Profit provides biggest boost for the poorest

Far from excluding disadvantaged children, allowing commercial companies to run schools could benefit the least well off the most

"Progressive" politicians around the world fall over themselves to reassure their respective publics that they oppose private-sector companies making a profit from running state-funded schools. They are often joined by many in the education community, who consider the introduction of the profit motive to be anathema.

A key argument against the profit motive in education is that it would reduce equity. Commercial interests, it is claimed, would focus primarily on students from high socio-economic backgrounds who are cheaper to teach, thus increasing school segregation and leaving the poor further behind. Instead of producing a tide that lifts all boats, profits would allegedly lift some and sink others, reproducing and increasing existing inequalities in the education system.

But is this really the case? Not necessarily. I believe that it is not, in fact, clear that profit-making organisations have strong incentives to focus on advantaged students - and for a variety of reasons.

More affluent parents already have plenty of choice. They can move closer to good state schools, purchase a private education and, in England at least, push for - or set up - non-profit, state-funded free schools, or in other ways play the game to secure for their child a place in the school of their choice. Poor parents do not have the money to engage in these activities.

It is always the poor who are underserved in a system where choice is constrained to the middle and upper echelons of society. Consequently, it would be natural for commercial education companies to see this underserved segment as a promising untapped market.

Indeed, the empirical evidence lends credence to this argument. In the Swedish voucher system (where parents can put a certificate issued by the government towards tuition at a private school), for-profit free schools tend to enrol more students of similar profiles to those in municipal schools than non-profit free schools.

In fact, at the upper-secondary school level (ages 16-19), there is basically no difference between the municipal and for-profit free school sectors in terms of student composition. Non-profit free schools, on the other hand, tend to enrol more advantaged students in compulsory and upper-secondary education.

We see a similar picture in Chile. While Chilean voucher schools that charge top-up fees tend to enrol students from privileged socio-economic backgrounds, for-profit schools not charging fees enrol more disadvantaged students than municipal and free non-profit schools. In other words, profit-making businesses often move into disadvantaged neighbourhoods, giving parents more choice than they would otherwise have.

Equity is essential

This is important from an equity perspective. International research suggests that larger enrolment shares in publicly funded independent schools reduce the impact of parental background on achievement in Pisa (Programme for International Student Assessment) and Timss (Trends in International Mathematics and Science Study), the two main international surveys. Expanding choice, and enabling poorer children to attend independently operated schools, means that people with privileged backgrounds have less of an unfair advantage.

England already has a vibrant non-profit school sector that has mostly catered to more affluent families, but without bona fide for-profit providers, choice is unlikely to expand sufficiently to where it is most desperately needed.

The same applies to expanding excellence among the good schools that serve disadvantaged students. In order to raise performance across the board in poor communities, it is naturally desirable that the best schools offer their education to more than just a small number of lucky students.

Yet there are few incentives to do so in the non-profit sector. Evidence from Chile, for example, suggests that while there is a relationship between performance and enrolment growth in for-profit schools serving disadvantaged students, there is no such relationship in non-profit schools.

There is nothing wrong with non-profit schools. But for-profit companies have an important role to play if poor children are to be reached on a sufficiently large scale and excellence widely promoted among them.

Of course, other institutional factors are important for the profit motive to have an impact in education. For example, with well-differentiated funding, companies have stronger incentives to target poor students because they are compensated accordingly. Also, planning laws currently make it difficult to build schools, regardless of ownership structure, thus partly strangling the supply-side profit potential. Clearly, the overall system design needs to be coherent for the profit motive to reach its potential as a driver of equity.

A system where proximity is the key determinant of student allocation restricts school choice to parents with means, and decoupling choice from the size of parents' wallets is an attractive alternative to such a system. Indeed, England's recent Conservative-led reforms are partly justified as a lever of choice among students from poorer backgrounds. Yet without profit-making companies, it is unlikely that choice will expand to a degree where all students benefit. While the profit motive is not sufficient for ensuring an equitable education system that raises standards for all, it is an important ingredient in a reform package designed to produce such a system. Under the right circumstances, it is clear that profit can be progressive.

Gabriel H. Sahlgren is director of research with the UK Centre for Market Reform of Education, based at the Institute of Economic Affairs, and author of Incentivising Excellence: school choice and education quality.

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