The Changing Transitions to Adulthood in Developing Countries Selected Studies (2005) / Chapter Skim
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11 Assessing the Economic Returns to Investing in Youth in Developing Countries--James C. Knowles and Jere R. Behrman
11 Assessing the Economic Returns to Investing in Youth in Developing Countries--James C. Knowles and Jere R. Behrman
Pages 424-490
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From page 424... ...
Some evidence suggests that youth-focused interventions may be costeffective in improving health, reducing poverty, and providing overall benefits to society. Compared to investments in child health and development, investments in youth often offer a shorter time lag between costs and benefits, thereby having higher benefit-cost ratios, all else equal, if even a relatively modest discount rate is used.
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From page 425... ...
· Developing countries in which hundreds of millions of youth live-particularly in Asia but also elsewhere -- have experienced historically unprecedented economic growth, while smaller but still large numbers of youth, particularly in sub-Saharan Africa, Latin America, the Middle East/ North Africa, and Central Asia, live in countries with limited economic growth or stagnation, often with high rates of youth unemployment. · Human capital investments in the form of formal schooling and training have expanded rapidly, particularly for females, and have facilitated the exploitation of new technologies and new markets by those in whom such investments have been made.
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From page 426... ...
KNOWLES AND JERE R BEHRMAN Therefore, it is necessary to rethink and to reevaluate the range of investments in youth in developing countries, inter alia, schooling, training, reproductive health, and investments in other aspects of health, including behavioral changes related to food consumption, physical activity, and substance use.
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From page 427... ...
Such estimates are presented for a number of alternative investments in youth, including formal and nonformal schooling, reproductive health, school-based health interventions, and investments to reduce the consumption of tobacco. The final section presents a synthesis and conclusions, with emphasis on what are the highest return investments in youth, how these compare with other investments, and what are the highest priority research areas.
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From page 428... ...
The economic returns to reproductive health investments designed to reduce rates of HIV infection increase substantially with HIV prevalence in the targeted age groups. FRAMEWORKS FOR ANALYSIS Why Frameworks for Analysis Are Necessary Good analysis of impacts of investments in youth has tripartite foundations: data, modeling, and estimation.
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From page 429... ...
The analytical frameworks provided by models are essential if the empirical estimates are based on behavioral data generated in the presence of unobservables such as innate ability and family connections. The problem, for example, is that youth with greater ability and motivation and better innate health may be more productive directly and may also benefit from higher levels of investments.
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From page 430... ...
Woytinsky Lecture provides a simple framework for investments in human resources that captures many of the critical aspects of investments more broadly in youth and which has been widely appealed to in rationalizing empirical studies of the determinants of investments in youth. In Becker's framework, human resource investment demands, under risk neutrality, reflect the equating of expected marginal private benefits and expected marginal private costs (both in present discounted terms)
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From page 431... ...
This equilibrium human resource investment is associated with an equilibrium rate of return that equates the present discounted value of expected marginal private benefits with the present discounted value of expected marginal private costs. This simple stylized representation of human resource determinants is based on a dynamic perspective, with both benefits and costs not only in the present but also those that are expected in the future and with current period options conditional on past decisions.
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From page 432... ...
Investments in Youth In the case of schooling, which is an important example, most empirical studies represent human resource investments empirically by years of schooling or highest grade (level) of schooling completed.
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From page 433... ...
, there are many other investments in the human resources of youth. Such investments may be directed, for example, at improving health, nutrition, information, social capital, and habitual behaviors that lead to desirable outcomes.
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From page 434... ...
in a well-known study of the economic benefits of female schooling. This procedure gives, for hard-to-evaluate outcomes, what society is willing to pay for alternative ways of attaining the same gain -- and thus, if the prices that are used in the evaluation reflect the true social marginal costs of resources, the true resource costs of such gains.
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From page 435... ...
For another example, raising funds for governmental programs in itself may have large distortionary costs. Measurement of Policies Including policies among key variables for which there are measurement problems might seem strange.
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From page 436... ...
(2002) analyze another example in which students were selected randomly from poor applicants to receive scholarships to attend private schools in urban Colombia.
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From page 437... ...
Consider the difficulties with the possibility of randomly assigning schooling among individuals in order to obtain better estimates of the effects of human resource investments in youth, as would be desirable for the present study. Fourth, even for the policies for which good experiments can be conducted at a reasonable (resource, ethical, and political)
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From page 438... ...
If the resources devoted to such special programs tend to be concentrated in communities that have greater political power, wealth, and more healthy youth net of the effects of the special health programs and of characteristics that are observed in the data, the association between youth health and resources devoted to special health programs without control for resource allocation among these special health programs in different communities overstates the effectiveness of the programs. Those communities that receive more 10If programs are allocated randomly, this problem is avoided.
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From page 439... ...
. On the other hand, if the resources devoted to such special health programs tend to be concentrated in communities that have poorer health environments, greater poverty and less healthy youth net of the effects of the programs and of characteristics observed in the data, the association between youth health and resources devoted to special health programs without control for resource allocation among those programs in different communities understates the effectiveness of the programs.
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From page 440... ...
Consider the possibility that private incentives for investments differ from social incentives for such investments, first with respect to the marginal benefits and then with respect to the marginal costs. Why might marginal social benefits exceed marginal private benefits for investments in youth?
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From page 441... ...
Answers include the following: · There may be capital market imperfections for some types of investments (e.g., social capital investments and human resource investments, in part because these forms of capital are not accepted as collateral) such that the marginal private costs for such investments exceed their true marginal social costs, which probably is more relevant for individuals from poorer families who cannot easily self-finance such investments.
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From page 442... ...
KNOWLES AND JERE R BEHRMAN hours during which schools are open, limit textbook choices, impose quality standards based on different conditions in other economies, or limit provision of services to public providers, all may result in much greater costs of attaining specific investments than would be possible with fewer regulations.13 What are the implications of differences in the marginal private and social benefits or costs?
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From page 443... ...
In fact the costs may be sufficiently high that it is not desirable to try to offset some market failures by policies.16 But, if it is desirable to do so, there is a case generally for making policy changes that are directed as specifically as possible to the inefficiency of concern because that tends to lessen the distortionary costs. An efficiency policy hierarchy can be defined in which alternative policies to attain the same improvement in efficiency are ranked according to their social marginal costs, including direct and distortionary 15If all other markets in the economy are not operating efficiently, then policies that narrow differences between private and social incentives in a particular market related to investments in youth do not necessarily increase efficiency.
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From page 444... ...
Higher in the hierarchy might be the elimination of any public subsidies for education and health that are not warranted by the marginal social benefits exceeding the marginal private benefits. 18This is also an argument for considering an experimental approach to evaluating policy alternatives when possible; for example, rather than introducing a reform countrywide, introduce variants of reforms in randomly selected sites with careful monitoring of the results for both the experimental groups and the control groups.
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From page 445... ...
But presumably it is desirable to assure that everyone has these basic options at as little cost in terms of productivity as possible, so, rather than ignoring efficiency considerations, it is desirable to choose policies as high as possible in the efficiency policy hierarchy and still assure that the basic service objectives are met. Thus, to obtain a given distributional objective, it is possible to define a distributional policy hierarchy in which policy alternatives that obtain that objective are ordered from lowest to highest marginal direct and indirect costs.
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From page 446... ...
But, despite such difficulties, it is important to attempt to undertake benefit/cost analysis with such considerations in mind -- though, all too often, they are ignored. Methodologies for Economic Evaluation of Investments in Youth If one has reliable estimates of the effectiveness of a set of alternative investments in youth, how can one best evaluate them against the criteria of efficiency and distribution?
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From page 447... ...
, the delay between investments and the resulting effects can have an important effect on benefit/cost ratios or internal rates of return. We also try to examine critically the case for public intervention with respect to each type of 21On the other hand, CEA can be, and often is, explicitly used to assess alternative means of attaining specific distributional goals, such as improving reproductive health outcomes for poor populations.
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From page 448... ...
. Without reliable information about the effectiveness of interventions, it is impossible to obtain reliable estimates of the benefits and thus of the benefit/cost ratios or the internal rates of return of various investments.
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From page 449... ...
tobacco advertising health labor employment safety, media supplements fortification accident rehabilitation health on on Child Other (e.g., Tax Ban Antialcohol Antidrug Mass Food Food Road Mental Microcredit Youth Other Behrman and literacy Knowles in and supplements programs education programs sanitization programs technical treatment examinations policies health and insurance and education investments Reviewed recreation basic health lunch/feeding micronutrient deworming water malaria physical health and health development Youth in Vocational Adult Military School School-based School School School School School School School Sports School Youth Investments laws services outreach RH (RH) services investments education marriage of improvements RH programs Alternative attendance RH other health programs delay development to and 11-1 quality marketing services counseling media centers program School Scholarships Compulsory School-based Social Youth-friendly Linked Peer Mass Workplace/community Programs RH Youth TABLE Reproductive Community
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From page 450... ...
However, the cost estimates do not include distortionary costs, or even administrative costs in some cases. Reliable estimates of effects, in terms of cognitive achievement, are not available in any study that we have been able to locate.
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From page 451... ...
Another problem with the existing studies on reproductive health investments in youth is that they tend to focus on only one effect, such as HIV prevention, but not, for example, on teen pregnancy prevention. There is almost no information on either the cost or effectiveness of reproductive health policy development investments or on investments designed to delay age at marriage.
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From page 452... ...
. There is somewhat less reliable information available on the costs and effects of school-based health education programs (other than those focused on reproductive health)
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From page 453... ...
For example, if the cost per birth averted in a family planning program is used to value the effect of reduced fertility, it is important to adjust that cost for the other benefits that family planning programs provide, such as reduced maternal mortality and morbidity, reduced child mortality, ability to space births, and information.27 · It is important not to double count the value of effects that are directly and indirectly valued (van der Gaag and Tan, 1997)
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From page 454... ...
Because there is a substantial literature on relationships between increased education and enhanced labor productivity and on how to assign a monetary value to enhanced productivity, it is usually possible to value this component directly. However, other components of increased education (e.g., reduced teen pregnancy, reduced crime, reduced fertility)
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From page 455... ...
Increased/Decreased Work Effort There is often little information on the effect of investments in demandside schooling (e.g., scholarships and other transfers) or the enforcement of child labor laws on adult and child work effort.
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From page 456... ...
Effects That Are Particularly Difficult to Value Directly or Indirectly Some examples of effects of investments in youth that are particularly difficult to value, whether directly or indirectly, include increased social capital, averted infertility, averted social exclusion, improved self-esteem, and enhanced national security (an effect of military training)
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From page 457... ...
Clearly the estimated gain in earnings would exceed the program's cost as calculated in the study in any cost/benefit analysis, even if earnings gains are heavily discounted, distortionary costs are included, and social and other private benefits from improved cognitive achievement are ignored. Increasing the Quality Versus the Quantity of Basic Schooling in Rural Pakistan Increasing the quantity or quality of schooling an individual receives is likely to raise his or her cognitive skills.
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From page 458... ...
Averted TB infections Improved health Improved nutritional status Improved mental health Delayed marriage (females) Averted drug/alcohol abuse Averted physical and/or sexual abuse Averted crime Averted female genital cutting Reduced fertility Averted abortion Reduced tobacco use Reduced violence and civil conflict Averted orphans NOTE: STI = Sexually transmitted infection.
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From page 459... ...
Alternatively, the estimated number of DALYs gained per averted HIV infection, multiplied by an estimate of the monetary benefits per DALY gained. Cost per STI averted through cost-effective investments to prevent HIV/AIDS (e.g., cost of preventive interventions directed to high-risk populations)
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From page 460... ...
Furthermore, as in the other studies reviewed in this section, there is no attention to some possibly important distortionary costs, such as those incurred to raise governmental revenues. 30Alderman et al.
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From page 461... ...
Scholarship Program The effect of the investment on increased education is estimated on the basis of results obtained in the PACES voucher program (Colombia) , which awarded scholarships to poor children (some of whom were selected randomly from among applicants via a lottery)
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From page 462... ...
Because increased education is a broad effect, the following additional assumptions were made about the components of increased education: · Each additional year of completed secondary schooling results in reduced fertility (i.e., 0.1 fewer births at age 35, averaged over males and females) and improved health (i.e., 1.0 DALY spread out evenly between ages 15 and 70)
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From page 463... ...
renders it impossible to obtain separate estimates of the social and private benefits of this investment. The benefits from reduced fertility, improved health, and reduced child work are assumed to be as follows: · $50 per birth averted (indirectly estimated, based on the cost of 4 couple years of protection using contraceptives)
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From page 464... ...
· Each additional year of primary school equivalency results in a 10 percent increase in annual earnings, as compared to average annual earnings of $1,400 in Colombia.34 · Earnings are received continuously from age 19 until age 60. · The discount rate is 5 percent per annum.
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From page 465... ...
. · There is no effect of increased education on any of the following: violence and civil conflict, crime, social exclusion, youth unemployment, teen pregnancies, HIV infection or STIs, drug/alcohol abuse, physical/sexual abuse, or mental health.
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From page 466... ...
. 35If each DALY gained from an averted HIV infection is valued at twice the level of national earnings ($2,000, instead of $1,000, and still less than the upper range of three times the level of national earnings estimated by the Commission on Macroeconomics and Health, 2001, the benefit/cost ratio rises to 0.987 (with an internal rate of return of 4.7 percent)
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From page 467... ...
This assumption (necessitated by the absence of estimates of averted HIV infection on these effects) renders it impossible to obtain separate estimates of the social and private benefits of this investment.
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From page 468... ...
In this case, health education received at age 15 would have the same impact, in terms of HIV infections averted per $1,000 investment, at ages 18 to 29. Under these revised assumptions, the estimated benefit/cost ratio would increase to 4.59 in the case of benefits estimated using the aggregate method, and to 1.115 in the case of benefits estimated using the disaggregated method.
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From page 469... ...
· The discount rate is 5 percent per annum. Because increased education is a broad effect, the following additional assumptions were made about the components of increased education: · Each additional year of completed secondary schooling results in reduced fertility (i.e., 0.1 fewer births at age 35, averaged over males and females)
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From page 470... ...
. School-based reproductive health programs to prevent HIV/AIDS provide comparably high economic returns when annual HIV incidence among targeted youth rises to 1 to 2 percent or more or when their effects are assumed to last over a period longer than one year (although there is
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From page 471... ...
. The economic returns to school-based reproductive health programs designed to prevent HIV/ AIDS would also be higher if they could be shown to yield other benefits, such as the prevention of adolescent pregnancies and other types of STIs.
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From page 472... ...
Four Critical Research Gaps First, an important gap is the absence of reliable estimates of many hypothesized effects of investments in youth. In future research, high priority should be given to obtaining reliable estimates of the effects of those investments for which little, if any, information currently exists (e.g., the effects of ABEL, vocational and technical training, military training, reproductive health policy development, investments designed to avert drug and alcohol abuse and to improve mental health, youth centers, youth rehabilitation programs, sports and recreation programs targeted to youth)
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From page 473... ...
. Third, partly in the short to medium term, due to the lack of reliable information on many of the hypothesized effects of investments in youth, there is a role for indirect valuation of the effects of investments in youth (particularly of broad effects, such as "increased education" or "improved health," that are difficult to value directly)
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From page 474... ...
For such assessments, it is important to distinguish between private and social benefits and costs -- but there is almost no information with which to assess these differences. Obtaining reliable estimates of both private and social benefits depends critically on the availability of reliable estimates of a full range of the effects of a given investment, not only of the private benefits associated with increased productivity.
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From page 475... ...
A "+" in a particular column indicates that the broad effect corresponding to that column includes the component corresponding to that row of the table. For example, column 1 refers to the broad effect of "increased education." The table indicates that the components of this broad effect include "enhanced labor productivity," "averted youth unemployment," and "reduced child labor," among others.
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From page 476... ...
KNOWLES AND JERE R BEHRMAN ANNEX TABLE A11-1 The Components of Broad Effects of Investments in Youth Components Units Enhanced labor productivity % Reduced underutilization of labor % Increased adult work effort % Increased social capital Crime rate Expanded access to risk-pooling services 1 insured person Reduced age at which children achieve a 1 year given level of schooling Reduced cost of medical care % Averted infertility 1 woman Increased tax revenue $ Increased education 1 year of schooling completed Averted youth unemployment 1 youth Reduced child labor 1 hour Averted teen pregnancy 1 pregnancy Averted HIV infection 1 infection Averted STIs 1 infection Averted TB infections 1 infection Improved health 1 DALY Improved nutritional status (height)
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From page 477... ...
(Body Increased Averted Unemployment Reduced Averted Averted Averted Improved Improved Status Improved Status (1)
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From page 478... ...
KNOWLES AND JERE R BEHRMAN ANNEX TABLE A11-1 Continued Components Units Enhanced labor productivity % Reduced underutilization of labor % Increased adult work effort % Increased social capital Crime rate Expanded access to risk-pooling services 1 insured person Reduced age at which children achieve a 1 year given level of schooling Reduced cost of medical care % Averted infertility 1 woman Increased tax revenue $ Increased education 1 year of schooling completed Averted youth unemployment 1 youth Reduced child labor 1 hour Averted teen pregnancy 1 pregnancy Averted HIV infection 1 infection Averted STIs 1 infection Averted TB infections 1 infection Improved health 1 DALY Improved nutritional status (height)
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From page 479... ...
ASSESSING THE ECONOMIC RETURNS 479 Broad Effects Status Status Status Status Abuse Health and/or Deficiency) Nutritional Nutritional Nutritional A Nutritional Obesity Mental Deficiency)
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From page 480... ...
KNOWLES AND JERE R BEHRMAN ANNEX TABLE A11-1 Continued Components Units Enhanced labor productivity % Reduced underutilization of labor % Increased adult work effort % Increased social capital Crime rate Expanded access to risk-pooling services 1 insured person Reduced age at which children achieve a 1 year given level of schooling Reduced cost of medical care % Averted infertility 1 woman Increased tax revenue $ Increased education 1 year of schooling completed Averted youth unemployment 1 youth Reduced child labor 1 hour Averted teen pregnancy 1 pregnancy Averted HIV infection 1 infection Averted STIs 1 infection Averted TB infections 1 infection Improved health 1 DALY Improved nutritional status (height)
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From page 481... ...
ASSESSING THE ECONOMIC RETURNS 481 Broad Effects Use and Genital Exclusion Self-Esteem Female Fertility Abortion Tobacco Violence Social Orphans Conflict Improved Averted Cutting Reduced Averted Reduced Reduced Civil Averted Averted (20)
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From page 482... ...
with m + n rows and n columns, each (m + n) × 1 column of which lists first the m directly monetizable components of one of the n broad effects and then the n remaining components of one of the n broad effects.
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From page 483... ...
× 1 vector of benefits (Z) corresponding to one unit of each of the m + n directly monetizable and broad effects.41 We partition Z into Z1, containing the first m elements of Z, and Z2, containing the last n elements of Z
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From page 484... ...
. However, increased education is a broad effect assumed to have the following components: · Each girl's labor productivity increases by 10 percent from age 16 until retirement (assumed to occur at age 60)
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From page 485... ...
effects. Annex Table B11-3 presents the broad effects translation matrix (T)
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From page 486... ...
KNOWLES AND JERE R BEHRMAN ANNEX TABLE B11-1 Assumed Timing of Lifecycle Effects for One Girl in Hypothetical Girls' Scholarship Example Improved Increased Enhanced Labor Reduced Improved Health Age Education Productivity Fertility Health of Children Discounted 1.2155 2.0576 0.4155 1.1972 1.0200 (to age 18)
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From page 487... ...
ASSESSING THE ECONOMIC RETURNS 487 Increased Decreased Education Reduced Risk of Improved Medical Discount of Children HIV Infection Health (HIV)
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From page 488... ...
for Hypothetical Scholarship Program for 10 Girls Effects of Hypothetical Investment Scholarship Program Enhanced productivity 0.0000 Reduced fertility 0.0000 Improved health 0.0000 Improved health of children 0.0000 Decreased medical care expenditure 0.0000 Increased education 12.1551 Increased education of children 0.0000 Averted HIV infections 0.0000 SOURCE: See text. ANNEX TABLE B11-3 Broad Effects Translation Matrix (T)
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From page 489... ...
. The distributional implications of government family planning and reproductive health services in Vietnam.
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From page 490... ...
. Review of World Bank supported projects in adult basic education and literacy, 1997-2002.
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