An estimation model for private rate of return on education in high income petroleum based developing countries: The case of Kuwait

Abstract

The benefits of a good education are numerous; it not only offers knowledge and power to individuals, but also enables them to lead the life they wish to; and to benefit both their own family and country. Education has a positive impact on the development of a country. An educated society can eradicate poverty, illiteracy and unemployment, and help in the improvement of the health care standards, the political structures, and the national productivity. The contribution of education in this development process is evident and easily recognized. Many studies show that investments in education generate benefits for people (private benefits) and society (social benefits), similar to those of the physical capital investments. Due to the important role that education plays in the development of human capital, in order to conduct the process of development in developing countries, to achieve their growth aims, significant attention should be placed on studying human capital investment accumulation through the means of the rate of return on education (RORE). So far, numerous economists and researchers have attempted to estimate the RORE for the purpose of observing the efficiency of educational spending and resource allocation (see Psacharopoulos, 1973, 1980, 1985, 1994, 2002, and 2004), in order to be able to analyse the output of the educational process on the economy. The estimation of the rate of return on education (RORE) can help in describing different phenomena, such as the following: employees of the public sector benefiting greatly from higher earnings as compared to the employees of the private sector working in the same capacity; the observed difference in the attendance between males and females to complete their education; the large demand for 'easy-discipline', 'aversion‘ (sub) specialties and the high rate of dropouts from school by males. The research problem of this thesis is that there has been a lack of information regarding estimating the RORE in high income petroleum-based developing countries, such as Kuwait, as most of the existing research has not accurately differentiated between low and high income developing nations. The aim of this research is to clarify the influencing variables and factors affecting the investment on education and their relationships by identifying these factors. This study endeavours to develop a framework based on the RORE model and to verify it by estimating the rate of return in high-income petroleum based economies in developing countries, and in this context, data is acquired from Kuwait to verify it, as a case study. The results of the employed regression model show positive and economically significant parameters for return on education and a negative return for extra years of experience. The estimated rate of return for females is relatively higher than males. The average estimated rate of return to education is 5.2%; with the estimated return for females being 6.7%; and for males 5.5%. On the other hand, by expanding the model to include the 'level of education‘ terms, the results show the highest return for primary education and lowest for intermediate and diploma education. Results indicate also that the highest rates of return on education for females occur in high school, whereas for males in bachelor-level higher education.