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Kezia Dinelt and Mark Chesney CBA Critique #2

Fall 2014

A Cost-Benefit Critique on the World Bank’s Assessing a higher education project: a Mauritius feasibility study

Introduction The proposed project is a program for university degrees in Mauritius, which was

published in 1999. Because the country was facing economic challenges due to wage

increases with slowing production, it needed to find ways to revive its competitiveness

relative to the rest of the world. Capital-intensive technologies were seen as methods to lift

the country out of the stagnation and slow growth it was experiencing. To achieve this,

higher education could potentially be the mechanism to produce more technical experts with

higher skills, thus elevating Mauritius’ ability to compete.

The project, which is one that is independent and without a budget constraint (with

no mention of postponement), offers direct individual benefits to students by investing in

their educations and careers. Furthermore, societal benefits are the economic boosts due

to the growth of various advanced skill job sectors. Whether or not this project came into

fruition is unknown at the time of this study being published.

The procedure for improving education had outlined upgrades to staff and facilities,

improving curriculum, tighter relationships between graduates and job recruiters, and

continuing education programs for professionals. These improvements are expected to

expand enrollment into this program. The authors conduct a thorough “with and without”

analysis, using treatment and control groups to measure the effects of higher education on

social welfare, making projections for how such a program would pan out. To assess this

project, both economic and financial analyses were conducted to understand the net costs

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and benefits to society. We will examine the report to identify correctness in the evaluation,

as well as look for any areas of opportunity that could have been included.

Rate of Return Analysis, NPV, and Investment Criteria There are two methods used to gauge the expected gains to come to society by

investing in this program: the estimated net present value (NPV) and the internal rate of

return (IRR). The IRR turned out to be very similar between social and private cost-benefit

profiles. This is because Mauritius’ government enacts a progressive tax, rather than

subsidizing higher education.

In calculating the program’s NPV, a comparison would be done between a

graduate’s income and that person’s income before attending school. Then the benefits of

the entire program would be assessed by multiplying the contributions of each graduate by

the number of graduates. These benefits would be discounted once, at 12%, to account for

unemployment, and it would be discounted a second time, to compute the present value at

a common date. Initially in the report, a rate of 10% is proposed and said to be socially and

privately profitable, but the rate of 12% is used throughout the analysis and for all cost-

benefit calculations, which does seem reasonable.

Scope and Standing Scope encompasses duration of the project. Conceivably this project is expected to

last at least until 2020, implied by Table A2 in the appendix from the original publication, as

well as Table 5 (see below). In these tables there are projected figures that extend to

2020. This timeline seems reasonable because it projects many years into the future, and

the income projections go 40 years into the future.

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The question of who has standing extends to graduate students, both at the Master’s and

PhD levels, as well as the educational institutions, the government, since it would be

partially funding the project, and the Mauritian population, hoping to reap the benefits of the

push towards bettering higher education in return for economic growth for the nation.

Welfare Analysis In regards to social benefits from the project, the authors measure the incremental

productivity of the graduates through a proxy: post-graduation wages. This proxy is used

because the economic condition of Mauritius is positive – the labor market is competitive

and employment is at full capacity; otherwise, perhaps looking at changes in unemployment

rates would have been an alternative measurement. The authors accurately refer to the

project as a “with or without” rather than a “before and after” comparison, and they do a

good job of correctly identifying taxes paid by students as a transfer, and instead use pre-

tax earnings of these graduates’ salaries to compute the benefits to society in the form of

advanced skills and technologies (shown by increased earnings).

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There is a thorough economic analysis done by looking at the projected costs and

benefits to society, through resource costs, capital costs, foregone income (opportunity

cost), recurrent costs dedicated to maintenance, increased earnings its its societal effects,

and better quality universities. There will, of course, be real resources used for capital costs

for new schools, as well as in revamping the educational structure and institutions. For

students, foregone income while in school is a cost incurred, and is the opportunity cost of

what they could have earned in lieu of going to school. The schools will need to be

maintained over the years, which is another cost accounted for, and students must also pay

for tuition and other fees that are mandatory. The main benefit is the increase in earnings

the graduates enjoy, which is broken down into three categories along with their respective

NPV: an engineering degree, an MBA, and a PhD. Both the engineering and MBA degrees

result in positive net present values, however the doctoral degrees incur more costs than

benefits, so NPV is negative here. In the case of the engineering degree, net benefits are

forecast to be negative in years 1 to 4 but become positive in year 5. For MBAs, the net

benefits become positive in year 3, which could incentivize students to pursue a career in

business.

The public sector should be willing to pay for this higher education through

subsidization since the nation as a whole benefits above and beyond the private benefits of

increased income. The people have a right to an education, and since society benefits from

this education investment, the government should be able to fund this program.

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Consumer and Producer Benefits We begin by identifying producers and consumers in the case study. The product is

higher education; this is provided by the universities (the producer), and is to be

“consumed” by enrolled students (consumers).

Figure 1 depicts the positive non-market external effect of improving Mauritius’

competitiveness through higher education. The pink-shaded and green-outlined triangles

indicate the consumer surpluses with and without the program, respectively. (Note that the

green triangle is visually cut off here, extending up to the vertical intercept of marginal social

benefit (MSB), and this triangle is considerably larger than the pink one.) Likewise the

orange producer surplus triangle, attributed to increased productivity from the program,

exceeds that of the light blue producer surplus triangle without this program. Total revenue

of this program to the university system is the red square.

Figure 1: Visualization of Welfare Analysis

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Shadow Prices, Exchange Rates, and Wages Although shadow pricing was not used in this case study, shadow exchange rates

were used due to distortions in the political economy of Mauritius. Import duties were first

removed. Next the shadow exchange rate was employed to get a proper numeraire that

brings border prices into domestic prices. Shadow wages were not deemed

necessary. Knowing that the relative national prosperity of the 1980s had persisted quite

well through the 1990s, full unemployment and the high competition of labor obviates any

use of shadow wage rates.

Numeraire In the study, the authors are correct to use a numeraire: the monetary values are in

domestic currency, the Mauritius rupee, which are expressed in present value, accounting

for inflation over time. This is used consistently in the report.

Financial and Sensitivity Analysis and Uncertainty In conjunction with the economic analysis, the authors provides us with a financial

analysis to determine if the project is financially viable. By calculating the income taxes

generated by the increased wages of these students, MR177 million, however, this gain is

offset by the loss of income taxes, MR271 million, from the students while in school since

they do not work during this time. There is also a loss of import duties of MR10 million for

the government. The project is viable though, due to the incremental income benefits that

outweigh the costs to society and to the government, and therefore, it is supported through

the financial analysis. The authors also take care to do a risk analysis to test the expected

NPV of the project. Since costs are certain and based on existing prices, it is the NPV that

is uncertain and hence subject to a sensitivity analysis to determine if benefits would remain

positive under different scenarios. By using the assumed earnings after graduation,

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incremental productivity created is measured, which is dependent on three factors:

enrollment rates, the income differential between graduates of the project and graduates,

and the employment rates of graduates. Due to the variability that exists in income and

employment rates, the benefits could become negative, in which case the project should not

be accepted. In discussing enrollment rates, which are assumed to increase with this

project, the authors do note that lowering the lower bound of the employment rate could

bias the results by lowering the benefits, so bias is taken into account.

Conclusion In closing, the authors do a good job of assessing the costs and benefits to society

for the project aimed at increasing enrollment of graduate-level students at universities and

polytechnic schools as well as improving the quality of the education provided at these

schools through better qualified staff and faculty. The project is found to be viable, both in

terms of the financial and economic analyses, however, with enough adjustments made in

the sensitivity analysis process, the project’s NPV could become negative, in which case

the project should not be adopted. The authors also correctly account for many things, as

discussed, such as the numeraire, the scope, avoiding counting transfers, and including

opportunity costs. We would liked to have seen a deeper discussion and analysis on more

specific changes to society to better understand the increases in output associated with the

improved higher education system, other than the conversation that was confined to

increased wages. Namely, improvements in the national economy would be compounded to

the benefit of society. Speculation into improvements in other segments of the economy

would be worthwhile to investigate.