Education finance and decentralization in Chile

Pablo González, University of ChileConference on Education finance and decentralization, Washington

D.C., January 13-14, 2005

Objective of the presentation Account for key financial and

regulation issues that affect the incentives faced by agents participating in the education market in Chile today

Does not deal with the overall Chilean education reform

Method: Historical account of key events

Outline of the presentation

The financial and administrative reforms under military rule

Education finance and regulation priorities of democratic governments

Some key figures to give a flavor of the actual situation

The challenges ahead

The financial and administrative reforms under military rule

This story can be traced back to 1981 where several reforms attempted to foster the role of the private sector in the provision of social services

Context: Military government 1973-1989 New private pension fund system New private health insurance system Non-discriminatory rules for the entry of private

institutions into tertiary education and financing based on cost recovery

Funding mechanism that does not discriminate between public and private schools (amount based on number of students attending)

DECONCENTRATION & DEVOLUTION

Local governments became responsible for (gradually 1981-1987): Primary level of public health care system And public schooling

Elected majors serving only since 1992

The Chilean demand subsidy in context

“Funds follow the child” system Open by students Open by schools Flat voucher Top-up voucher Account for different costs of

provision

Taking account of different costs of provision Funds follow the child allows for explicit

consideration of costs differentials Different subsidies for special, lower basic (K1-

6), upper basic (K7-8) and secondary education (K9-12)

Differences for 4 types of vocational education Pre-primary 5 years old and limited fund for 4

years old Full school day subsidy Come back later to rural provision

Rationality of financial reform Competition and quality

IF families choose school according to quality Schools of higher quality will attract more students and

will grow Schools of lower quality will be forced to improve or die

Freedom of choice has a value on its own Assumption that private sector is more efficient Better account of heterogeneity of preferences More parental involvement in the education of

their children and accountability of schools More private resources? More targeting of

public resources? Less bureaucracy?

Other benefits (specially important for a developing country)

Transparent non-discriminatory rule for transferring resources /reduces “capture”

Increases in enrolment automatically financed (no negotiation with Min. of Fin.)

Risk associated with investment decisions privatized or decentralized

Political motivation: dismantle the power of the teacher union

Problems of the system National assessment required to inform

parents decisions: not published until 95 S-competition: ex-ante (poor students & entrance

examinations) and ex-post (bad behavior & results) selection by schools

How do parents choose? Economies of scale and rural areas: (i)

average costs and (ii) incentives Costs of remaining in a bad school and psycho

logical costs of changing

S-competition The objective function of schools might turn to be

the maximization of the indicator rather than the quality of the more complex product that the indicator is attempting to measure

Segregation is bad in itself but also might reduce the average education attained by the system as long as the learning of those excluded decreases more than the increase in learning of those mixing with better peers (Mixed evidence in Chile: Carnoy and McEwan, 1999, Hsieh and Urquiola, 2001; Gallego, 2003, Auguste and Valenzuela, 2004)

68% of all 10th grade students passed through a selection process, including 59% in the municipal system (SIMCE 2003 accompanying survey)

Education finance and regulation priorities under democracy

Since 1990 a center-left coalition has been in power Accepting the decentralization process and

the demand subsidy system Building a stronger state to guide an

improvement process,- that sometimes disregarded

the decentralized nature of the system,- through: 1992 “MECE” basic education program 1994 MECE secondary education program 1996 Full school day reform 1997 Curricular reform 2001 “Liceo para todos” (High school for all) and “Chile

Solidario” (Social protection system including education)

Economic reasons for centralized production of certain goods

Economies of scale (public auctions of school meals & books) and scope (supply chains, program design)

Coordination, innovation and scarcity of certain technical capacities (national curriculum &

assessment, programs)

Distributive role of central government & ad hoc targeting mechanisms (school meals &

scholarships)

Positive externalities (school meals, textbooks & teacher training)

Complementary? Positive spillovers?

The Teacher’s Statute With the transference of fiscal schools to

municipalities, teachers lose their fiscal employee status and their employment relationship was then ruled by the private labor code

The new democratic government refused to return schools and teachers to the public sector but gave teachers a special labor statute (and others for municipal and non-teachers employees)

The Teacher Statute approved in 1991 (with the internal opposition of economic ministers) instituted a system with employment guarantee and a national salary scale dependent solely on “experience”

…The Teacher’s Statute Opened door for central bargaining between

teacher union and the ministry Municipal representatives so far have been

excluded from negotiations No room left for personnel policy at the

municipal level Fixed expenditures with variable income… In 1995 a limited possibility of labor contract

termination was introduced along with an incentive program for retirement

Was it necessary?

Costs of rural provision Special considerations for rural schools introduced

only in 1988 1995 an adjustment was made on the basis of a

rudimentary “efficient school model”, verifying important economies of scale

Rural “floor” for schools located in isolated areas Increment of the subsidy decreasing with the number of

students up to 90 students per (four years) cycle Expenditure on special provisions for rural schools

tripled in real terms between 1994 and 1996 No private provision in 25% of local districts

Rural correction tableNumber of students Factor Number of students Factor

01 19 2,000 54 55 1,196

20 21 1,886 56 57 1,181

22 23 1,792 58 59 1,167

24 25 1,712 60 61 1,153

26 27 1,643 62 63 1,141

28 29 1,583 64 65 1,129

30 31 1,531 66 67 1,118

32 33 1,485 68 69 1,107

34 35 1,444 70 71 1,097

36 37 1,408 72 73 1,088

38 39 1,375 74 75 1,079

40 41 1,345 76 77 1,071

42 43 1,318 78 79 1,063

44 45 1,293 80 81 1,049

46 47 1,271 82 83 1,041

48 49 1,250 84 85 1,033

50 51 1,231 86 87 1,026

52 53 1,213 88 90 1,015

SNED addressed two problems (without pretending to solve them)

Introduced in 1996, gives an incentive to 25% best performing schools in each regional homogenous group (cluster) heavily dependent on socioeconomic origin of students

Non-selection practices along with SIMCE score and improvement of SIMCE are the most important criteria for ranking schools

Supply side incentive Penalizes selection Extends incentives of competition to rural

areas, and introduces some wage dispersion based on

performance

Individual evaluations (skip) More recently: two new evaluation systems of individual

teachers, one voluntary for high performers and another compulsory since 2005 (resisted for more than ten years by the teacher union)

Assessment of capacity of teachers rather than students learning

Therefore do not address the problem of moral hazard but at least introduce more pay differentials not based on age

Teachers learn about their weaknesses and on how to improve

Why conducted by the government? Scarce capacities Local governments might dismiss bad performers if three

consecutive bad evaluations (12 years?) Expensive?

Toping-up: “shared” financing (skip) As part of an agreement with the right

wing opposition in the Parliament and as an exchange coin for their approval of a tax reform, a law favoring the contribution of parents was introduced

In 1997 a compulsory scholarship fund was added in legislation (different percentages below average charge adding up to percentages indicated in next slide)

Expected 2004 Ch$132 billion (more than US$220 million)

Average charge between

Discount of the fiscal

subsidy as a % of

average charge

Fiscal contribution

to the scholarship

fund

School contribution

to the scholarship

fund

Up to 0,5 USE 0 0 5%

0,5 to 1 USE 10% 100% 5%

1 to 2 USE 20% 50% 7%

2 to 4 USE 35% 20% 10%

Discount and scholarship table

Key figures regarding the actual situation

EVOLUTION OF PUBLIC EXPENDITURE

0

500

1000

1500

2000

2500

3000

3500

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Millio

ns o

f US$

of 2

003 (

1US$

=ChS

600)

TotalExpenditure

Subsidy

Highereducation

Evolution of expenditure Average per student subsidy decreased

25% between 1981 and 1990 It increased from $11,423 in 1990 to

$32,167 in 2004 (182%) – both in Ch$2004, 1US$=Ch$600

Public expenditure increased from 2.6% of GDP in 1990 to 4.3% in 2000

Private expenditure in education increased from 1.8% of GDP in 1990 to 3.1% in 2000

Evolution of enrolment

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Municipal

Private withsubsidy

Private

Vocationalcorporations

Fiscal+Municipal+Corp.

Totalenrolment

National standardized test results (SIMCE), fourth grade

1988 1990 1992 1994 1996 1999ª 2002

Type of school:

Municipal 49.25 56.7 63.85 64.43 68.00 238 237

Private subsidized 56.35 58.8 70.15 70.66 73.65 257 257

Private non-subsidized 76.15 80.05 86.05 85.07 85.85 298 299

Source: Ministry of education. Note: a/ Before 1998 scores represent percentage of success. From then onwards scores are normalized around 250.

Average score in TIMSS Mathematics 1999

Filipinas

Japón

Israel

Estados Unidos

Singapur

Chile

Sud Africa

Canadá

Italia

250

300

350

400

450

500

550

600

650

Promedio internacional

Bad results have been bad for a long time…

Población según nivel de lectura de documentos, 16 a 65 años, en %

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Chile

Eslovenia

Hungría

EEUU

Bélgica (Fl)

N.Zelandia

Australia

Canadá

R.Checa

Holanda

Nivel 1

Nivel 2

Nivel 3

Nivel 4/5

Chile: gerentesprofesionales

Social mixture?

Decil SchoolDecil student in each school  

1 2 3 4 5 6 7 8 9 10 Total

1 38.0 19.8 16.1 9.2 6.5 4.3 3.0 1.9 1.1 * 100.0  

2 23.4 18.0 17.5 12.7 10.3 6.8 6.0 3.0 1.9 * 100.0  

3 16.4 14.5 15.7 14.3 12.9 8.8 8.9 5.3 2.5 * 100.0  

4 11.5 10.9 13.6 14.3 14.6 11.5 12.3 7.0 3.4 * 100.0  

5 6.6 8.7 10.6 12.5 14.5 12.1 15.9 11.1 6.4 1.7 100.0  

6 3.4 4.2 5.5 9.0 12.7 12.2 19.1 17.7 12.8 3.5 100.0  

7 1.2 1.7 2.4 4.2 7.2 8.6 18.5 22.9 24.6 8.7 100.0  

8 * * * 1.6 3.1 4.2 10.9 20.6 34.4 23.1 100.0  

9 * * * * * * 2.2 8.9 28.9 58.0 100.0  

10 * * * * * * * 1.2 8.2 89.9 100.0  

Source: González, Mizala & Romaguera, 2004.

How do parents chose? First studies found influence of irrelevant

factors (names in English and other marketing techniques, status)

Parents, - even those considering several alternatives, - do not use information of tests scores when selecting the school for their children (Elacqua and Fabrega, draft)

Practical reasons (proximity) and school values appear to be the most important factors explaining school choice

The challenges ahead

Equity Subsidy should be differentiated according to

socioeconomic status Debate on whether by school or by individual reflect different views

within the Ministry (refer to inclusion and exclusion errors of school or district targeting) Take account of concentration of poor students in a given school (peer

effect) Is S-competition the inevitable consequence of any

attempt for addressing the problem of imperfect information?

Prohibit selection by schools? Random assignment? In 2004 the requirement that at least 15% of

students must come from low income households was introduced in the legislation: just a signal of concern

Value added indicator in National Assessment?

Quality All the system must improve, including private paid

system What have we done wrong? Worldwide problem ? Low quality equilibrium? Factors of production? Size of decentralized units is too small for adequate

technical capacities except in a few municipalities: redefine level in charge of managing the public education system?

Does this mean that market incentives have failed? Factors damping competition and efficiency:

The dilution of incentives in the municipal system Rigidities of the Teacher Statute Little school autonomy … But results of private sector are also disappointing (debate on

whether they are nevertheless better or not) Parents do not use quality indicators for choosing a school

…Quality

Dubious cost-effectiveness of more important investments : Teacher salaries Full school day reform

Improvisation of important government decisions. Need for evidence-based policy.

Participation and Convention of Children Rights Nation built from top to bottom Social participation has not been a priority

for the last three democratic governments (at the beginning for fear of growing social demands, later due to inertia)

School system culture is authoritarian Recently there is more concern about

violence against children Using the energy of families is still a

challenge but it might further reduce equity Recent legislation instituted School

Councils

Costs of remaining in a bad school and psychological costs of changing

Remedial programs: P900; critical schools

NEED FOR FURTHER MEASURES Possibility of closing schools? Possibility of removing school director and

other officials? Information on what can be done to

improve? (effective school research) Possibilities of support from families Subsidy linked to results?