 2007, have improved the Governance policies related to the transfer of education efficiency of education finance tremendously, increasing resources substantially influence the quality of service class sizes to appropriate levels and making excess delivery at the school level (Fiszbein, Ringold, and Rogers teachers redundant. 2011). Governance also makes a difference when actual education expenditures do not resemble planned budgets and thus weaken the implementation of education policy. Promoting equity with differentiated funding Accountability means that education finance systems in Ontario, Canada provide necessary resources, collect information about the The Canadian province of Ontario has strong policies in education services made possible with these resources, and place to provide additional resources to students from enforce quality standards (see World Bank 2003). In addition disadvantaged backgrounds. Despite the fact that 24 percent to providing and monitoring funding, an efficient education of the student population has an immigrant background and finance system confirms that resources are converted into 15 percent come from a poor household, Ontario has been learning opportunities. Because reported public expenditures a top performer on the PISA international assessment since on education do not guarantee the implementation of 2000. Of note, there is very little correlation between PISA education policy, the World Bank and other donors have scores and student disadvantage in the province. Many recently made an effort to track expenditures against the factors, including education finance policies, contribute to quality of service delivery at the school level using tools the high learning levels of students in Ontario, regardless like Public Expenditure Tracking Surveys (PETS) and of their backgrounds. The province distributes resources to Quantitative Service Delivery Surveys (QSDS). school boards based on an equalization formula. Funding is equitably distributed so that all local education authorities have enough resources for education, regardless of a Examples of Effective Education Finance Systems Figure 2. Key Policy Goals of Education Finance Ensuring adequacy with per capita funding in Armenia Armenia has recently undertaken a series of major but incremental education finance reforms, including decentralization and the use of per capita funding, to respond to demographic and political changes1. At the time of the dissolution of the Soviet Union in the early 1990s, Armenia experienced a decline in education expenditures and a decrease in enrollment, but an increase in the number of teachers. The inefficiency 1 This section is adapted from Kataoka (2011). Source: SABER-Finance Team, World Bank. EDUCATION NOTES February 2012 locality’s ability to generate revenue. In addition, the funding formula provides specific support to students who have Looking Forward special needs, speak a different first language, come from an Diverse actors and stakeholders with different perspectives indigenous background, live in an urban or rural location, or and motivations manage the flow of resources in an have certain socioeconomic backgrounds. These resources education finance system and hold one another accountable. enable the provision of intensive language classes, student The policy goals of ensuring adequacy, promoting equity, success coaches, special needs teams, and other programs and performing efficiently should guide these actors so that designed to raise the achievement of student groups that the funding process provides resources to schools effectively face greater challenges. and meets public finance objectives. References Edstats (Education Statistics Database). n.d.World Bank, Washington, DC. http://go.worldbank.org/ITABCOGIV1. Education Week. 2012. “Quality Counts 2012: The Global Challenge.� Bethesda, MD: EPE Research Center. Filmer, D. 2008. “Inequalities in Education: Effects of Gender, Poverty, Orphanhood, and Disability.� In Girls’ Education in the 21st Century, ed. M. Tembon and L. Fort, 95–114. Washington, DC: World Bank. Fiszbein, A., D. Ringold, and F. H. Rogers. 2011. “Indicators, Assessments, and Benchmarking of the Quality and Governance of Public Service Delivery in the Human Development Sectors.� World Bank Policy Research Working Paper 5690. World Bank, Washington, DC. Glewwe, P. W., E. A. Hanushek, S. D. Humpage, and R. Renato. 2011. “School Resources and Educational Outcomes in Developing Countries: A Review of the Literature from 1990 to 2010.� NBER Working Paper 17554. Cambridge, MA: National Bureau of Economic Research (NBER). Hanushek, E. A. 1986. “The Economics of Schooling: Production and Efficiency in Public Schools.� Journal of Economic Literature 24 (3): 1141–77. Harbison, R. W., and E. A. Hanushek. 1992. Educational Performance of the Poor: Lessons from Rural Northeast Brazil. Washington, DC: The World Bank. Heyneman, S. P., and W. A. Loxley. 1983. “The Effect of Primary- School Quality on Academic Achievement across Twenty-Nine High- and Low-Income Countries.� The American Journal of Sociology 88 (6): 1162–94. Kataoka, S. 2011. “Per Capita Financing of General Education in Armenia.� In Reforming Education Finance in Transition Countries, ed. J. D. Alonso and A. Sanchez, 10–32. Washington, DC: World Bank. OECD. 2011. Strong Performers and Successful Reformers in Education: Lessons from PISA for the United States. Paris: OECD. Pritchett, L., and D. Filmer. 1999. “What Education Production Functions Really Show: A Positive Theory of Education Expenditures.� Economics of Education Review 18 (2): 223–39. Reinikka, R., and J. Svensson. 2004. “The Power of Information: Evidence from a Newspaper Campaign to Reduce Capture.� World Bank Policy Research Working Paper 3239. World Bank, Washington, DC. Reschovsky, A., and J. Imazeki. 2001. “Achieving Educational Adequacy through School Finance Reform.� Journal of Education Finance 26 (4): 373–96. Underwood, J. K. 1995. “School Finance Adequacy as Vertical Equity.� University of Michigan Journal of Law Reform 28 (3): 493–519. Vegas, E., and C. Coffin. 2012. “SABER-Finance: What Makes an Education Finance System Effective?� Education Unit, Human Development Network, World Bank. Wagstaff, A., and L. C. Wang. 2011. “A Hybrid Approach to Efficiency Measurement with Empirical Illustrations from Education and Health.� World Bank Policy Research Working Paper 5751. World Bank, Washington, DC. World Bank. 2003. World Development Report 2004: Making Services Work for Poor People. Washington, DC: World Bank. Education Notes is a series produced by the World Bank to share lessons learned from innovative approaches to improving education practice and policy around the globe. Background work for this piece was done in partnership, with support from the United Kingdom’s Department for International Development (DFID). For additional information or hard copies, please go to www.worldbank.org/education or contact the Education Advisory Service: eservice@worldbank.org. Author: Emiliana Vegas and Chelsea Coffin Photo Credit: Jonathan Ernst/World Bank