Tuesday, March 24, 2009

Education (human resources) sector in Nepal

As evidenced by the increasing enrollment rates among Nepali people, the supply of education among those entering the workforce has been increasing since 1991. A push for universal primary education has drastically increased enrollment in primary and secondary education.

Not only primary and secondary enrollment, net tertiary enrollment is also increase and is at its highest level. Since there is a free flow of labor between India and Nepal, any discrepancy in demand for and supply of labor in the market is compensated by importing labor from India. At present, 15% of the labor market demand in the skilled sectors is fulfilled by importing human resources from India, according to the ILO.

Despite being low, the quality of human resource is also improving in recent years. The labor productivity is consistently increasing in the domestic market and any shortfall in human resource is substituted by importing human resource from the Indian labor market.

Nepal’s youth and adult literacy ratio has satisfactorily improved since 1991. Though Nepal’s literacy rate is still slightly below the regional and LIC average, it is improving and the trend is encouraging.

Public spending on education (% of GDP) is satisfactory and is increasing in recent years. Based on income per capita and the size of the economy, Nepal’s expenditure on education is not that different from other low income countries. In fact, looking at the per capita income of regional counterparts like India, Bangladesh, and Pakistan, Nepal’s spending is pretty impressive.

Finally, the return to investment in education is low in Nepal. This is indicative of the fact that the economy is not suffering from a shortage of human resources because if it were so, then the wage rate of the existing employees should have been high. The shadow price of a binding constraint should be high and rising; if supply of skilled workers is binding, then firms would be offering them increasingly higher wages. This seems not to be the case in Nepal.

Source: Adapted from Patrinos & Psacharopoulos[1], 2002

These data and analysis are difficult to reconcile with a hypothesis that the provision of education (human resource) is a binding constraint on Nepal’s economic growth.

Note that I am not saying education (lack of human resources) is not a constraint on growth in the Nepali economy. As is seen above, it is definitely a strong constraint. However, I don’t think it is as binding a constraint as bad infrastructure is. Here is my take on bad infrastructure as the most binding constraint on economic activity in Nepal. I have expanded on it a lot and will post the whole stuff later on. So far, I have discussed these constraints: taxes, coordination failures, and a discussion of the evolution of the exports sector. Discussion on other constraints to follow soon.

[1] Data correspond to studies done in the year indicated in the table. Dilip Parajuli from the World Bank did the study on returns to investment in education for Nepal in 1999. Latest data available are used. Readers should be cautious in interpreting these data for comparative purposes because some of the data for countries correspond to the state of education sector two decades ago.