Can’t Touch This! – A Merit-based Reservation Strategy to Social Equity
Ganga Prasad G. Rao
gprasadrao@hotmail.com
gprasadrao.blogspot.com
Look around and it might seem as though the gulf between the Developing world and the Developed world is closing. But look closer and beyond the industrialization and consumerism, often the benchmark for such comparisons, and what do you find? Many, if not most third world societies, are steeped in economic and social inequity that has, due the spread of western capitalism, turned oppressive on the poor and/or historically socially suppressed. To compound it, this oppressed class, a large electoral block, has been the darling of many a political party who have sought, whether from the heart or with an axe to grind, to espouse their cause on way to the corridors of power. Predictably, the politicians thus elected enforced equity by adopting the brute force, heavy-handed means of reversing the wrong – a Quota-based reservation/entitlement system in higher education and jobs. To make matters worse, they chose to limit the quota exclusively to those socially disadvantaged irrespective of income - despite the fact it is a primary, fundamental determinant of educational achievement in a capitalist society - thus excluding the worthy poor belonging to the socially forward classes. The ill-effects of quota have been extensively documented. They deny the deserving, even reverse the incentive to excel in the society, and in the present context, only serve to induce the flight of the intelligentia to a fairer, more just society, often a developed nation, thus robbing the nation of its brighter, and potentially the more influential of its citizens. Between the ‘rather today than the day after’ incentives in politics, and the crocodile tears of the legislators, the quota-based reservation system is turning our society toward mediocrity – a mediocrity magnified by the economic inefficiencies and the irreversible, unjust social paradoxes that it engenders. The big question facing you and me, the thinkers, is whether there is a way out of this double-edged dilemma, how, and when?
Now, I could buttress my proposal with economic rationale, establish the motivation for intervention, then posit a social objective function, and optimize it taking cognizance of the various constraints – political, financial and social, to obtain ‘optimized rules’ that spell out the ‘hows’ of achieving the objective. Instead, I lay out here a modest proposal, if descriptive and tentative. The proposal sets forth a financially-closed, merit-based system of ensuring social equity in educational attainment that fosters justice for students from poor and the suppressed sections of the society while retaining the incentives to excel, and the freedom of choice across the various stakeholders. Consider an academic structure in which universities follow a graduated, strictly merit-based system of admissions to choose between and manage applications for admissions. In this system, applicants are either invited with lumpsum awards on enrolment, accepted without an admission fee, or required to pay a lumpsum (capitation) fee toward admission (as different from annual tuition fees, for which banks provide collateralized educational loans). Anticipating this monetary (dis-) incentive-based admission system, the Government and the Industry - both with equal stakes, if in the long run - contribute toward a pot for both economically and socially disadvantaged students. The Government finances annual, cohort-specific Equal Opportunity pots by issuing an annual series of EO Bonds in the financial markets. The Manager of the EO pot first matches infrastructural investments by the Industry in the education sector, and issues EO units to the target group of students from the residual in the pot. The industry invests in a ‘risk-based’ ZS between, on one hand, sovereign EO bonds of various past cohorts, and on the other, incremental educational infrastructure that anticipate a matching grant from the Government. This apportionment is guided by long-run macro and career/wage trends. In Boom time, when the Government is loath to issue new EO Bonds due the rise in bond yields, the Industry cashes out of equities, and moves partly in to the EO pot for the fixed returns the EO Pot Manager offers. It invests the rest in bargain-priced EO bonds of previous years. In recessions, as Bond prices rise and the Government issues a fresh series of EO Bonds, the Industry moves from EO Bonds in to, on one hand, Educational Infrastructure (with a match from the Government), and on the other, a ‘perpendicular’ set of equities. This financing scheme serves the Government’s cause of supporting equity in education and career. It also constitutes a balanced approach for the Industry to assess future educational demand, if necessary stoke it, and provide for anticipated educational infrastructure.
The decision regarding the magnitude of EO bonds to be issued is determined, if implicitly, with marginal economics. Put succinctly, the Government issues EO bonds until, and at the margin, it perceives the marginal cost of funds raised (the coupon rate on the Bonds) just equal the falling social marginal returns from supporting the disadvantaged. (The Government could also examine the implication of limiting its bond issue to the value of collaterals that underlie the student loan portfolio which it purchases in bulk from banks). Too less an issue of EO bonds and the Industry falls behind in adding to educational infrastructure as does the society in correcting educational and, consequently, career inequity. An excess issue of EO bonds induces a crowding out of investment from other productive sectors of the economy, and affords many in the target group the luxury to drop out before college with potentially a substantial, undeserved hand-out that reduces the cause of education and social upliftment.
The EO Bonds issued by the Government are bought by investors, in particular the Banks and the Industry. The Industry exploits these bonds as a risk-counterweight to infrastructural investments it makes in the education sector. The variations in coupon rates, prices and maturity dates of the various EO bond series, as well as the differences in both the amount of, and interest rates charged on loan portfolios across years, create arbitrage and hedging opportunities necessitated by the dynamics of the financial markets. The ‘cohort/’vintage’-specific’ EO bonds are traded between the Industry and the Banks who both use them as a counter-instrument to engage in interest rate arbitrage trading against the Government which holds and trades, as part of its periodic monetary balancing, various vintages of discounted collateralised student loan portfolios that it leverages to underwrite the EO bonds. These trades reveal the various marginals that inform on the direction of investment, opportunities and anticipated risks in the education sector and the career market. The Government has the option to retire the EO bonds prematurely once their face value is recovered in these arbitrage trades and hedging operations.
Having outlined the financial sub-module of the proposal, we now move to the apportionment of the EO pot. At its core, the proposal involves a one-time crediting of ‘EO units’ to the targeted group from the net assets of the cohort-specific EO pot. The EO units gain in NAV through the school years, and vest with the student upon successful completion of schooling; their value at vesting time is determined by the then prevailing NAV of the cohort-specific EO pot units. To avoid the issue of defining poverty cut-offs arbitrarily, the Government chooses to issue units on an income-based sliding scale that is common across the targeted social classes. Under the sliding scale allotment, students constituting the lower income percentiles of the target group are favoured with more units than students belonging to the higher income percentiles (whose family income equal those of the upper middle class of the society). The matter turns murky when accommodating a hierarchy across the socially suppressed classes (OBC, BC, SC, ST) who do not necessarily conform to correlatory prejudices concerning social status and incomes. One feasible way out of this quicksand involves preferentially favouring the relatively impenured within each suppressed class. Thus, while the largest majority of the poor and socially disadvantaged students gain even otherwise, those extra-ordinarily rich within their social class must achieve a higher ‘within group’ end-of-school performance percentile. Larger the difference between actual and ‘staked’ income, higher the ‘within group’ performance benchmark they must achieve to be endowed in full with the monetized EO units. This relationship, as graphed below, would vary across social classes and over time, thus permitting the policymaker (as opposed to the representatives elected by the majority) fine control over social outcomes. Those socially disadvantaged but rich, who might stake a low income along the sliding scale to obtain more EO units, must achieve a correspondingly high ‘within group performance percentile’, or pay the price with a lesser vesting proportion of their cumulative EO units as appropriate to their academic underperformance. In other words, a rich but socially disadvantaged student, who stakes a low income for the units it affords, must achieve in the higher percentiles of the distribution of scores for his group, else cede EO units in some relation to his ‘within-group’ under-performance. This policy avoids the income stereotyping of suppressed social classes, yet incentivizes academic excellence among the ‘would be’ (wealthy) leaders of the suppressed groups. It also checks any incentive to walk away ‘rich’ with a mere school education.
Students seek admission to various universities and specializations and obtain offers with either a lumpsum enrolment incentive, free admission, or a fee depending on their academic merit relative to the competition for the University and the particular field of study. Crucially, the decision concerning admission is entirely merit-based and non-cognizant of income or social considerations; those academically worthy being welcomed with lumpsum scholarship grants and those less competitive with either a freeship, or, as when a highly sought specialization is sought at a top university, even a lumpsum admission fee. Students evaluate the ‘University-Field of study-Financial (Dis-)Incentive’ offers on hand and choose one consistent with the highest expected future pay-off given their accumulated, vested EO balance at the current NAV. Clearly, their choice could involve exhausting the entire vested EO balance on the highest offer, an academic compromise that enables them to encash a part of their vested balance if by choosing a less popular university and/or field of study, or even dropping out with the entire vested/partly vested balance if the perceived benefits of university education are deemed less attractive compared to the alternatives available to them beyond the academe (Paradoxically, the alternative to drop out after school with the vested, monetized EO unit balance provides a ‘reality check’ on the costs and rewards of education).
The proposal outlined above is simultaneously efficient and equitable. It brings about equity in educational opportunities within and across groups. It provides the largest degree of freedom to the various stakeholders. The inclusion of the financial markets, in particular the closed nature of financing, ensures that the policy is robust and self-contained, and will not spill over to the rest of the financial market. The cross-trades of the EO bonds from various cohorts against the tuition loan portfolios reveal a richer dynamics of the education sector. Further, the use of collateralised tuition loans to back the issue of fresh EO bonds ensures a transfer of ‘information’ from the future ‘downstream’ world of higher education and career ‘upstream’ to the future generation while they are yet students in school. Such advance information permits anticipatory actions, reactions and alleviating strategies that smoothen and align ‘demand’ and ‘supply’ closer to the equilibrium. By avoiding irreversible, inter-generation effects on the student side, and anticipatory shortages in, or pre-empting wasteful large, fixed investments in educational infrastructure, the proposed policy minimizes the inter-temporal costs of achieving an efficient and equitable society with a professionally qualified and educated populace. Just as important, the proposal offers a closed financial solution that provides resources to the needy and suppressed, and financial returns to those who take risks and invest in social causes. It preserves the sanctity of academic and professional world while ensuring that social justice for the poor and suppressed classes is naturally achieved in the pursuit of stakeholder self-interest.
Have the cake………………………..and eat it too!
Ganga Prasad G. Rao
gprasadrao@hotmail.com
gprasadrao.blogspot.com
Look around and it might seem as though the gulf between the Developing world and the Developed world is closing. But look closer and beyond the industrialization and consumerism, often the benchmark for such comparisons, and what do you find? Many, if not most third world societies, are steeped in economic and social inequity that has, due the spread of western capitalism, turned oppressive on the poor and/or historically socially suppressed. To compound it, this oppressed class, a large electoral block, has been the darling of many a political party who have sought, whether from the heart or with an axe to grind, to espouse their cause on way to the corridors of power. Predictably, the politicians thus elected enforced equity by adopting the brute force, heavy-handed means of reversing the wrong – a Quota-based reservation/entitlement system in higher education and jobs. To make matters worse, they chose to limit the quota exclusively to those socially disadvantaged irrespective of income - despite the fact it is a primary, fundamental determinant of educational achievement in a capitalist society - thus excluding the worthy poor belonging to the socially forward classes. The ill-effects of quota have been extensively documented. They deny the deserving, even reverse the incentive to excel in the society, and in the present context, only serve to induce the flight of the intelligentia to a fairer, more just society, often a developed nation, thus robbing the nation of its brighter, and potentially the more influential of its citizens. Between the ‘rather today than the day after’ incentives in politics, and the crocodile tears of the legislators, the quota-based reservation system is turning our society toward mediocrity – a mediocrity magnified by the economic inefficiencies and the irreversible, unjust social paradoxes that it engenders. The big question facing you and me, the thinkers, is whether there is a way out of this double-edged dilemma, how, and when?
Now, I could buttress my proposal with economic rationale, establish the motivation for intervention, then posit a social objective function, and optimize it taking cognizance of the various constraints – political, financial and social, to obtain ‘optimized rules’ that spell out the ‘hows’ of achieving the objective. Instead, I lay out here a modest proposal, if descriptive and tentative. The proposal sets forth a financially-closed, merit-based system of ensuring social equity in educational attainment that fosters justice for students from poor and the suppressed sections of the society while retaining the incentives to excel, and the freedom of choice across the various stakeholders. Consider an academic structure in which universities follow a graduated, strictly merit-based system of admissions to choose between and manage applications for admissions. In this system, applicants are either invited with lumpsum awards on enrolment, accepted without an admission fee, or required to pay a lumpsum (capitation) fee toward admission (as different from annual tuition fees, for which banks provide collateralized educational loans). Anticipating this monetary (dis-) incentive-based admission system, the Government and the Industry - both with equal stakes, if in the long run - contribute toward a pot for both economically and socially disadvantaged students. The Government finances annual, cohort-specific Equal Opportunity pots by issuing an annual series of EO Bonds in the financial markets. The Manager of the EO pot first matches infrastructural investments by the Industry in the education sector, and issues EO units to the target group of students from the residual in the pot. The industry invests in a ‘risk-based’ ZS between, on one hand, sovereign EO bonds of various past cohorts, and on the other, incremental educational infrastructure that anticipate a matching grant from the Government. This apportionment is guided by long-run macro and career/wage trends. In Boom time, when the Government is loath to issue new EO Bonds due the rise in bond yields, the Industry cashes out of equities, and moves partly in to the EO pot for the fixed returns the EO Pot Manager offers. It invests the rest in bargain-priced EO bonds of previous years. In recessions, as Bond prices rise and the Government issues a fresh series of EO Bonds, the Industry moves from EO Bonds in to, on one hand, Educational Infrastructure (with a match from the Government), and on the other, a ‘perpendicular’ set of equities. This financing scheme serves the Government’s cause of supporting equity in education and career. It also constitutes a balanced approach for the Industry to assess future educational demand, if necessary stoke it, and provide for anticipated educational infrastructure.
The decision regarding the magnitude of EO bonds to be issued is determined, if implicitly, with marginal economics. Put succinctly, the Government issues EO bonds until, and at the margin, it perceives the marginal cost of funds raised (the coupon rate on the Bonds) just equal the falling social marginal returns from supporting the disadvantaged. (The Government could also examine the implication of limiting its bond issue to the value of collaterals that underlie the student loan portfolio which it purchases in bulk from banks). Too less an issue of EO bonds and the Industry falls behind in adding to educational infrastructure as does the society in correcting educational and, consequently, career inequity. An excess issue of EO bonds induces a crowding out of investment from other productive sectors of the economy, and affords many in the target group the luxury to drop out before college with potentially a substantial, undeserved hand-out that reduces the cause of education and social upliftment.
The EO Bonds issued by the Government are bought by investors, in particular the Banks and the Industry. The Industry exploits these bonds as a risk-counterweight to infrastructural investments it makes in the education sector. The variations in coupon rates, prices and maturity dates of the various EO bond series, as well as the differences in both the amount of, and interest rates charged on loan portfolios across years, create arbitrage and hedging opportunities necessitated by the dynamics of the financial markets. The ‘cohort/’vintage’-specific’ EO bonds are traded between the Industry and the Banks who both use them as a counter-instrument to engage in interest rate arbitrage trading against the Government which holds and trades, as part of its periodic monetary balancing, various vintages of discounted collateralised student loan portfolios that it leverages to underwrite the EO bonds. These trades reveal the various marginals that inform on the direction of investment, opportunities and anticipated risks in the education sector and the career market. The Government has the option to retire the EO bonds prematurely once their face value is recovered in these arbitrage trades and hedging operations.
Having outlined the financial sub-module of the proposal, we now move to the apportionment of the EO pot. At its core, the proposal involves a one-time crediting of ‘EO units’ to the targeted group from the net assets of the cohort-specific EO pot. The EO units gain in NAV through the school years, and vest with the student upon successful completion of schooling; their value at vesting time is determined by the then prevailing NAV of the cohort-specific EO pot units. To avoid the issue of defining poverty cut-offs arbitrarily, the Government chooses to issue units on an income-based sliding scale that is common across the targeted social classes. Under the sliding scale allotment, students constituting the lower income percentiles of the target group are favoured with more units than students belonging to the higher income percentiles (whose family income equal those of the upper middle class of the society). The matter turns murky when accommodating a hierarchy across the socially suppressed classes (OBC, BC, SC, ST) who do not necessarily conform to correlatory prejudices concerning social status and incomes. One feasible way out of this quicksand involves preferentially favouring the relatively impenured within each suppressed class. Thus, while the largest majority of the poor and socially disadvantaged students gain even otherwise, those extra-ordinarily rich within their social class must achieve a higher ‘within group’ end-of-school performance percentile. Larger the difference between actual and ‘staked’ income, higher the ‘within group’ performance benchmark they must achieve to be endowed in full with the monetized EO units. This relationship, as graphed below, would vary across social classes and over time, thus permitting the policymaker (as opposed to the representatives elected by the majority) fine control over social outcomes. Those socially disadvantaged but rich, who might stake a low income along the sliding scale to obtain more EO units, must achieve a correspondingly high ‘within group performance percentile’, or pay the price with a lesser vesting proportion of their cumulative EO units as appropriate to their academic underperformance. In other words, a rich but socially disadvantaged student, who stakes a low income for the units it affords, must achieve in the higher percentiles of the distribution of scores for his group, else cede EO units in some relation to his ‘within-group’ under-performance. This policy avoids the income stereotyping of suppressed social classes, yet incentivizes academic excellence among the ‘would be’ (wealthy) leaders of the suppressed groups. It also checks any incentive to walk away ‘rich’ with a mere school education.
Students seek admission to various universities and specializations and obtain offers with either a lumpsum enrolment incentive, free admission, or a fee depending on their academic merit relative to the competition for the University and the particular field of study. Crucially, the decision concerning admission is entirely merit-based and non-cognizant of income or social considerations; those academically worthy being welcomed with lumpsum scholarship grants and those less competitive with either a freeship, or, as when a highly sought specialization is sought at a top university, even a lumpsum admission fee. Students evaluate the ‘University-Field of study-Financial (Dis-)Incentive’ offers on hand and choose one consistent with the highest expected future pay-off given their accumulated, vested EO balance at the current NAV. Clearly, their choice could involve exhausting the entire vested EO balance on the highest offer, an academic compromise that enables them to encash a part of their vested balance if by choosing a less popular university and/or field of study, or even dropping out with the entire vested/partly vested balance if the perceived benefits of university education are deemed less attractive compared to the alternatives available to them beyond the academe (Paradoxically, the alternative to drop out after school with the vested, monetized EO unit balance provides a ‘reality check’ on the costs and rewards of education).
The proposal outlined above is simultaneously efficient and equitable. It brings about equity in educational opportunities within and across groups. It provides the largest degree of freedom to the various stakeholders. The inclusion of the financial markets, in particular the closed nature of financing, ensures that the policy is robust and self-contained, and will not spill over to the rest of the financial market. The cross-trades of the EO bonds from various cohorts against the tuition loan portfolios reveal a richer dynamics of the education sector. Further, the use of collateralised tuition loans to back the issue of fresh EO bonds ensures a transfer of ‘information’ from the future ‘downstream’ world of higher education and career ‘upstream’ to the future generation while they are yet students in school. Such advance information permits anticipatory actions, reactions and alleviating strategies that smoothen and align ‘demand’ and ‘supply’ closer to the equilibrium. By avoiding irreversible, inter-generation effects on the student side, and anticipatory shortages in, or pre-empting wasteful large, fixed investments in educational infrastructure, the proposed policy minimizes the inter-temporal costs of achieving an efficient and equitable society with a professionally qualified and educated populace. Just as important, the proposal offers a closed financial solution that provides resources to the needy and suppressed, and financial returns to those who take risks and invest in social causes. It preserves the sanctity of academic and professional world while ensuring that social justice for the poor and suppressed classes is naturally achieved in the pursuit of stakeholder self-interest.
Have the cake………………………..and eat it too!
