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The World Bank's first effort to spur educational investments in children was in Tunisia in 1962. At that time, 41 percent of the world's children aged 6–11 were not in school. In SSA, only 25 percent of primary-aged children were in school, while enrollment rates in the Arab States (39 percent) and South Asia (44 percent) were only modestly better. Their parents were not in a position to produce the education in the home – only one-third of the adult population in low-income countries were literate and the average adult education level was 1.6 years. Even in middle-income countries, about 20 percent of the primary-aged children were not in school, and one-third of their parents were illiterate with an average education level of 2.8 years. Given the overwhelming evidence that literacy and schooling can improve health and economic outcomes, the World Bank's focus was on expanding the supply of available schools and qualified teachers.
Over the next forty-nine years, the World Bank has invested $69 billion around the world to increase schooling outcomes in developing countries. Schooling outcomes have improved dramatically in the developing world over that time. Only 10 percent of primary-aged children are not in school. The enrollment rates in the Arab States (86 percent) and South Asia (91 percent) are more than double the rates in 1960. Of the primary-aged children out of school in these regions, just over half will never attend school while the rest have either dropped out after attending for at least some years or will enter eventually. Consequently, primary completion rates are approaching 90 percent or more in these areas, as they are in the world as a whole.
This chapter reviews the stylized facts regarding the distribution of human capital investments and the returns to those investments in developing countries. It then examines recent evidence regarding which policies can induce increased human capital investments in the most efficient manner, using estimated benefits and costs as a guide. Supply-side strategies such as increasing school access or improving school quality are more costly, have less certain benefits, and have a weak record of success. Demand-side interventions such as school sited health programs, vouchers, and conditional transfers have a greater likelihood of improving literacy in the most cost-effective manner.
Few empirical relationships have been more frequently investigated than that between years of schooling and earnings. Literally hundreds of studies using alternative data sets from developing and developed countries, spanning many decades, and employing alternative specifications to correct for various potential sources of bias, have derived amazingly consistent estimated private returns per year of schooling. Average returns are almost universally positive and at or above market returns on other investments. Using harmonized household data sets from 48 developing countries, Fares, Montenegro and Orazem (2007) found that returns for women average 9.6% compared to 7.1% for men, and 8.1% for urban residents compared to 7.5% for rural residents. There may be external benefits from schooling beyond those that go to the individual. These social benefits include improved governance due to an educated electorate, improved climate for growth due to agglomerations of skilled individuals, reduced fertility behavior, and improved household health.
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