External efficiency is the private and social benefits derived from investment in education. Typically, these are measured by private and social economic rates of return. Such studies have been conducted in many countries since the 1960s. Studies by the World Bank and others consistently find that the rate of returns to primary education is highest followed by returns to secondary education and lowest return to higher education in many developing countries. The rate of return on education in many countries and especially in Developing Countries are quite high compared to returns to other types of investment. One can therefore argue that expenditure on education is a good investment. Economic returns to education are important indicators of external efficiency of education. However, in a rapidly changing world future investments and allocation between different sub-sectors of education cannot exclusively rely on returns on past investment. In times of structural changes in the economy and the policy environment these returns can change significantly. G. Psachporoulos and H.A. Patrinos in a recent update on returns to education acknowledge that “Not only has the academic literature on returns to schooling increased, as is evidenced here, both in quantity and quality, but the policy implications have changed, too. No longer are returns to education seen as prescriptive, but rather as indicators, suggesting areas of concentration”.
Reference: Returns to Investment in Education: A Further Update, George Psacharopoulos and Harry Anthony Patrinos, POLICY RESEARCH WORKING PAPER 2 8 8 1, 2002, The World Bank.
