The Benefits of Early Child Development Program: An Economic Analysis

Table of Contents

Acknowledgement

Abstract

1. Introduction

2. Benefit-Cost Analysis

3. Benefits from Early Child Development Programs

3.1 The Economic Benefits of Education

3.2 Other Benefits from Education

3.3 Benefits that are not Education Related

4. An Example: The Bolivian PIDI Program

4.1 The PIDI Program

4.2 Direct Benefits from Service Delivery

4.3 Preparing the Base-Line Data for the Productivity Analysis

4.3.1 The Education System

4.3.2 The Impact of the PIDI Project on Social Development

4.3.3 The Net Present Value of Increased Productivity

4.4 Benefits other than Increased Productivity

4.5 The Cost of ECD Programs

4.5.1 Direct Costs

4.5.2 Fiscal Costs

4.6 Benefits-Cost Ratios for The PIDI Program

5. Who Should Pay?

5.1 Who are the Beneficiaries of the Program?

5.2 Towards a Just Society

6. Conclusion

References

Annex 1. A Note on Estimating Returns to Education

 

 

Acknowledgment 

We would like to thank participants at workshops in Washington, D.C., and in Cartagena, Colombia for their valuable comments and suggestions. Special thanks go to Mary Eming Young, Anne Kielland, Sandra Rosenhouse and Ricardo Moran. Their detailed comments and discussions of various parts of the paper have lead to significant improvements. Husein Abdul-Hamid developed the "ECD-Calculator" program. Only we are responsible for any remaining errors.

 

Jacques van der Gaag

Chief Economist

Human Development Network

Jee-Peng Tan

Principal Human Resources Economist

Education Department

Human Development Network

 

 

 

Abstract

This paper provides a framework for estimating the economic benefits of early child development (ECD) programs, and applies it to preliminary data from the PIDI project in Bolivia. "Economic benefits" refer first to the monetary value of the benefits in health, nutritional status, and cognitive and social development that accrue to the children who enroll in ECD programs. To these benefits we need to add benefits to the mother and other family members, to the neighborhood in which the children centers operate, and to society as a whole.

A major objective of ECD programs is to prepare young children for enrollment in primary school. Many of the benefits of ECD therefore are realized "through" improved enrollment and schooling achievements of ECD graduates. We take advantage of this in our evaluation. Borrowing from the literature on the economics of education, we will base part of our analysis on the assumption that one of the objectives of ECD programs is to increase children’s chances to become productive citizens. Productivity in this regard is very broadly defined to include productivity in the market place as well as home-production. The latter manifests itself in the relationship between, for instance, higher mother’s education and children’s health and nutrition status.

We will quantify the benefits of increased life-time productivity as a result of ECD enrollment. We will also discuss additional benefits from education, but quantification will prove to be difficult.

Not all benefits of ECD programs are education related. There are direct benefits to the child (e.g. meals provided at the ECD centers), and indirect benefits to society (e.g. greater community participation, or lower future fertility rates). We will try to catalog all benefits but, again, will not always be able to put a dollar value on them.

Based on the benefits we can quantify, our preliminary results for Bolivia show that ECD programs that are (1) well-targeted, and (2) have a major impact on school enrollment and achievement, and are excellent investments from an economic point of view. We will also argue that if one adheres to some modest notion of social justice, ECD programs should be subsidized (or be provided free-of-charge) for those children who are born and grow up in the most deprived segments of society.

 

1. Introduction

In recent years, an avalanche of literature has shown the importance of good nutrition, good health, a stimulating environment, and loving care in the early years of life, for the physical, mental and social development of a child. From better school performance to lower criminal behavior, the right combination of health care, adequate food, a pro-learning environment and good parenting, installs qualities, however defined, that result in more productive, more socially adapted, and in a general sense "better" children and adults, compared to when one of these factors is missing.

The links between good nutrition and brain development, even in utero, are well known (Martorell,1996). Del Rosso and Marek (1995) document the importance of good health and nutrition for cognitive development. De-worming has had significant effects on school performance (Bundy, 1997). School feeding programs have not only increased enrollment, but also achievement (Pollitt et al.,1993). Pre-school programs have erased the disadvantages that young children experience when they grow up in marginalized neighborhoods, characterized by poverty, hunger and malnutrition, broken-up families, and crime (Schweinhart, 1993, Haveman and Wolfe, 1995).

Young (1996) provides a useful summary of programs aimed at children in the early years of life that consist of a combination of nutrition, health care and cognitive development components. These programs are collectively referred to as Early Child Development (ECD) programs. Myers (1995) provides one of the first comprehensive assessments of such programs for the developing world. Young (1997) gives a state-of-the-art review of the benefits that result from these interventions. Even the popular press has recently highlighted the importance of ECD (see NEWSWEEK, January, 1995, TIME Magazine, December, 1996 and NEWSWEEK, April, 1997).

It is not surprising that there is general consensus that ECD programs are particularly beneficial for disadvantaged children. Most of the components that contribute to the proper development of a child are usually present in relatively well-off households. It is also well-known that, generally speaking, ECD programs are expensive. Though cost estimates vary widely (see Wilson, 1995), the annual cost per child can easily exceed the cost for one year of primary education. The need to target costly interventions at resource-poor areas or poor households, underscores the importance of providing policy makers with information that will allow them to judge which interventions are most beneficial while still being affordable. After all, in a financially constrained environment, ECD interventions compete for resources with other programs and projects, such as primary education, irrigation works, or feeder roads.

In this paper we will show how benefit-cost analysis can assist in providing that information, help select the "best" ECD program for the situation at hand from the myriad of program options available, and compare the economic benefits of ECD interventions with those from more standard investments. The key-word is "investment". First, we will argue that ECD programs are investments aimed at improving the future productivity of the child, just as education is thought to do. This will allow us to estimate the (net present) dollar value of the benefits of ECD programs, to the extent that these benefits are reflected in higher productivity levels of the ECD graduates. Subsequently we will bring in additional benefits of ECD. Though it is important to be aware of such benefits, it will not always be possible to put a monetary value on them (for instance, how does one estimate the monetary value of "improved self-esteem of the mother"?).

In the next section we will give a couple of examples of benefit-cost analysis of programs that address the needs of very young children. This will show the practical use of such analysis in real life situations, rather than in a laboratory setting. It will also show that, although the theory of benefit-cost analysis is well-established, the application involves many judgment calls that depend on the scope of the analysis as well as on the particular conditions under which the programs are being implemented. The examples will be used to motivate the approach we will take in this paper. This approach is a direct application of the economics of education literature, particularly regarding "the rates of return to education". This literature is introduced in section 3. In that section we will also list ECD benefits that are not education related. In section 4 we will apply our framework to the so-called PIDI 1 program in Bolivia.

In section 5 we will answer the question of "who should pay?". As we will see, a large part of the benefits of ECD programs goes directly to the child in the form of increased future earnings. On first sight, that would suggest that these children themselves (or rather their parents) should pay for these interventions. However, ECD programs have externalities, (benefits that accrue to society as a whole), which would argue for government financing, or at least subsidizing. We will add to this an argument in favor of government financing of ECD programs for poor disadvantaged children: any society that adheres to a minimum notion of social justice - see, for instance, Rawls 1971 - should take measures to prevent children from being "doomed for life", just because they were born in poverty. Providing ECD programs is a powerful way to break the intergenerational cycle of poverty.

Section 6 concludes.

 

2. Benefit-Cost Analysis of ECD Programs

The program for Women, Infants and Children (WIC) which serves 6.5 million disadvantaged children and their mothers in the U.S., provides a good example of how a limited cost-benefit analysis can have a significant impact on policy making.

The program’s main objective is to improve the health and nutritional status of children. It provides supplemental food, nutrition and health services, as well as breastfeeding counseling to nutritionally at-risk, low-income, pregnant and postpartum women and their infants and children up to five years of age. The WIC program has been evaluated extensively. It has been shown to decrease the incidence of very low birth weight by 44 percent and to lower the incidence of late fetal deaths by up to one-third (US Government Accounting Office, 1992; Rush et al., 1988). Clearly, in a technical (health-improving) sense, WIC has been effective. The evaluations also show that WIC has been cost-effective in the sense that "for every dollar spent...the associated savings in Medicaid costs...ranged from $1.77 to $3.13." (US Department of Agriculture, 1990, page xii).2

This WIC evaluation does not constitute a complete benefit-cost evaluation of the program. Benefits are only measured as reductions in the costs of another program (Medicaid). Additional benefits such as the effect of higher birth weight on future school performance are not taken into account. Still, this evaluation has had important policy implications. By showing that the WIC program could significantly reduce the costs of Medicaid, the program received strong and sustained political support.

Another important aspect of this evaluation is that it depends completely on the existence of another program. In other words, the evaluation is very situation-specific. This is generally the case for benefit-costs analysis. Consequently, most studies are unique. The results do not carry over easily to other countries (or regions, or target groups).

The evaluation of the High/Scope Perry Pre-school program provides another example of benefit-cost analysis of ECD-type interventions. The study followed 123 children who were randomly divided into a program group and a control group. Information was collected annually from ages 3 to 11, at ages 14-15, at age 19, and at age 27. It includes IQ-scores, school performance, employment and earnings, home ownership, criminal behavior, dependency on welfare programs, and other aspects of well-being and social behavior.

Among many other results, the findings of the study include the following (Schweinhart et al., 1993); higher scores on literacy tests at age 19, higher monthly earnings at age 27 (of pre-school participants as compared to the control group), higher percentage of home ownership, higher level of schooling completed, lower percentage receiving social services, fewer arrests, fewer out of wedlock births, etc.

Based on these results, the authors calculate that: "over the lifetime of the participants, the pre-school program returns to the public an estimated $7.16 for every dollar invested" (op cit page xviii). How did they come up with this number?

Estimating the cost (investment) of the program is relatively straightforward. Calculating the monetary value of the benefits, however, is much more complicated and involves many judgment calls that depend on the objective and scope of the study, and on the specific circumstances under which the program has been implemented. The authors make an effort to estimate the monetary value of the program benefits, as shown in Table 1.

Table 1: Valuing the Benefits From the High/Scope Perry Pre-school Program

1. Child Care Benefits

In addition to pre-school education, the program provides direct benefits in the form of childcare to the enrolled children. The monetary value of these childcare services (which are benefits that accrue to the parents) is estimated as equal to the equivalent costs of professional childcare services at the time the children were enrolled in the program.

2. Employment Related Compensation

Program benefits were measured as the difference in earnings and fringe benefits between program participants and the control group.

3. Adult Secondary Education

Pre-school participants had a lower rate of enrollment in adult high school classes than non-participants. The value of this benefit was set equal to the costs of these remedial adult education courses.

4. Education

The education benefits of the program were estimated as increased efficiency of the education process due to higher achievements of the program group (either measured as an increase in educational output - increased graduation - or as a reduction in the cost of schooling - reduced dropout). Included in these estimates are the costs of special school programs, such as classes for compensatory education, which were lower for pre-school graduates.

5. Public Welfare Assistance

Program participants were, as adults, less dependent on the social welfare system. The associated cost savings were added to the monetary benefits of the program.

6. Delinquency and Crime

The study showed that pre-school participants had lower criminal behavior. The monetary value of this benefit was calculated as the sum of the reduction in the costs to the victims, the costs of the criminal justice system, and the costs of private security measures.

Source: Adapted from Schweinhart et al. (1993)

 

 

In conducting the analysis, the authors had the benefit of longitudinal data, spanning almost three decades after the pre-school intervention. Many of the benefits listed for the High/Scope Perry pre-school program appeared two or three decades after the intervention (reduced welfare dependency, reduced crime). That does not make them irrelevant. To the contrary, they are major contributors to the overall value of the program. But as a practical matter, the analysis has to be done ex ante, and certainly well before the first beneficiaries of the ECD program are at the end of their lives. Moreover, even in the "best case" scenario of the current example, the authors had to restrict their analysis to those benefits that were actually measured in the various rounds of surveys.

This example again points to the fact that benefit-costs analysis are country specific. As was the case in the WIC example, the monetary value of the benefits of this pre-school program depends heavily on the presence of other programs and policies. These programs can be considered substitutes for ECD programs (e.g. providing remedial education service or medical care for underweight babies). If these programs were abolished, the benefits of pre-school education (in these examples) would appear to be diminished.

For most benefit analysis it will be necessary to decide first which "good outcomes" of the program should be included in the evaluation, and secondly, how to "monetize" these benefits. This element of "judgment" cannot be avoided, nor is it possible to arrive at a once-and-for-all benefit/cost ratio. The specific circumstances of the program need to be taken into account every time.

In the next section we will argue that one way to "sort" the benefits in those that can be quantified (even in the absence of longitudinal data), and those for which we need to rely on more qualitative assessments, is to borrow from the literature on the economics of education. The starting point is the position that education is an investment in human capital. This investment results in higher productivity of the educated person, which is reflected in higher earnings. The present value of these higher earnings constitute the monetary value of the education benefits. In the next section we will take a closer look at this approach and see how it can be adopted to estimate the benefits of ECD programs.

 

3. Benefits from Early Child Development Programs

3.1 The Economic Benefits of Education

A central feature of the literature on the economic returns to education is the so-called "age-earnings profile." Imagine a young child who grows up healthy, well-nourished, and without any damage to her cognitive and emotional development. She stays at home until the age of, say 12, and then starts helping her parents in the field. Or perhaps she helps a family member in the household, or does simple work in a local store. She did not go to school and cannot read, write or do basic calculations. Her productivity in the first year is low, but she learns from experience: during her first years of work, her productivity (and thus her income) increases, but after a while she reaches her maximum level of productivity. At the age of, say 55, she retires. This pattern of productivity over her lifetime (her "age-earnings profile") is sketched in Figure 1.

 

Figure 1. Age-Earnings Profile Without Schooling

 

 

Now let's look at the same girl, and let's put her in school at age 6. This comes at a cost, illustrated in Figure 2 by the gray area. When she goes to work at age 12, she can read the instructions on the box of fertilizer or pesticides, or she can work the cash register at the store. Her productivity is higher than in the case without schooling, for the rest of her life. By comparing the increase in lifetime productivity (area B in Figure 2), with the cost of education—area C, the "investment"—we can calculate the economic returns to education, just as we do with any other investment (see Annex 1 for further details).

Figure 2: Age-Earnings Profile with and without Schooling

 

 

 

These returns turn out to be high indeed (Table 2). They usually range from 10 to 30 percent. To be more precise: the economic literature on education estimates that one extra year of primary education will increase someone's future productivity (as, for instance, reflected in an hourly wage rate) by 10 to 30 percent.

 

Table 2: Economic Returns to Investment in Education; percentages 

Argentina

10.0

Nigeria

30.0

Bolivia

9.8

Pakistan

20.0

Brazil

9.7

Philippines

18.3

Cyprus

15.4

Spain

31.6

Ethiopia

35.0

Yemen

10.0

India

19.8

Zimbabwe

16.6

Source:Psacharopoulos (1994)

 

 

These high economic returns are the main reason why the development community is pushing for "Education for All": education is the surest way out of poverty, because it has a very high economic rate of return.

But remember, we were talking about a girl who is healthy, well-nourished and well-developed for her age—ready to learn. When you put a child like this in a good school, the benefits are high.

Unfortunately, the situation in many parts of the developing world is much more grim. Despite tremendous progress during the past 3 decades, the struggle for survival of young children in low-income countries, as well as in poor areas of middle-income countries, is not over yet. In 25 out of 40 low-income countries, the Infant Mortality Rate still exceeds 100. The children who do survive, often suffer from malnutrition (whether from lack of protein, or from lack of one or more of the essential micro-nutrients). Furthermore, despite major progress in all parts of the world, primary enrollment rates in some countries are less than 60 percent, and lower yet for girls. Once in school, it is not uncommon for children to repeat grades or drop out before graduation,3 resulting in many children being functionally illiterate. Table 3 gives an example of social indicators for children, as often found in poor countries, or in poor regions in middle-income countries.

 

Table 3: Hypothetical Social Indicators in Poor Countries

Indicator

Value

Infant Mortality Rate

150 per 1000

Child Mortality Rate

50 per 1000

Malnutrition

50 percent

Primary Enrollment

60 percent

Average Late Enrollment

2 years

Drop-out Rate

30 percent

Repetition Rate

30 percent

 

 

From this example it is clear that most children in poor countries will never reach their full productive potential. Some will die before they reach school-age, others’ development will be damaged in early life due to malnutrition, disease and lack of a stimulating learning environment. Not all will enter school and those who do may drop out. Figure 3 illustrates the loss in productivity associated with the kind of social indicators that are characteristic for a poor society. The "age-earnings profile" shown can be interpreted as being for an entire cohort of , say, 1000 newborns. We will view ECD programs as a comprehensive approach to address the set of problems that prevent the children in this cohort to reach their full productive potential.

 

Figure 3: Reduction in the Cohort's Full Productive Potential

 

 

 

By investing in these children in their first years of life, we improve their chances to fully develop into productive adults. By comparing the gain in productivity (area B in Figure 4) with the cost of the investment (the gray area C which now includes investments in ECD programs, in addition to primary education) we can obtain the benefit-cost ratio of the ECD investment.

 

Figure 4: Regaining the Lost Productive Potential

 

 

We will use the approach to estimate the benefits of ECD programs that materialize in terms of higher productivity4, but in order to do so, it is important to distinguish three groups in the population: wage earners, the self-employed (agricultural and non-agricultural), and those who do not work in the market place.

 

Wage earners.

Age-earnings profiles are usually estimated on data from wage earners only. Whatever systematic wage differentials one observes among workers with different levels of education is, cetires paribus, considered to be a reflection of increased productivity as a result of education. This assumption will be closest to the truth in undistorted labor markets. Public sector wages, for instance, may reflect factors other than productivity (e.g. when the government hires large numbers of workers to keep unemployment down.) In general one can expect private sector wages in non-unionized markets to best reflect productivity differentials.

 

Self-employed.

It is sometimes argued that the real role of education is not to increase productivity but to "signal" to future employers the capacity and talent of the worker (Arrow, 1973, Spence, 1973). By completing a certain level of education, the student receives a diploma which serves as a "ticket" to entry into the formal wage sector. Consequently, one should not interpret wage differentials as direct reflections of productivity differences, nor can one use results from the wage sector as proxies for productivity differences in the self-employment part of the economy.

These arguments have been refuted by two streams of research. First, studies that have used direct measures of cognitive skill (such as test-scores) show that wage differentials do reflect differences in human capital, not just differences in "diplomas" (Knight and Sabot, 1990, Marnane and Willett, 1995). Secondly, there is a large literature on the effect of education on agricultural productivity showing that education significantly adds to output (see, for instance, Lockheed et al., 1980, Tilak, 1993).

As a first approximation, therefore, one could use the results from the formal sector (the wage-equations), as an estimate for productivity differentials for the self-employed. If data on the incomes of self-employed workers were available, one could estimate separate age-earnings functions for this segment of the economy. However, the benefits of increased productivity show up 10 or more years after the ECD intervention (i.e. after the time of the analysis). To incorporate sector-specific effects of education on productivity, one needs to project the sectoral composition of the economy 10 to 30 years ahead. Partly because of the lack of data, and partly because of the difficulty of projecting the development of an economy decades ahead, we expect most studies to accept the estimation results of the formal (wage) sector as valid for the entire economy.

The voluntary unemployed.

Anyone who has ever looked at time-use studies of persons (usually women) who stay at home, would hesitate to call this population group "unemployed". Table 4 shows an example of typical activity pattern of these women.

 

Table 4: Home Production: Average Hours Spent

per Day By Mothers in Rural Households

Activity

Hours per Day

Activity

Hours per Day

Cooking

2.06

Feeding or Chopping

.07

Breast-Feeding

.36

Household Chores

2.76

Bottle-Feeding

.01

Story Telling

.003

Caring for Children

1.69

Care of Aged or Sick

.04

Marketing and Travel

.39

School or class

.04

 

 

TOTAL

7.42

Source: Adopted from King and Evenson (1983).

 

 

It is exactly this "home-productivity" which manifests itself in the link between better education levels of the mother and a host of favorable outcomes, such as healthier (and often fewer) children, better nutritional status of all household members, better hygiene, more attention to learning, etc. A major challenge is how to put a (monetary) value on improvements in home-productivity that result from better education.

We will make the following strong assumption to facilitate the benefit-cost analysis:

productivity differentials in the market place, which are due to differences in education levels, can serve as a proxy for differentials in "home-productivity". For example, if 5 years of schooling increases future wages by 40 percent, the difference in home-production between someone without education and someone with 5 years of education, is estimated to be 40 percent.

This assumption5 will allow us to estimate the value of the benefits that will accrue to the household as a result of a higher education level of the mother, directly from the age-earnings profile. Alternatively, this value needs to be obtained from individual effects, (e.g. better child health), the value of which could be equated to the costs of programs that yield similar effects, (e.g. child health care).

In any case, it is extremely important to avoid double-counting: If one uses the wage-equations to estimate differentials in "home-productivity", one should not also add the benefits in terms of "improved children’s health", or "improved nutritional status", that result from higher education levels of mothers. Conversely, if one values the components of home production individually, one should first separate the population among those who will enter the labor market (10 years or more in the future) and those who do not. The benefits of increased labor-market productivity should subsequently only be added to the future wage-earners and self-employed, and not to the latter group, the "unemployed" (i.e. those who produce at home). Of course, again, predicting which percentage of the population will work in which segments of the economy (including work at home), one or more decades in the future, is often beyond the ability of the analyst. The assumption that productivity differentials in the market place can be used as a proxy for productivity differentials at home, circumvents this difficulty.

The involuntary unemployed.

We need to address one more important topic: how to deal with the involuntary unemployed? The answer is: we don’t know. The previous discussion assumed implicitly that people have a choice regarding their employment: if their home-productivity (their "reservation wage") exceeds the wage they can get in the market place, they stay home. If the market wage exceeds their reservation wage, they will work in the market for wages or as self-employed workers. For many developing countries, this is probably not a bad assumption. In the absence of adequate social safety nets (e.g. to insure against involuntary unemployment), people either have to produce at home or in the market place.

However, when unemployment is high among the well-educated, the value of their home-production is likely to be well below their market value. An efficient labor market would reduce wages in the presence of large unemployment, which in turn would reduce the economic benefits of education, but would allow the framework stated above the stay intact. "Wage-stickiness", however, creates involuntary unemployment which may imply that much of the potential value of education (especially higher education) will not be realized. In practice it will prove extremely difficult to predict involuntary unemployment levels 10 to 30 years in the future. Nevertheless, the issue is important. At a minimum it points to the relevancy of stable market-oriented macro policies to realize the benefits of investments in human capital.6

3.2 Other Benefits from Education

The benefits of education are most visible in the market place where they are reflected in higher wages. We have argued that these market place "productivity" benefits are a reasonable proxy for differentials in "home-productivity". Still there are many other benefits associated with education that are not captured by these productivity gains. Some of these benefits accrue directly to the educated individual, but other benefits may have a wider impact7. Table 5 shows a "Catalog of Impacts of Schooling", the nature of this impact, and the state of our knowledge regarding the economic value of the impact (Haveman R. and B.Wolfe, 1984).

 

 

Table 5: Catalog of Impacts Of Schooling, Nature of Impacts, and Evidence

On Magnitude of Level and Value Of Impact

 

Channel of Impact on Schooling

 

Economic Nature of Impact

Status of Economic Benefit Estimates

1.

Individual market productivity

Private; marketed; human capital investment

Increments to marginal value products, reported as rates of return. Producers’ surplus neglected

2.

Non-wage labor market remuneration

Private; marketed and non-marketed; human capital investment

Rough estimates of true returns to schooling 10 to 40 percent greater that rate of return estimates

3.

Leisure

Private; non-marketed; consumption

 

4.

Individual productivity in knowledge production

Private; non-marketed; human capital investment

No. firm evidence on the extent of value

5.

Non-market individual productivity (e.g. do-it-yourself)

Private; non-marketed; human capital investment

No estimates of economic value

6.

Intra-family productivity

Private; some external effects; both marketed and non-marketed; human capital investment

No estimates of economic value

7.

Child quality through home activities

Private; some external effects; both non-marketed and marketed; human capital investment

No significant evidence of economic value except intergenerational earnings effects (Swift and Weisbrod [96], Spiegelman [94])

8.

Own health

Private; modest external effects; partially marketed; human capital investment and consumption

Little evidence on economic value; except indirect evidence via earnings, weeks worked, and life expectancy

9.

Spouse and family health

Private (within household); modest external effects; partially marketed; human capital investment and consumption

Little evidence of economic value; except indirect evidence via earnings, weeks worked, and life expectancy

10a.

Fertility (viz., attainment of desired family size)

Private (within household); non-marketed; consumption

No estimates of economic value

10b.

Fertility (viz., changes tastes for children)

Private (within household); some external effects; non-marketed consumption

No estimates of economic value; perhaps impossible given nature of taste change

11.

"Entertainment"

Private; non-marketed; consumption

No estimates of the value of increased efficiency

12.

Consumer choice efficiency

Private; some external effects; non-marketed; human capital investment

No estimates of the value of increased efficiency

13.

Labor market search efficiency (including migration)

Private; some external effects; non-marketed; human capital investment

No estimates of the value of increased efficiency

14.

Marital choice efficiency

Private; minor external effects; non-marketed; consumption

No estimate of economic value

15.

Crime reduction

Public good

No estimate of economic value

16.

Social cohesion

Public good

No estimate of economic value

17.

Technological change

Public good

No estimate of economic value

18.

Income distribution

Public good

No estimate of economic value

19.

Savings

Private; some external effects; marketed productive factor

No estimate of economic value

20.

Charitable giving

Both private and public; non-marketed

No estimate of economic value

Source: Haveman, R. and B. Wolfe (1984).

 

 

 

The first two entries correspond with "productivity gains" in the market place we discussed in section 3.1. Items 3 to 10a could be captured under "home production", especially regarding the health outcomes of households with better educated parents.9 These benefits accrue mostly to the household and are therefore a direct reflection of the gains in home production due to increased education. As we argued above, the value of this increased "home-productivity" is captured in the reservation wage of the adults who stay at home.10

The benefits listed from item 10a on, however, have thus far been ignored in our analysis. They accrue (mostly) to society as a whole and are therefore not reflected in the reservation wage. Unfortunately, as the Table 5 indicates, estimates of the economic value of these benefits is generally not available, though some recent attempts have been made to quantify some components. Summers (1994), for example, equates the benefits of "one birth averted" (due to increased education levels of women) with alternative costs per birth averted (as a result of family planning programs). The number of averted births resulting from the education program is estimated based on a result in the population literature which shows that an extra year of education (of the mother) reduces fertility by 5 to 10 percent.11 The economic benefits of the crime reduction effect (item 15) have been estimated by Schweinhart et al. 1993. Chances are that this effect is highly country-specific and information about it will generally not be available. However, if such information exists, the reduction in costs to the victims, as well as reduced costs for the judicial system and private security measures can be used as proxies for program benefits.12

Note finally that reduced dependency on social welfare programs (as included by Schweinhart et al. 1993) could be added to this catalogue of education related program benefits. However, in most poor countries such programs are not very well developed or are non-existent, so that ignoring these potential benefits in the analysis will have little or no impact on the end result.

We repeat that in most cases where benefits accrue to society as a whole (benefits that have a public goods character) information on the economic value is usually not available. As we shall see in section 6, this makes the decision of "who should pay" for the ECD program considerably more complicated.

3.3 Benefits that are not Education Related

While many of the benefits of ECD programs become evident "through" increased education levels of ECD graduates, many other benefits are more direct and are not related to the education system. The most obvious benefits of the program are the goods and services received by the child and her family. They include the value of food, health services, the "baby-sit" component of the program, information and training to the parents of the child, etc. The benefits of these goods and services can usually be valued at market prices charged by alternative suppliers. In addition to these benefits, which are directly enjoyed by the participating families, there are other, indirect, benefits. Myers (1996) distinguished five groups of beneficiaries: children, adults, communities, schools and health service facilities, and society as a whole (Table 6). Most of the benefits that accrue to the children can be "translated" into increased future productivity and are thus captured in the analysis presented above. For most of the other benefits it will again prove to be very difficult to estimate a monetary value. One possible exception is the improved employment opportunity for mothers who enroll their child in an ECD program. If the child-care service inherent in an ECD program allows the mother to work in the market place (and thus, presumably, realize earnings that exceed the value of her productivity at home), the income gain (minus the possible loss in home-productivity) can be counted as a benefit of the ECD program.13

  

Table 6: Benefits of ECD Programs By Beneficiary Groups

Beneficiary Group

Area of Change

Indicators of Change

Children

Psycho-social Development

Improved cognitive development (thinking, reasoning); improved social development (relationships to others); improved emotional development (self-image, security); improved language skills

 

 

Health and nutrition

Increased survival chances; reduced morbidity; improved hygiene; improved weight & height for age; improved micronutrient balances

 

 

Progress and performance in primary school

Higher chance of entering; less chance of repeating; higher learning and better performance

 

Adults (program staff, parents) and siblings

General health knowledge, general health attitudes and practices

Improved health and hygiene; improved nutrition (own status); preventative medical monitoring and attention; timely treatment; improved diet

 

 

Self-esteem

Relationships

Employment

Improved relationships between husband and wife, between parents and older children; caregivers freed to seek or improve employment; new employment opportunities created by program; increased market for program related goods

 

Communities

Physical environment

Social participation

Solidarity

Improved sanitation; more spaces for play; new facilities; greater female participation; greater demand for existing services, community projects benefiting all

 

Schools and health service facilities

Efficiency

Better attention to health; changed user practices; reduced school repetition and dropout

 

 

Effectiveness

Capacity

Practice and Content

Greater coverage; improved ability, confidence, or organization; methods and curriculum content

 

Society

Health and Education Status

Participation

Productivity

Delinquency

Fertility

Equality

Fewer days lost to sickness; a healthier population; a more literate, education population; greater social participation; a more productive labor force; reduced delinquency; reduced fertility; reduced social inequality

Source: Myers 1996

 

 

 

Finally, one should consider a benefit to society that could be of great importance, but the value of which may be impossible to estimate: the creation of a more just society, one in which all citizens have a reasonable chance to escape poverty. We will discuss this benefit to society as a whole in section 5, and show that it is of crucial importance in the decision of who should pay for ECD programs. But first we will use the framework presented above to try to estimate the benefits (and subsequently the costs) of a recently developed ECD Program in Bolivia.

 

4. An Example: The Bolivian PIDI Program

4.1 The PIDI Program

The Bolivian ECD Program (known as the PIDI program) consists of non-formal homebased daycare centers where children receive nutrition, health and cognitive development services. Each center serves 15 children, ranging from 6 months to 6 years of age. There is one mother/caretaker, who is assisted by one or two helpers, depending on the number of children under 2 in the PIDI.15

Children enrolled in the program receive two meals per day and a snack which together provide 70% of their calorie requirements. PIDI staff make sure they are fully immunized. Children receive basic healthcare when needed, are regularly weighted and measured to monitor their physical growth, and they go through a relatively strict daily program of games and age-specific exercises to stimulate their cognitive development.

The target population consists of very poor households who live in peri-urban areas. Many are recent migrants from rural areas trying to improve their standard of living by finding employment in the city. Social conditions are characterized by high infant and child mortality, high levels of malnutrition, excess disease burden, and stunted psycho-social development. Primary school enrollment is very low. Repetition rates and drop out rates are high. There is virtually no progression to higher levels of education. The program’s objectives are (1) to improve children’s readiness to succeed in school and beyond by facilitating their physical, emotional, social and cognitive development, (2) to enhance the status of women by increasing their employment opportunities, and to expand their knowledge of health, education, and nutrition, and, (3) to increase community and private sector participation in the social development process.16

The PIDI program is expensive. Recent estimates suggest that one year enrollment in the project costs between $300 and $400. Given their socio-economic conditions, between 150,000 and 300,000 children in Bolivia may be eligible for the program.17 Thus, depending on the scope of the program, recurrent costs could amount to between $50 and $100 million annually. To put this in perspective, the entire government budget for education in 1995 was about $300 million.

Whether or not the PIDI program costs "too much" depends not on the level of expenditures, which is certainly considerable, but on the benefits that one expects from each dollar invested in this program. We already know how beneficial ECD programs can be in terms of improved health, nutrition and cognitive development. We will now attempt to estimate these benefits in monetary terms.

 

4.2 Direct Benefits from Service Delivery

ECD programs provide a number of services that directly benefit the enrolled child and her family. They include: meals and health care, and, as in the High/Scope Perry pre-school example, child care services. Additional direct benefits may include training to the mothers (for example on a child’s nutritional needs), which may be valued by these mothers for its’ own sake.18

In general, it is not difficult to measure the value of the direct benefits. The value of the food benefit can be estimated as its market value. If health care services are provided, the cost of these services in, say, a clinic can provide an estimate of its value to the recipient. In the same way all other services that are provided directly to the child or her mother or parents can be included in the analysis. 19

If we restrict ourselves to the value of the two meals per day that PIDI children receive, the direct benefits would amount to $150 (about half of total service delivery costs20). Alternatively, we could use the total recurrent costs of the program21 as a proxy for the service delivery benefits to the children and their families. This would put the direct service delivery benefits at about $300 per child per year.

Note that at this point it is irrelevant whether or not the parents pay for this food or any of the other services. We are only concerned with the benefit side, regardless of how the program is being financed.

 

4.3 Preparing the Base-Line Data for the Productivity Analysis

4.3.1 The Education System

This part of the analysis involves the benefits in the form of increased productivity resulting from more education. Therefore, we first need to characterize the Bolivian education system. In Table 7 we show the four levels of formal education in Bolivia, from primary schooling to higher education. We also indicate the years required for each level and the unit costs of one year of schooling. For performance indicators we chose enrollment and repetition rates by level of schooling. As the data shows, Bolivia has a long way to go before the education of the population reaches levels sufficient to compete successfully in an increasingly knowledge-based and competitive global economy.

 

Table 7: Characteristics of the Bolivian Schooling System

School level

Years

Cost per Year*

Enrollment

Dropout

Repetition

Enrollment of Target Group

Primary

5

228

.95

.35

.10

20%

Middle

3

228

.70

.30

.10

0

Secondary

4

320

.60

.30

.10

0

Higher

4

1598

.20

.10

.10

0

*In Bolivianos.

 

 

 

 

 

 

 

 

The last column shows the education indicators for the target group: primary enrollment is just 20%.22 Progression to higher levels of education is virtually out of the question for these children. We finally note that child-mortality is very high in Bolivia. The regional average for under-5 mortality is estimated to be 109 for females and 127 for males. For the target group, (the poorest one third of the population), we estimate the rate to be as high as 200 per 1000 live births.

Using data from a 1993 integrated household survey covering a representative sample of urban households, we estimated a wage equation that related differences in (the logarithm of) wages, to differences in education levels and years of experience. Table 8 shows the results.

 

Table 8: Estimation Results of the Wage Equation*

Primary School

.42

College

1.76

Middle School

.76

Experience

.07

Secondary School

1.01

Experience squared

-.001

*Authors’ calculations: the constant term is 6.69; see Annex I for details.

 

 

 These results imply that someone who completed primary education earns 42 percent more, ("is 42 percent more productive"), than someone without schooling. Since primary school has five grades, this amounts to a modest 8 percent increase in wages per year of education (compare Table 2). We also find that a college graduate earns on average 2.76 times as much as an unschooled wage-earner. The estimation results on experience imply that wages peak after about 35 years of experience.

Armed with this information, we can now quantify the benefits of ECD programs that are manifested in increased productivity.

 

4.3.2 The Impact of the PIDI Project on Social Development

The first program effect we look at is increased survival. Once a child is born she will grow up to become a productive member of society. The level of her productivity will depend on her physical and cognitive development during the early years of life, as well as on the investment in basic and higher education, and on subsequent investments in human capital, through continued learning and experience.

If the child dies prematurely, her future productivity, whatever its level, is lost for society. Preliminary results from the PIDI program suggest that the mortality of those enrolled is extremely low, less than 1 percent. This contrasts with the high child mortality rate of the target population in the absence of the ECD intervention: about 20 percent. Once children are enrolled in a safe environment where life-threatening diseases (diarrhea, severe malnutrition) are recognized and treated on time, children 6 months old or older have virtually a 100 percent chance to survive past the age of 5.

Reliable information on changes in the nutritional status of enrolled children is not yet available. Possible changes in chronic malnutrition (stunting) may not be evident for years (they may not occur until the children reach puberty). Estimates on the program’s effect on acute malnutrition (wasting) also await future evaluation efforts.

Forty percent of children who enroll in the PIDI program show stunted psycho-social development. After one year in the program this percentage is reduced to 20 percent. After two years it is cut to five percent. (Clemente, 1996). If this result of tremendous progress in psycho-social development holds up under further scrutiny, it bodes well for the future chances of successful education of PIDI graduates.

Before we can translate these results into monetary benefits, using the standard economics of education approach explained in the previous section, we need to translate these programs effects on nutritional status and cognitive development into expected changes in enrollment, drop out rates, repetition rates, and progression to higher levels of education. We are fortunate to have direct observations of changes in primary enrollment, but we have to turn to the literature, (or to data on the general population), to obtain estimates for improvements in school performance.

Though the PIDI project is still young, the limited information available suggests that virtually all children who leave the program at the age of six enroll in primary school, up from 20 percent in the absence of the program. Part of this large increase is probably the direct result of the improvements in the children’s health and nutrition levels (see e.g. Glewwe and Jacoby, 1993 or Del Rosso and Marke, 1995). Part, no doubt, also stems from parents’ greater awareness of the benefits of education - a result of the parents’ active participation in the program.

Given favorable outcomes on nutrition and school preparedness (or psycho-social development), one would expect improvements in school performance, which are reflected in reduced drop-out and repetition rates and increased progression to higher levels of education. Due to lack of more detailed information, we will assume that PIDI graduates, once they are enrolled in primary school, will perform at the same level as the national average. Table 9 summarizes the relevant social indicators of the target group, with and without the PIDI program. (Scenario I).

Table 9: Social Indicators of the Target Group,

With and Without the PIDI Project*

 

Scenario I

Scenario II

 

Without PIDI

With PIDI*

Without PIDI

With PIDI

Under 5 Mortality

200/1000

10/1000

162/1000

105/1000

Primary Enrollment

.20

.95

.65

.95

Middle School

0

.50

.50

.70

Secondary

0

.40

.50

.60

Higher

0

.20

.09

.20

*We will also assume that drop out rates and repetition rates in primary school will be reduced by 50 percent

 

.

 

This first scenario can be thought of as the result of a very narrow targeting effort that reaches the most deprived segments of society. We add to this an alternative (Scenario II), representing a part of society which already enjoys modestly favorable social indicators. The effects of the ECD intervention are therefore less dramatic than in the first scenario. We assume that the infant mortality rate and the primary enrollment rate can be improved to the national averages while progression to higher levels of schooling improves modestly. Results from both scenarios will give us a range for the benefit-cost ratios.

 

4.3.3. The Dollar Value of Increased Productivity

We first estimate the net present value of the education system as it currently functions for the target group, that is with 20 percent primary enrollment, 35 percent drop-out, 10 percent repetition, and no progression to higher levels of education. The 20 percent of children who do enroll have a higher level of productivity during their active lifetime than they would have had without this education. We use the age-earnings function to estimate this increase in productivity. We calculate the present value of this increase by discounting it at an annual rate of 7 percent. After subtracting the cost of education,25 we obtain the net present value of the current education system.26 Table 10 shows the results for a cohort of 1000 children in the target population. For this cohort, the current education system increases lifetime productivity by $264,517. These are societies’ "profits" from investing in the human capital of just 20 percent of 1000 children in the target group, net of the cost of education.27 This relatively high number is, of course, a direct reflection of the economic returns to primary education that were estimated from the wage-earnings function.

Next we reduce the under-5 mortality from 200 to 10 per 1000. This adds 190 productive people to the cohort, of whom 20 percent will increase their basic productivity by enrolling in primary education. This raises the net present value of the education system from $264,517 to $327,340. (Table 10 row A). In other words, we could invest ($327,340 - $264,517)=$62,823 per 1000 high-risk children, just to increase their survival rates, and still break even. Given the relatively cheap measures that are available to prevent the premature death of a child (e.g. a dose of ORT costs about two dollars) survival appears to be a good economic deal, on the sole basis of future productive contributions to society.28

 

Table 10: Increase in Net Present Value of Productivity due to

Improved Social Indicators (Scenario I)

Description

Net Present Value of the Education System*

Increase in NPV due to the PIDI program

0. Base-line; Without PIDI; net

impact of education system

$264,517

-

A. Under 5 mortality from 200 - 10

$327,340

$62,823

B. Primary enrollment for 20 to 95

$1,256,458

$991,941

C. Improved survival and enrollment

$1,554,867

$1,290,350

D. As C, plus improved primary school

performance**

$2,061,574

$1,797,057

*For a cohort of 1000 children in the target group.

**Dropout reduced from .35 to .15. Repetition from .10 to .05.

 

 

Row B of the table shows the net benefits from increased enrollment (without increased survival). If the only effect of the ECD program would be to increase enrollment in primary education from 20 percent to 95 percent, the net present value of this benefit (measured only by the increased productivity of the cohort) would amount to $1,256,458.

In the next rows we first combine the programs impact on survival and enrollment (row C). We then add a reduction in drop-out and repetition rates, from .35 to .15 and from .10 to .05, respectively (row D). Subsequently we increase progression rates for the target group to post-primary levels of education, from zero to the national averages (row E).

Under these assumptions, the combined impact of the program on the lifetime productivity of 1000 children in the target group has a net present value of $3,160,533.

If one would be able to implement a program for pre-school children that costs $3,160 per child, and that would produce changes in the under-5 mortality rate and the education indicators in the target population as given in Table 6, the program would pay for itself in terms of higher life-time productivity of the participants.

If a child enrolls for four years in such a program, at $350 per year, for a total cost of $1400,29 the benefit-cost ratio of the program, on the basis of this benefit alone, would be 2.07. In other words, the net present value of the productivity related benefits of the PIDI program, exceeds the initial investment by 126 percent.

In Table 11 we show the results for Scenario II.

 

Table 11: Increase in Net Present Value Due to Improved Social Indicators (Scenario II)

Description

Net Present Value of the Education System

Increase in NPV due to the PIDI Program

0. Baseline; Without PIDI; net impact of education system

$966,212

 

A. Under 5 mortality from 162 to 105

$1,031,933

$65,721

B. Primary enrollment from 65 to 95

$1,412,156

$445,944

C. Improved survival and enrollment

$1,508,210

$541,998

D. As C, plus improved primary school performance

$1,997,847

$1,031,635

E. As D, plus increased progression to post-primary education

$2,901,864

$1,935,652

 

 

As expected, the overall impact in this scenario is less than in the first (relatively extreme) case. Still, the overall benefits of $1,935,652 imply a benefit cost ratio of 1.38 at a discount rate of 7%. Thus, solely on the basis of benefits that result from increased future productivity, the benefit-cost ratio of the PIDI program lies between 1.38 and 2.07.

 

4.4 Benefits Other than Increased Productivity

Thus far, we looked only at direct program benefits (such as food received) and benefits that emerge through increased education. Of the latter, we looked at the effect of education on future productivity only. In this section we will look at one additional benefit that result from improved education: reduced future fertility.

We assume that because of the ECD program, girls will enjoy six years education, instead of not enrolling in school at all. As a result of this, fertility could drop by 30 to 60 percent.30 Using the lower bound, and a current fertility rate of 9 in the target group, the ECD program could reduce the expected number of births in a group to 1000 ECD participants (500 girls), from 4500 (fertility rate is 9), to 3000 (fertility rate is 6).

The alternative costs of one birth averted is $250. The economic benefits of the ECD program, as a result of reduced fertility, amounts to 1500 x $250=$375,000, for 1000 children enrolled in the program. Since these benefits are savings on population programs that would have to be implemented about 10 years in the future, the discounted value of this benefit amounts to $190,630 or $190 per enrolled child.

It may seem contradictory to count both a death averted (reduced IMR) and a birth averted as program benefits, but it is not. Under certain conditions, a reduction in fertility bestows benefits on society that go beyond the benefits in terms of improved mother’s health or improved quality of life for the (fewer) children in the family. At the same time, once a child is born, it is beneficial for society to help her grow up and become a productive citizen. Both the increased levels of productivity and the lower number of births are benefits that result from ECD programs.

 

4.5 The Costs of ECD Programs

4.5.1 Direct Costs

A recent study shows that the total costs of the PIDI program currently amounts to $43.09 per child per month. Table 12 shows a breakdown of these costs, by service delivery category and administrative overhead. We estimate that the very high level of administrative costs will go down significantly once enrollment rates increase from about 15,000 children today to 30,000 or 100,000. For the time being we will assume that, at high levels of enrollment, the annual costs per child will be between $300 and $400, about half of which it would be for food.

 

Table 12: Cost Structure of the PIDI Program

Operating Costs

Percentages

Food

38.5

Operation

3.5

Health

.4

Care takers

15.7

Equipment

4.6

Maintenance

1.5

Support Staff

11.3

Training

1.4

Total Operating Costs

77.0

Administrative Costs

23.0

Total

100.0

Source: adopted from Ruiz and Giussani (1997).

 

 

4.5.2 Fiscal Costs

In addition to the direct costs, we need to account for the costs associated with the financing of the program. If all costs would be recovered by charging user fees (private payments by the beneficiaries), the financing costs would be minimal.31 But if all or part of the costs are covered by public (tax) revenues, the fiscal costs could be considerable.

Following Devarajan et al, (1997), we could obtain an estimate of the "marginal costs of public funds" from the economic literature. Based on a study for the U.S., for instance, it is estimated that it costs society between 17 and 56 cents to raise one dollar of extra tax revenue. Thus, if an ECD project is fully funded by the government, it’s marginal benefits should exceed $1.17 to $1.56 per dollar of costs. (op cit, p.42). Unfortunately, estimates of these fiscal costs are relatively scarce and vary widely, by country and by type of tax. Diewert and Lawrence (1994), for instance, estimate that is costs 18 cents to raise one dollar of labor taxes in New Zealand, while Ahmad and Stern (1987) estimate the marginal costs of an extra sales-tax dollar in India to be as high as 85 cents. Therefore, unless estimates of the fiscal costs of a specific tax are available for the country under study, this brand of economic literature provides little practical guidance.

There is another way of looking at the potential fiscal impact of a publicly funded ECD program (or, indeed, any other publicly funded program). A study of the Bolivian Emergency Social Fund (ESF) (Jorgensen et al., 1992) estimated that $100 million of foreign investment would generate an increase in GDP of about 2 percent. Assume that a full-scale ECD program costs $100 million, and that the fiscal costs amounts to $1.25 for every tax dollar raised, the ECD program would therefore "drain" $25 million from the economy. Using the ESF multiplier result, we find that this could cause a 0.5 percent reduction in GDP. This, in turn, could result in a 1.0 percent increase in poverty.32

In this case, the fiscal costs relative to the benefits, at least in terms of "increased poverty", appears to be modest. Still, the example shows the importance of checking the growth implications of even the most attractive of anti-poverty programs. All evidence shows that economic growth is the best way to reduce long-term poverty.33 Every social program that aims at reducing long-term poverty, (the PIDI program is a prime example), should therefore be evaluated on its impact on economic growth. While reducing poverty through providing direct program benefits to the poor, one should be cautious that overall poverty may go up due to adverse effects on economic growth. For publicly funded programs, these adverse effects result from the fiscal costs of raising the revenues.

Finally, we should mention another, simpler, way of taking into account the fiscal impact of the program. $100 million per year34 for the PIDI program constitutes about six percent of the Bolivian government budget. If increasing the fiscal burden is ruled out because of the possible adverse impact on economic growth, resources for the program need to be found within the current budget. This underscores that ECD programs need to compete for public money with other government programs, in most cases on the basis of benefit-cost ratio comparisons. The high benefit-cost ratio of ECD (see below) is likely to make it a tough competitor in the struggle for scarce resources.35

 

4.6 Benefit/Cost for the PIDI Program

On the basis of the results presented above, we are now able to calculate benefit-cost ratios for the Bolivian PIDI Program. We use the productivity gains as discussed for Scenarios I and II. We add the benefits (to the family) of direct services, as well as the benefits (to society) of reduced future fertility We are unable to quantify many of the numerous benefits listed in Tables 5 and 6. We use $350 as the total annual cost of enrollment in the ECD program, and assume that children enroll for four years, for a total cost of $1400. The benefit-cost ratios are presented in Table 13.

 

Table 13: Benefit-Cost Ratios for the Bolivian PIDI Program

 

Benefit Cost Ratio

Scenario I

Benefit Cost Ratio

Scenario II

Benefits from increased productivity

2.07

1.38

plus direct service delivery ($1200)

2.93

2.24

plus reduced fertility ($190)

3.06

2.38

 

 

Thus the benefit/cost ratio of the PIDI program lies between 2.38 and 3.06. To put these numbers in perspective, we present in Table 14 benefit-cost36 ratios for different projects. Clearly, the value of the investment in the PIDI program compares favorably with those in the so-called "hard" sectors.

 

Table 14: Benefit-Cost Ratios for Selected Projects

Project

Benefit/Cost Ratio

Hill Forest Development Project, Nepal/1

1.18

Philippine Ilocos Irrigaton System Improvement Project/2

1.48

Large-Scale Alternative

1.32

Small-Scale Alternative

1.99

Livestock Development Project, Uruguay/3

1.59

Livestock and Agricultural Development Project, Paraguay/4

1.62

Cotton Processing and Marketing Project, Kenya/5

1.80

Kunda Cement Factory, Estonia/6

2.27

1 Asian Development Bank, "Appraisal of the Hill Forest Development Project in the Kingdom of Nepal, 1983.

2 World Bank, "Philippines: Appraisal of the Irrigation Systems Improvement Project: I," 1488a, 1977.

3 World Bank, "Uruguay: Third Livestock Development Project," PA-38a, 1970.

4 World Bank, "Staff Appraisal Report: Paraguay-Livestock and Agricultural Development Project," 2272-PA, 1979.

5 World Bank, "Kenya, Cotton Processing and Markeing Project, Staff Appraisal Report," 2272-PA, 1979.

6 Cost Benefit Analysis of Private Sector Environmental Investments: A Case Study the Kunda Cement Factory. IFC Discussion Paper Number 30.

 

 

 

5. Who Should Pay?

 What does a high benefit-cost ratio for ECD tell us about the role of the government in the financing of such programs? The unambiguous answer is: nothing.37 As with all unambiguous answers, this one needs to be modified, but only slightly so. If the benefit-cost ratio is low, in particular if it is less than one, no-one in the private sector or in the government should invest in the project. In this sense the benefit-cost ratio does have a value for public policy, but only after the decision has been made that government financing, in whole or in part, is justifiable. This latter issue, "should the government get involved", depends on arguments other than the benefit-cost ratio. Two of these arguments will be discussed here: (1) who are the beneficiaries of the program? and (2) what constitutes a "just" society?

 

5.1 Who are the Beneficiaries of the Program?

As we showed in Table 10, the beneficiaries include the child, her mother and other family members, the neighborhood, and society as a whole. In the example presented in section 4, a large share of the benefits that we were able to quantify in monetary terms accrue to the child and her family. Society as a whole is better off because of these benefits. If one defines social welfare as the summation over the entire population of individual welfare, social welfare goes up if one individual (or family) gains in welfare. This is the case here: the child and her family benefit, and therefore society as a whole benefits. But the important observation is that the benefits accrue to the individual. They are private benefits.

Other benefits accrue not to the individual, but to her environment, be it the neighborhood (e.g. benefiting from increased participation) or the nation (e.g. benefiting from reduced aggregate fertility). Unfortunately, as we have seen above, it is usually very hard to quantify these public benefits. And it is exactly the magnitude of these public benefits, relative to the private ones, that is important in the decision of whether the government should finance or subsidize ECD programs and by how much. Strictly speaking, failure to quantify the public benefits leaves us empty handed when it comes to the important decision regarding the proper role of the government in program financing.

All we can say is that there are benefits to society ("externalities") from having a healthier, longer living, better nourished, literate, and higher educated population. Hence society ("the government") should be willing to use some public resources to promote these outcomes. However, it is virtually impossible to put a dollar value on these benefits, and hence on the amount of subsidies that are justified on the basis of these "externalities" arguments. Fortunately, there is another set of arguments that, while not decisive, can guide public policy. It regards the role of the government in providing a "level playing field " for all its citizens.

 

5.2 Towards a Just Society

There are solid economic reasons for society to want to reduce poverty. For example, if poverty breeds crime and violence, the non-poor have a good reason to reduce poverty. Or, to take an example from the international development community, if poor countries start to grow, international trade will flourish and all countries - including the rich - will benefit. Indeed, many advocates of social welfare programs or international aid will use these "selfish" reasons to argue their cause.

Many countries, and the international development society as a whole, have taken the reduction of poverty as a major, sometimes the overarching, social objective, either because of these "selfish" reasons, or based on more altruistic motives. Either way, when societies put a large social value on reducing poverty (or on "reducing inequality" or "promoting social justice") the social value of programs and policies that foster these outcomes should be considered as "benefits".

It will always be contentious to put a dollar value on these benefits, but it would be wrong to ignore them. "Equality" or "reduced poverty" has a social value. At a minimum we could ask how much society (or "politicians") are willing to pay for the positive impact on the distribution of welfare that is likely to result from alternative policies or programs.

ECD programs are a powerful tool in breaking the inter-generational cycle of poverty. As we have shown in section 4, under the right conditions ECD programs also have significant economic benefits, especially for the (children of) the poor. But the poor, almost by definition, are unable to pay for the considerable costs of ECD programs. How can society justify providing (or subsidizing) ECD programs for those segments of society that are likely to benefit the most?

This is not the place to elaborate on what constitutes a "just society" (see, for example, Rawls, 1971, Dasgupta, 1993--especially chapter 2--, Sen, 1985). However, a minimal notion of what constitutes "social justice" would exclude any state in which some groups of children are deprived of having a reasonable chance to live a productive life, just because they are born in poverty. Even societies that are unable, or unwilling, to provide a "level playing field" across the board, may want to put policies in place that allow all who have reasonable talents, and are willing to use them, a chance to enjoy a least minimum level of well-being.

Malnutrition during the early ages, excess disease, exposure to unsafe environments and lack of stimulation, damage children for the rest of their lives. The resulting lack of schooling (or inability to learn) traps them into poverty for the rest of their lives. ECD programs aim at preventing this damage and avoiding this trap. As such, if properly targeted, they deserve a place among the public policies that governments want to put in place to constitute a just society.

 

6. Conclusion

Investments in the health and nutritional status of young children, and in their cognitive development, have multiple benefits. They range from the direct reduction in the number of children who suffer from ill health, to enjoying more productive lives as adults, to societal benefits such as reduced crime rates. In this paper we have tried to list all benefits of ECD-programs in a systematic way and quantify them in dollar terms where feasible.

In general, ECD programs are expensive. Moreover, ECD investments trigger further investments in human capital, thus increasing the total cost of the program.

We have compared the quantifiable benefits of one ECD-program, PIDI, with its costs, and obtained benefit-cost rations between 2.38 and 3.10. This ratio is highest for interventions that target population groups whose social indicators show severe deprivation (high infant mortality rates, high malnutrition rates, low school enrollment, poor school performance, etc.)

The combined impact of integrated ECD-programs result in a large increase in the accumulation of human capital. Because of this, ECD-programs as an investment compare favourable, in terms of economic rate of return alone, with investments in the so-called "hard" sectors.

Whether governments should invest in ECD is a different question. The answer depends in part on one’s assessment of the societal benefits (the externalities) of ECD and in part on one’s definition of what constitutes a just society. The externality arguments in favor of public financing, are very similar to those for education in general.38

We have argued that a strong case in favor of public financing (or subsidizing) of ECD-programs can be made on the basis of a minimalistic sense of "societal justice". ECD programs are likely to be most beneficial for children who grow up in the poorest households - the same households who cannot afford to pay for ECD services. This suggests that well-targeted public programs can maximize society’s benefits of ECD interventions while remaining affordable. Since a large part of the benefits of ECD are private benefits, it seems reasonable to expect better-off parents to contribute to the cost of this investment in the future of their children.

Societies cannot prosper if their children suffer. ECD programs are a sound investment in the well-being of children and in the future of societies. By breaking the inter-generational cycle of deprivation, ECD-programs are a powerful tool to obtain the ultimate objective of development: to give all people a chance to live productive and fulfilling lives.

 Notes:

1PIDI is the Spanish acronym for Integrated Child Development Project.

2 These savings are for the prenatal component of the program only.

3Repetition and drop-out are major problems in the developing world, and often linked to poverty (see e.g. Patrinos and Psacharopoulos, 1996).

4This approach is not new. Selowsky (1981) states: "...by increasing the level of early cognitive development of poor children [the preschool intervention] could (a) increase the productivity of a given amount of schooling, and (b) generate additional benefits to the extent it induces additional schooling". (op cit. p.332).

5 Which is based on the theory of "reservation wages" see Jacob Mincer (1963), Reuben Gronau (1973) and (1986), Smith, 1980.

6 Kaufmann and Wang (1995), Isham and Kaufmann (1995) and Isham, Kaufmann and Pritchett show that projects that are implemented in a stable macro environment have benefits that are higher than otherwise.

7Mingat and Tan (1996) argue that all benefits from education (including externalities) are reflected in the impact of education on a country’s economic growth performance.

8 Though we did not have separate information on fringe benefits.

9 The article from which we borrowed this table stems from 1984. Since then, the evidence on the effect of education on these outcomes has been greatly strengthened (see, for instance, Glewwe, 1997).

10 Throughout, we have ignored "the value of leisure" (item 3).

11Though this is not a universal finding, see for example Jejeebhoy (1995), who provides a review of the literature which concludes, "For developing countries as a whole, data clearly indicates that the relationship between women’s education and their fertility is reverse...The danger is that aggregation may obscure considerable variation within countries...Hence, examining aggregated relationships between education and fertility may mislead policy-makers, who wold be better informed by reviewing individual-level studies." (p.18).

12 We do not have enough information to make to estimates these benefits for Bolivia.

13Though this may be the case for the PIDI program, lack of data prevent us from estimating the value of this benefit.

14Projecto Integral de Desarollo Infantil

15 This new noun, "PIDI", refers to one home-based daycare center providing services to 15 children.

16 See Staff Appraisal report No 11905-BO. World Bank, June 7, 1993.

17 By the end of 1997, 20,000 are expected to be enrolled.

18 Though they may also yield additional benefits, for instance in spill-over effects to siblings of the enrolled child.

19Schweinhart et al. (1993) use the cost of child care as an estimate for the "baby-sitting" services of the preschool program.

20 See Ruiz and Giussani (1997).

21 net of overhead costs such as administration and evaluation.

22 This is probably an overestimate, the real number may be closer to zero. Furthermore, for lack of data, we will assume for the target group, the same dropout and repitition rates in primary school as for the population as a whole.

23 This assumes that no child will grow up to be a "drag" on society. Very few citizens in the developing world take more from society than they contribute. Most grow up capable of taking care of themselves and their families, even if that means a subsistence level of well being. Those with a productivity below subsistence will simply die in the absence of adequate safety nets. However, some citizens may get involved in activities that may have significant negative externalities for society. Illegal drug cultivation, violent crimes and environmental degradation are examples. To the extent that ECD programs (directly or indirectly ) can help reduce such activities in the future, one should count this as additional benefits of the program.

24 Pinstrup-Andersen et al., 1995, take stock of existing knowledge of the nutritional impact of a variety of project interventions. See also, OED, 1995, for an evaluation of the Tamil Nadu project in India.

25 including opportunity costs for children over 10 years of age, see Annex 2.

26 All calculations are made using the "ECD Calculator". A detailed description of this program and its use is given in Annex II.

27 The cost of this education amounts to $171,456. Thus the benefit-cost ratio is about 1.9.

28 This exercise should not be confused with estimating "the value of life". See, for instance, Chapter 9 in LLC, 1996.

29 This is a very high number, see below.

30 Throughout this example we use data from Summers, 1994.

31 They would be the sum of all costs involved in collecting the fees.

32 See Ravallion et al. (1991), who estimated that the income (GDP) elasticity of poverty is between -2.0 and -3.0. Based on the lower estimate, the number of urban poor (about 35 percent of the population, or 1.75 million) could increase by 17,500.

33 See, for instance, Ravallion (1995).

34 Note that this refers to an enrollment of 300,000 in the PIDI program. Current enrollment is just 5 percent of this.

35 This argument holds cetirus paribus, for non-fiscal resources such as foreign borrowing or grants.

36 A better name would be benefit-investment ratios. See Gittinger, 1982 and 1984.

37 Devarajan et al. (1994) state: "Traditional cost-benefit analysis...addressed the following question: Will the project under consideration result in a net benefit to the economy? This is an important question. But the answer to this question says nothing about whether the project ought to be in the public or private sector. (op.cit. page 37).

38 See Lott, 1987, for a critical survey of these arguments.

 

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