RATES OF RETURN TO TERTIARY EDUCATION IN SOUTH AFRICA

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RATES OF RETURN TO TERTIARY EDUCATION IN SOUTH
                                       AFRICA1
                                      HELEN KEAN
                         SUPERVISOR: PROFESSOR ANTROBUS

Abstract
South African research has found tertiary education to have the highest rate of return
amongst levels of education. Measures of effectiveness of the large allocation by
government are a crucial area of study relatively untapped. Income levels relative to level
of education were found to have significant correlation with probability of entering into
an income bracket of above R8 000 being 2.3 times higher with a tertiary degree. A
sample of Rhodes University NSFAS funded students, analysed within the framework of
a cost benefit equation, indicated the positive effect of government funding on rates of
return.
                                 1. INTRODUCTION

TERTIARY/VOCATIONAL EDUCATION IN SOUTH AFRICA is a crucial element
of transformation for the nation. The Freedom Charter states that "higher education and
technical training shall be opened to all by means of state allowances and scholarships
awarded on the basis of merit and that adult illiteracy shall be ended by a mass state
education plan" (Freedom Charter, 1955:1). The paper focuses on the funding of tertiary
and vocational education and consequently the provision of sustainable job market entry
skills. Affordability and access to education remains the primary hindrance factor. The
state is and has invested large sums of money into tertiary/ vocational education. As
stated by Trevor Manuel (Manuel, 2009:1), Minister of Finance, "government's
contribution to education remains the single largest investment of government as it is key
to poverty reduction and future economic growth: over the period 2005-2007
government expenditure on education grew by 14% annually and for the 2008/ 2009
period accounts for R140.4 billion of provincial and national budgets." Accordingly, a
measure of the effectiveness of the allocation is a crucial and a relatively untapped area of
study in South Africa. The purpose of the paper is to consider such effectiveness
according to both private and social rates of return to previous funding.

                    2. HISTORY OF EDUCATION IN SOUTH AFRICA

 According to the National Student Financial Aid Scheme (NSFAS) access to education
and the quality thereof has been a point of struggle and contestation for many years both
pre and post democracy in South Africa. Education provides for a way out of deprivation

1
     Unpublished Honours Project, Department of Economics and Economic History, Rhodes
     University, Grahamstown, South Africa, 2009.
and is essential to building a participatory population that includes all South Africans"
(NSFAS, 2009:1).
   In order to understand the current position of tertiary education in South Africa, it is
necessary to look at the overall picture of education at a hierarchy of levels. Statistical
research in the area is plentiful, as programmes, both of an educational nature and a
macroeconomic nature, have been implemented, and progress results are crucial to
ongoing commitment to those variables, which have improved the educational level
within South Africa. According to the 2007, General Household Survey (most recent
online edition) there were 16.1 million learners currently registered with an educational
institution in 2007. Translated into percentages this was 33.7% of the population. At the
same time 9.3% of the population reported never having any formal educational at all,
eleven years prior (1996) this figure stood at 23% (Statistics SA, 2009:1).
   Since 2007, for the medium term, emphasis has been put on Early Childhood
Development Programmes by the Ministry of Education. Percentages of learners from
categorical populations are graphed in Table 1:
Table 1. Learner Participation Rates as a Percentage of Respective Categorical Populations, South Africa: 2002
versus 2007

  Age (years)     2002 (%)    2007 (%)

  0-4                  7.6         16.6

  5                   40.1         60.4

  6                   70.0         87.7

  7-15                96.3         97.9

Source: Pandor, 2009: 1

     Through a longer-term view the 7-15 age group participation rate has increased
slightly, noting the attendance rate of 89% for 1996. However, in 2007 those holding a
grade 12 certificate accounted for only 23.6% of the population (Statistics SA, 2009: 1).
Most recent results also indicate that in 2008 only 62.5% of the 533 561 learners
registered for Grade 12 passed the examinations. From this only 20.2% or 107, 462
learners achieved university endorsement. An additional 124, 000 learners achieved
entrance into a diploma or non-degree programme (Pandor, 2009:1). Commitment by the
Department of Education is now largely on Further Educational Training (FET) Colleges
and Sector Education and Training Authorities (SETa's) for learners who may not be
accepted into higher educational institutions. Nevertheless, opportunity needs to be open
for entrance into the higher education that an individual may have the potential to pursue.
     The reason given for such poor educational participation and achievement relates to
historical disadvantage, poverty, uneven support and poor management of the
educational system. Although the matric pass rate decreased between prior years and
2008, the percentage of university entrance achievements increased, so universities and
funding schemes needed to gear up for the intake. (Pandor, 2009: 1). Having results on
educational participation the context of the tertiary education enrolment rates must be
understood: in 2007 9.8% of the population aged 20 years and older had obtained a
tertiary education (Statistics SA, 2009:1) and at that point 17.8 million citizens were
enrolled in tertiary education, 286, 481 of which were in distance programmes. Of the
total 76% were previously disadvantaged and 55.5% female. 42% of the total studying
humanities, 31% business and 28% in science and technology, such factors pertaining to
the development needs of the economy (Department of Education, 2007: 30-42).
    According to Statistics SA, most studies provide a lack of fees as the most prominent
reason for not attending a tertiary educational institution, accounting for precisely 39.6%
of surveyed non-attendants in 2007. Demographically, it is seen that women are more
likely than men to have not received any formal education; in 2007, 7.1% of men
reported themselves as having no formal education, whilst for women this number stood
at 11.3%. Accordingly, there is a great need for funding according to identification of
need by economic demand (economic planning needs such as science and technology)
and supply (population by race and socioeconomic background) factors (Statistics, 2009:
1).

                                      3. THE NSFAS

Jackson (2002: 83 - 84) aimed to answer whether the NSFAS, being the primary means of
governmental investment into tertiary education, effectively fulfilled its objectives of
enabling academically deserving and financially needy students to meet their own and
South Africa's economic development needs, of building a sustainable financial aid
scheme and of impacting on South Africa's racially skewed student profile.
    "Through the National Student Financial Aid Scheme (NSFAS) the South African
government has made a commitment to equity and redress in the tertiary education
system. The NSFAS provides a sustainable financial aid system to academically deserving
and financially needy students to enable them to empower themselves and indirectly
develop South Africa as a nation" (Jackson, 2002: 82). Initially in 1991, the Tertiary
Education Fund of South Africa (TEFSA) was established to aid previously
disadvantaged students. At that point there was no national financial aid scheme and so
the responsibility was on individual institutions to support needy students. The system
however led to a student debt issue with their respective institution. Post 1994, TEFSA
was able to collaborate more closely with government, leading to the establishment of the
NSFAS in 2000, incorporating TEFSA. The scheme has since been upheld by two pillars
of trust: government's commitment to adequate funding (in 2009 being R330 million) and
student's commitment to repay their loans, this being at a rate more affordable than the
bank overdraft rate (Jackson, 2002: 82-85).
    The NSFAS's partnership with the twenty-three tertiary education institutions
nationally (eleven universities, six comprehensive universities and six universities of
technology) is documented annually, each institution being responsible for managing their
students and the respective loans. Exceptional progress by NSFAS has been reported (see
Table 2) not only for student participation rates but also for teacher training bursaries
that ensure the long-term sustainability of the participation rates.
Table 2: NSFAS Progress and Projection


 Indicator                Past                                   Current     Projected
                        2005/         2006/        2007/        2008/        2009/       2010/         2011/
                        2006          2007         2008         2009         2010        2011          2012

 Students assisted       106, 852     108, 416     113, 616       120, 000    130, 000    140, 000     150, 000

 Pass Rate (%)                   74           73           75          75          76            76            77

 Funds recovered (Rm)        329          390          479            501         526            578       608
 Teacher Training
 Bursaries                        0            0     3,842          5, 447      8, 715      9, 240       9, 795

  Source: Department of Education, 2009: 263

    The 2001 publication by the South African National Departments of Education and
Labour indicates South Africa's primary development need as focussed in areas of
science, engineering and technology, with the majority of awards in 2000 and 2001 made
to students in these particular areas (South African Government Information, 2009:1).
    Jackson (2002: 88-93) described the criteria that are accolades for the success to date
of the NSFAS which, amongst other elements, involved
     a. that it is a young scheme based on an extensive body of international literature
          already existing from which policy-makers could learn and record successes and
          failures (see, for example, Johnstone, 1986; Albrecht and Ziderman, 1991;
          Woodhall, 1989 and 1991),
     b. government's political will,
     c. extensive funding,
     d. legislation surrounding the scheme and it's operation,
     e. a macro design,
     f. a positive real rate of interest and
     g. income contingent loan repayments (Jackson, 2002: 88-93).
    The number of South African university attendants is expected to increase from 530,
000 in 2009 to 837, 000 in 2011, accordingly government has allocated an additional R700
million for the expansion. The NSFAS also received a R330 million boost to enhance
disabled learners participation. The 2009-10 budget indicates a 10.8% increase in
government subsidy to higher education to the R15.3 billion level, slightly lower than the
14% annual increase in overall education over the prior three years. NSFAS is hence
expected to support 130, 000 disadvantaged students with the new and existing funding
(Mcgregor, 2009: 1).
    With the rapid growth in student numbers, rates of return are a topical issue within
tertiary education funding. It is held that private returns to the graduate exceed indirect
social returns to society. It is for this reason that South Africa has committed itself to a
loan and bursary scheme instead of a scheme relying solely on grants, being confident of
the employment rates of graduates and their respective above-average earnings. It is
however noted that the contributions of graduates to the overall South African economy
should not be underestimated, leading to the reasoning behind the government
subsidizing up to 40% of student loans when academic performance (minimum of 50%
per year for all subjects) is met.
                                        4. LITERATURE REVIEW
Education, training and experience are three channels of human capital, with education
being primary for most individuals as it increases industry's productivity by adding new
skills and knowledge, producing resources needed to develop new technologies,
businesses, wealth and consequently economic growth (Joint Economic Committee,
2000: 1). Returns to education have been estimated since the mid 1950's, in which there
have been numerous reviews of empirical results across countries and levels of education
with the aim of forming a set pattern or economic theory to guide such investment
according to human capital theory. Thus a brief overview of the latest exponential growth
of techniques, theories and estimates found in the international literature up to 2008 will
be given.
    Internal Rates of Return (IRR) to education are a measure of the profitability of
furthering education (Becker, 1967: 23). Psacharopoulos (1994: 1-18 and 1995: 5-10) and
Heckman, Lochner and Todd (2005: 1) in an overview of a variety of methods of
calculating returns to education found that the most common [of the methods] were the
discount [method] and the Mincerian methods, both of which converged with similar
results holding certain assumptions stable. In a review of the most recent literature
documenting empirical studies (Boarini et. al, 2008) the two methods were combined into
a cost benefit equation and it was concluded that the IRR should be calculated as the
discount rate that equates the benefits from education (estimated from Mincerian
equations) and its costs (Boarini and Strauss, 2007:7). The Mincerian method has its
foundation in econometric estimation of human capital earnings functions based on
individual data (Mincer, 1974: 283-285). The cost benefit equation then provides a
foundation for decisions of furthering education in an economic way.
    Internationally, empirical studies of return literature are numerous. Most prominently
the work of Boarini and Strauss (2007), Boarini et. al (2008), Psacharopoulos (1973, 1994,
1995) and Psacharopoulos and Patrinos (2002 and 2004) investigated the determinants of
investment in education and patterns of return. It was concluded that there had been a
slight increase in rates of return over time due to globalisation of best practices and that
the traditionally proven pattern of decreasing returns by level of education as well as level
of economic development existed. Emphasis has been put on the pattern by educational
level backed by psychological studies that indicate 80% of the human brain development
within the first three years of life, owing focus for childhood development and
educational stimulation at preschool age (Lagman, 2009: 1).
    In South Africa, efforts have been made to estimate returns to education at different
levels across different race and gender variables. Research conducted specifically for
South Africa, mainly by Joubert (1978), Trotter (1984), Archer and Moll (1992) and
Hosking (1990, 1992a, 1992b and 2003), concluded that rates of return increase with the
level of education instead of following the international norm [of decreasing by level of
increased education]. Debate over whether South Africa should follow the international
or locally researched trend is inconclusive. It was noted by Hosking (2003: 100) however,
that internationally investment in higher education does not usually accurately reflect
external or social benefits, which are a large part of the return to tertiary education. In
order to improve the present educational levels of the South African population, much
opportunity remains to continue research on returns to education by level to most
effectively and rapidly guide investment for the individual and society's long-term benefit.
                          5. RESEARCH GOALS AND METHOD
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