(This essay was published in Hong Kong Economic Journal on 25 September 2013)


Recent controversies over the proposal by St. Stephen’s Girls’ College to join the Direct Subsidy Scheme and the withdrawal of subventions to the English Schools Foundation, where half the students enrolled are local residents, are telling episodes of the contradictions of education policy.


The St. Stephen’s Girls’ College proposal would have allowed the school to gain management freedoms in choosing the school’s curriculum, determining teachers’ remuneration, setting tuition fees, and selecting students. These are all important autonomies that local government aided schools have to surrender when they receive government subventions.


The regulation code book governing how subvented schools should be managed is as thick as a telephone directory and contains all kinds of detailed management regulations that effectively transform school principals from master teachers into public bureaucrats. The subvented school is essentially compelled to operate like a government entity managed according to prescribed rules, rather than an experimental laboratory with a creative culture that inspires students to innovate.


Compromise Creates Contradiction


The Direct Subsidy Scheme was introduced in 1991 as a compromise aimed at allowing participating schools to have management autonomy while continuing to receive government subsidies. It was a halfway solution between Professor Milton Friedman’s “schooling voucher scheme” and the regulation-driven government subvention scheme. Under a “schooling voucher scheme” government subsidies are given directly to parents who can then spend them on their child’s education. Parents are able to vote with their feet in deciding where to send their children. The schooling voucher empowers poor parents with the same voting power in the marketplace that a citizen in a democracy exercises at the ballot box. It is in effect an economic democracy.


Many teachers and not a few school principals in different parts of the world, including those in Hong Kong, do not like this scheme. Teachers everywhere are a little schizophrenic when it comes to their views of political democracy and economic democracy. They support consumer sovereignty in a political democracy, but favour producer sovereignty when it comes to funding for education.


Under a Direct Subsidy Scheme the choice for accepting management freedom is left to the schools and teachers. The schools decide whether to join the Direct Subsidy Scheme. Under the “schooling voucher scheme” all schools must play by the rules of an economic democracy and go after parental votes. Like all kinds of halfway solutions the Direct Subsidy Scheme contains inherent conflicts.


Schools that opt to join the Direct Subsidy Scheme are likely to be those that think they are able to get ahead under the game rules of an economic democracy. These are often the more established schools whose alumni urge them to opt into the scheme and who can rely on alumni support. In doing so they begin to offer a kind of schooling different from the rest. They attract and often choose to admit a certain clientele that appreciates and can afford the kind of education they offer. This provokes various reactions. Parents who cannot afford the school’s education are upset, parents who deplore that kind of education are alienated, and schools that are not in the Direct Subsidy Scheme are offended because the rules of competition for students has changed. Ultimately they too must begin to consider offering the same type of education as the Direct Subsidy Scheme schools or explicitly reject it.


The introduction of the Direct Subsidy Scheme is like “one country two systems.” Schools in that scheme operates under a market regulated system, while those not in the scheme operate under a government regulated system. The two systems will unavoidably interfere with each other.


Direct Subsidy Scheme Unfairly criticized


Some critics of the Direct Subsidy Scheme claim the schools essentially serve those clients who want and can afford an expensive education and that for this reason the schools should become fully private and not receive government subsidies. But this is a false argument. Government subsidies are justified on the grounds that they are provided to all schoolchildren. They only appear to be a subsidy to the schools because they are granted to them in the first instance, but the true ultimate beneficiaries are the students. Under a “schooling voucher scheme” the illusion that the schools are the recipients of the subsidies disappears.


Other critics claim that the Direct Subsidy Scheme is reproducing society’s inequality across generations and would reduce upward social mobility for those without means to afford expensive schooling. This is an empirical question but it can potentially be a very substantive criticism. It seems to me the crux of the matter is whether students with the necessary ability face more barriers to being admitted into Direct Subsidy Scheme schools, in particular lack of means. If so, then the natural solution is to provide sufficient merit scholarships so that the students would not have to suffer fewer opportunities. This would be a preferable solution than preventing schools from joining the Direct Subsidy Scheme. The latter would be akin to “cutting off the nose to spite the face.” It would lead to less innovation in education practices and induce a quality levelling process towards mediocrity and uniformity.


Let us consider why this might be the outcome and why it may not be in the interests of Hong Kong and especially the lower income groups. Learning effectiveness depends not only on one’s own effort and time, but also on that of others. Students learn a great deal from each other, who studies from whom matters, and so peer interaction is an important aspect of learning. How schools are subsidized and organized therefore can make a difference to the future prospects of society, to who gets ahead, and to the path by which high ability students without means can have a bright future.


Education Brings High Returns


Economists are pretty unanimously in favor of subsidizing education. They see three good reasons why human capital investment should be subsidized.


The first reason is the existence of unequal access to education. Education enhances the productivity of an individual. However, the cost of investing in education varies from individual to individual because of differences in family backgrounds. The opportunity cost of financing education is higher for an individual without means.


An individual should continue to invest in education as long as the marginal benefit of doing so is greater than the marginal cost. Beyond this it is not worthwhile because it would be a waste of resources. This means for each individual there is an optimal amount of investment, which would obviously depend on the ability of the individual to learn. An individual of high ability could obtain more benefits from education and it would make good economic sense for him to invest in more education for his own and for society’s benefit.


But if high ability individuals fail to invest in more education because of family background, then society loses because these individuals fail to realize their potential. It is a social loss. Society therefore gains from financing the education of high ability individuals by lowering their financing costs.


The idea that there is an individually optimal amount of human capital investment implies that the achievement of social efficiency does not require everyone to attain the same level of education. Individuals with higher ability should have more education than less able ones. The role of society as financier is merely to ensure that those with ability should not be denied access to further education for lack of means. It should also be noted that the subsidies are provided to equalize opportunities for individuals not to equalize education outcomes. Society benefits because all those who are talented can then develop their full potential. The economic justification for the provision of subsidies is not to equalize economic outcomes across individuals but to maximize the productive capacity of society.


The second reason for subsidizing education rests on the presence of positive spillover effects in economic production. There is overwhelming evidence that the productivity of an individual depends on the productivity and skills of his co-workers or teammates. He is more productive when his supervisor is more accomplished, his subordinates are more competent, and his peers are more skilled.


Very often these positive spillover effects are not restricted to the talent pool within a team or company. They are present within an industry and across economic sectors; geographically they exist across a city, across a country, and even across different parts of the world. Economists have therefore favored subsidizing human capital investment beyond the point where an individual’s private marginal cost equals private marginal benefits, but to the point where the social marginal cost equals social marginal benefits.


The third reason for subsidizing education stems from the presence of positive spillover effects in the learning process. That is, an individual’s learning effectiveness depends on whom they learn with at school. Trying to describe the ideal collection of students in a school, class or study team for maximizing students’ total learning experience is a counterproductive exercise. I doubt there is a single ideal model; even if one exists, it is unlikely we will know how to find it. Educators delude themselves into thinking they can uncover a single model. What is needed is experimentation in the schools where principals and teachers continue to develop their educational visions through trial and error.


Deregulating Schools Has Net Benefit


Professor James Heckman, Nobel Laureate in Economics 2000, has estimated that a person’s income depends on both cognitive and non-cognitive skills. Cognitive skills according to his estimates appear to plateau after eight years old. School learning tends to be largely knowledge accumulation and physical training. On the other hand non-cognitive skills continue to develop in school. This is highly suggestive of the idea that schooling should cultivate a diverse set of learning skills.


Certain types of learning are positively correlated with the intellectual or motor ability of one’s peers, but other types of learning may be related to a greater diversity of talents and skills among learning peers. How schooling should be organized in order to maximize total learning is best approached by allowing schools to have the freedom to experiment with their curriculum, recruit their own teachers, admit their own students, and manage their affairs. It is totally counter-intuitive to believe the diversity that exists in modern societies and economies is best served by uniformity and narrowness in how schools conduct their business.


Some economists, including myself, are in favor of imposing a minimal number of public regulations on schools and teachers if they are to receive subsidies. Only two regulations are required, first, the funding must be spent on educational purposes, and second, school accounts must be made available to those who provide the funding as either benefactors or clients.


A schooling system that fails to prepare young people for their future cannot be in the interest of anyone and especially those without means. Those who can afford better education would simply exit from a uniformly mediocre system, while those without means would be left without any affordable alternatives.


How should we finance the education of those with ability but without means? I have mentioned merit scholarships. I believe the best approach is to combine public encouragement and private initiative. Private benefactors should establish independent foundations with responsibility for selecting needy students and providing them with merit scholarships that they could use at any school they wish to attend. These foundations should develop professional expertise in order to discharge their obligations to the benefactors.


I think government could provide a small fraction of the merit scholarships to signal its policy aims, and these scholarships could be provided to the schools to administer. But the remaining bulk should be provided by private benefactors through independent professional foundations.


Two reasons I mention above that justify subsidizing education have to do with spillover effects in economic production and cross-learning effects within the student body of a school.


Subsidies For English Schools Justifiable


I noted earlier that positive spillover effects are present across a city, a country, and even different parts of the world. In an increasingly integrated global economy the benefits of human capital investment are shared with many different individuals and companies across national boundaries. Taking a narrow geographic location or country specific view of the returns to human capital investment is not sensible for a highly open international city like Hong Kong, where economic life is always in a flux and people come and leave. You never know who will end up staying or leaving. More importantly, those who do not stay can still make important contributions to you and your company.


Admitting foreign students into our educational institutions is beneficial to our own local residents. Financing the education costs of foreign residents whose parents are living in Hong Kong can benefit locals by virtue of these positive economic spillover effects. In addition, these foreign students make a direct contribution to enriching the learning environment in the schools where local students study. They help them to become better learners.


For these reasons, I believe the decision to end subsidies for the English Schools Foundation is a policy mistake. Half the students who study in these schools are locals and not foreign. Hong Kong today is a rich society. Not all foreigners who live in the city can afford our expensive schooling. The old days when expatriates were automatically among the most well off are long over. Unless we do not wish to attract foreign talent into our city, such an inward looking education policy means we are basically shooting ourselves in the foot.


The least that Hong Kong can do is to provide merit scholarships for students who attend English Schools Foundation schools. Both public effort and private initiatives are urgently required in this area so that an important international schooling experience in Hong Kong will not be compromised. If the English Schools Foundation falters, it will be to the detriment of Hong Kong’s students and to the overall development of the city, as foreign talent will avoid coming here.  A city that calls itself Asia’s world city should devote much more effort to ensure its words do not ring hollow.

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