expected years of schooling while test scores remain constant or vice versa, so it is useful to break down these overall elasticities to illuminate which component is most responsible for gains in LAYS due to increased spending. The elasticity of spending on expected years of schooling was higher (0.04) than the elasticity of increasing resources on improvements in harmonized learning outcomes (0.02). This shows that countries have found it somewhat easier to transform increases in resources into higher educational attainment rates than into better learning outcomes.

**Figure 12: Outcomes Increased by a Greater Amount than Spending in Only 18 Percent of Cases** _a. Country episodes with spending decreases b. Country episodes with spending increases_

<!-- Start of picture text --> 36<br>17<br>7<br>2 5<br>0<br>LAYS improved LAYS LAYS<br>deteriorated less deteriorated LAYS LAYS LAYS<br>than spending more than deteriorated improved less improved more<br>spending than spending than spending<br><!-- End of picture text --> _Source:_ World Bank calculations based on HCI, UIS, and IMF data.

# **_How Do a Country’s Initial Conditions Affect Its Ability to Transform Resources into Outcomes?_**

While intuition suggests that a country’s initial conditions determine the most likely paths for education outcomes, their relationship is not straightforward. First, it depends on which outcome is in question. Transforming resources into wider access has proven to be easier to achieve than improving learning outcomes. Second, starting from a low spending point may result in larger or smaller changes in outcomes depending on how access and learning are determined. If inputs have decreasing returns (that is, the provision of additional inputs has a larger effect on outcomes when existing inputs are low), we would expect that low-spending countries would have larger expected returns. If, on the other hand, it takes a combination of various good-quality inputs to generate learning, and a single input has a very small impact, we would expect low-spending countries to have low returns. As countries spend more and cover more than the most basic needs, we would expect the marginal return to additional resources to decline. Third, the initial level of outcomes is also likely to drive future outcomes, but the effect is also ambiguous. While improving from a lower starting point may seem easier–suggesting that low-income countries should register larger gains in outcomes–existing inefficiencies in a country can also impact results and contribute to poor outcomes. Thus, pouring more resources into a system with inefficiencies may not yield any improvements in outcomes. We explore this question empirically later in this section.

Four approaches are commonly used in the literature to measure the distance between the current level of outcomes and the potential level a country may be able to achieve. This is usually referred to as _efficiency,_ and it is a measure of the ability of countries to transform resources into improved education outcomes.<sup>19</sup> In the first approach, the residuals from an ordinary least squares (OLS) regression of education outcomes

> 19 For a fuller discussion of the advantages and disadvantages of the approaches outlined, see Grigoli (2014), Ravallion (2005), and Wagstaff and Wang (2011).

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