THE EFFECT OF EDUCATION ON POVERTY IN KOSOVO AND ALBANIA

Despite the positive economic growth over the last decade, poverty in Kosovo and Albania remains one of the highest in Europe. Both countries have experienced large migration flows which, together with remittances, seem to have been an effective mechanism for mitigating poverty, which would otherwise be even higher. This thesis investigates the determinants of poverty with a specific focus on the effect of education on poverty in Kosovo and Albania using data from the Kosovar Household Budget Survey 2011 and the Albanian Living Standard Measurement Survey 2012.
The review of studies suggests that there is no single unified theory of poverty. Moreover, there is no underpinning study that would fully inform the modelling approaches in this thesis. The economic theory of consumer behavior, duality theory as well as unitary approach provide the theoretical basis for measurement of household welfare. On the other hand, several theories and studies have been concerned with structural relations that affect poverty. According to human capital theory, education leads to increased income and thus decreases the risk of poverty. Literature also highlights the importance of migration, remittances and fertility in relation to poverty but also emphasizes the importance of education with regards to remittances and fertility. A key contribution of this thesis is
that, it attempts to put all these theories and approaches together to inform the models to be estimated in this thesis. Ordinary Least Squares and Probit estimation techniques are used to model consumption and poverty while quantile regression is used to gain further insights into how the determinants of household welfare change across the welfare distribution. Some of the factors which influence household poverty are expected to be endogenously related to poverty. In this thesis, this issue is addressed by controlling for the effect of the endogenous variables using pre-determined and exogenous indicators. One of the most important factors affecting household welfare is education.
Indicators such as the highest level of education in the household, share of adult members with respective education attainments, and mean years of education of adults are considered in the estimation, in addition to education of the household head (a commonly used education indicator), as they tend to better reflect the impact of education on household poverty.
Considering theoretical and empirical literature on migration, fertility and poverty, it seems
appropriate to expect that poverty, remittances and fertility are simultaneously determined; estimating each of the relationships separately would therefore not be appropriate. Hence, another important contribution of this thesis is that it models the three factors within a simultaneous equations system and thus explores the impact of education on poverty via different channels at the same time. For this purpose, Three-stage Least Squares (3SLS) estimation technique is utilized. An advantage of the 3SLS approach is that endogenous variables are allowed to appear on the right-hand side of the equations.
Findings are largely in accordance with theoretical expectations; education is found to be related to increased consumption and reduced poverty in both Kosovo and Albania, and the effect is higher for higher levels of education attained. The Quantile regression results indicate that the positive effect of increased levels of education on consumption is highest for the poorest households in Kosovo, while the same applies to the richest households in Albania. The results also underline the importance of migration and fertility in terms of household welfare in Kosovo and Albania. The 3SLS estimation results confirm our expectations regarding the joint determination of poverty, fertility and remittances.
Due to some limitations of the Kosovar dataset however, this analysis is performed using the
Albanian dataset only.