Tuition Subsidies in a Model of Economic Growth

IMF Working Papers, September 1, 1994

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This paper examines a two-sector aggregative growth model with human capital and educated unemployment.
In the model, a tuition subsidy may lead to a long-run decline in the educated fraction of the population because it may decrease the long-run per capita stock of physical capital in the economy.
A lower per capita stock of physical capital tends to reduce the output of the education sector and the incentives for workers to enroll in school.
The paper suggests that cuts in education subsidies undertaken by countries in Africa for adjustment reasons may actually lead to long-run increases in the educational attainment of their populations.

Framework: two-sector aggregative growth model with human capital and educated unemployment.
Mechanism demonstrated:
- Tuition subsidy → decrease in long-run per capita stock of physical capital.
- Lower per capita physical capital → reduced output of the education sector.
- Reduced output of the education sector → lower incentives to enroll in school → potential long-run decline in the educated fraction of the population.

Education subsidy cuts for adjustment reasons in African countries may, according to the model, produce counterintuitive outcomes:
- Such cuts may lead to long-run increases in educational attainment.
Policy design should account for general-equilibrium effects of subsidies on physical capital accumulation and education-sector output.