Education finance and decentralization in Chile

1. Education finance and decentralization in Chile Pablo González, University of Chile Conference on Education finance and decentralization, Washington D.C., January 13-14, 2005

2. 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

3. 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

4. The financial and administrative reforms under military rule

5. 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)

6. 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

7. 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

8. 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

9. 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?

10. 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

11. 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 psychological costs of changing

12. 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)

13. Education finance and regulation priorities under democracy

14. 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)

15. 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?

16. 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”

17. …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?

18. 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

19. Rural correction table

20. 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

21. 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?

22. 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)

23. Discount and scholarship table

24. Key figures regarding the actual situation

26. 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

28. National standardized test results (SIMCE), fourth grade Source: Ministry of education. Note: a/ Before 1998 scores represent percentage of success. From then onwards scores are normalized around 250.

29. Average score in TIMSS Mathematics 1999

30. Bad results have been bad for a long time…

31. Social mixture? Source: González, Mizala & Romaguera, 2004.

32. 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

33. The challenges ahead

34. 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?

35. 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

36. …Quality • Dubious cost-effectiveness of more important investments : • Teacher salaries • Full school day reform • Improvisation of important government decisions. Need for evidence-based policy.

37. 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

38. 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?