156 | The Role of Intergovernmental Fiscal Transfers in Improving Education Outcomes
general, and Lewis (2013) has shown that DAK does indeed have a strong positive effect on capital spending in the education sector. It is also plausible that DAK negatively affects routine spending as districts shift any additional fiscal resources to support DAK-financed capital projects. If this is true, then DAK’s positive impact on capital spending might be cancelled out by its negative effect on routine spending, thus voiding its net effect on aggregate spending. Lewis (2014b) provided some evidence to suggest that the DAK may crowd-in additional capital spending at least under certain circumstances, which supports this argument. A final issue of concern regarding DAK transfers is that the magnitude of annual allocations is quite volatile across districts, creating challenges in planning and completing capital projects in education and other sectors. This may also help explain the weak effects of DAK on spending. The relationship between district spending and education outcomes is examined next. Figure 6.14 illustrates the association between district total and education spending and education access, as measured by net enrollment rates, and education quality, as proxied by national test scores. The figure shows no clear relationship between district spending and education outcomes. But simple scatterplots do not account for several important aspects of the relationship between spending and education outcomes. First, they do not accommodate the likelihood that education outcomes in one period depend on outcomes in the previous period. Second, they do not account for the possible
FIGURE 6.14
District spending and education outcomes
Source: World Bank calculations based on data from Ministry of Finance.
