I S: U Xxi: J BGT

INTERNATIONAL SEMINAR: UNIVERSITY XXI
Brasilia, Brazil (25-27 November 2003)
HIGHER EDUCATION AND DEVELOPMENT

JANDHYALA B G TILAK
National Institute of Educational Planning and Administration 17B Sri Aurobindo Marg, New Delhi 110016 E-mail: jtilak@vsnl.com
Abstract
Higher education systems in many developing as well as developed counties are characterised with a crisis, rather a continuing crisis, with overcrowding, inadequate staffing, deteriorating standards and quality, poor physical facilities, insufficient equipment, and declining public budgets. More importantly, higher education is subject to neglect and even discrimination in public policy. The World Bank policies that discouraged investment in higher education for a long period, the improper use of estimates of rates of return, and excessive and rather exclusive emphasis on Education For All (EFA) in the recent years, and the adverse economic conditions in many developing countries, following structural adjustment policies, are some of the reasons for the neglect of higher education. The neglect also followed a general presumption supported by thin empirical evidence that higher education has no significant effect on economic growth, equity, poverty reduction and social indicators of development in developing countries. Such a view contributed very significantly to the neglect of higher education by the international organisations and by the developing countries themselves. First, based on the evidence on Asia and the Pacific countries, the paper quickly reviews the level of development of higher education, and then critically examines some of the widely held presumptions on the relationship between higher education and development, including human development and reports significant effects of higher education on development. Accordingly the paper pleads for according high priority for higher education. It shows that that no nation that has not expanded reasonably well its higher education system could aspire to achieve high level of socioeconomic transformation. Secondly, the paper looks at the public policies on financing higher education. The neo-liberal economists and the economists believing in welfare state philosophy constitute two distinct schools of thought on issues relating to financing and cot recovery in education. It is attempted to examine the arguments of these two schools of thought. Specifically it looks at the several approaches of costs recovery in higher education, and discusses the pros and cons of the several approaches, including their effects on equity and efficiency and reviews the experience of several developing countries in this regard.
Jandhyala Tilak: Higher Education and Development
Thirdly, the paper also reviews world experience with privatisation of higher education, and explodes some of the myths about private higher education. The paper argues that State has an important role in policy making, planning, providing and financing higher education, and any deviation from this responsibility may be counter productive for the development of higher education. It underlines the need for increased public financing of higher education and warns against excessive reliance on cost recovery measures and privatisation of higher education.
Higher Education and Development* Jandhyala B G Tilak
1. Introduction Higher education is an important form of investment in human capital development. In fact, it can be regarded as a high level or a specialised form of human capital, contribution of which to economic growth is very significant. It is rightly regarded as the engine of development in the new world economy (Castells, 1994, p.14). The contribution of higher education to development can be varied: it helps in the rapid industrialization of the economy, by providing manpower with professional, technical and managerial skills. In the present context of transformation of nations into knowledge economies and knowledge societies, higher education provides not just educated workers, but knowledge workers to the growth of the economy. It creates attitudes, and makes possible attitudinal changes necessary for the socialisation of the individuals and the modernisation and overall transformation of the societies. Fourthly and most importantly, higher education helps, through teaching and research in the creation, absorption and dissemination of knowledge. Higher education also helps in the formation of a strong nation-state and at the same time helps in globalisation. Lastly, higher education allows people to enjoy an enhanced life of mind offering the wider society both cultural and political benefits (TFHES, 2000, p. 37). Developing as well as developed economies have long recognised the importance of higher education in development. The human investment revolution in economic thought initiated by Theodore Schultz (1961) added further boost to the efforts of the developing economies during the post-War period. As Patel (1985) notes, there was an educational miracle occurred in the third world countries. In most developing countries there has been a rapid growth in education development in the number of schools and colleges and enrolments of students. Higher education also expanded fast in many countries during the post-war period. 2. Higher Education and Development Higher Education and Economic Growth What is the effect of the higher education on economic growth of the countries? There is a general presumption that higher education is not necessary for economic growth and development, particularly in developing countries. On the other hand, it is argued that it is literacy and primary education that are important. Estimates on internal rate of return also contributed to strengthening of such a
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presumption. Conventionally the contribution of education to economic development is analysed in terms of education-earnings relationships and more conveniently in the form of rates of return. Rates of return are a summary statistic of the relationship between lifetime earnings and the costs of education. Available estimates on rates of return show that the social rates of return to investment in primary education are the highest, followed by secondary education. The returns to higher education are the least. This pattern is more or less true in general with respect to private rates of return also. Such evidence is extensively used to discourage public investment in higher education and to concentrate rather exclusively on primary education. Though the rate of return to higher education is less than that to primary education, it should nevertheless be noted that higher education does yield an attractive rate of return to the society (above 10 per cent) and to the individual as well (19 per cent), as shown in Table 1.
Table 1
Returns to Higher Education (%) Social Asia* 11.0 Europe/Middle East/North Africa* 9.9 Latin America/Caribbean 12.3 OECD 8.5 Sub-Saharan Africa 11.3 World average 10.3 *non-OECD Source: Psacharopoulos and Patrinos (2002)
Private 18.2 18.8 19.5 11.6 27.8 19.0
The estimates in Table 1 are regional averages. There are wide variations in the rates of return between several countries. But on the whole, they show that (a) investment in higher education yields positive rates of return to the individual and also to the society at large; (b) in several countries social rates of return are high, above ten per cent, which can be considered as an alternative rate of return; and (c) rates of return seem to be increasing over the years in some countries. Generally, declining rates of return over time are often expected; but this is not necessarily the case in all countries. E.g., in some of the Asian countries, the rate of return is increasing. This may be due to rapid increase in the demand for higher educated manpower. Contribution of higher education to economic development can also be measured better with the help of production function or even a simple regression equation. The gross enrolment ratio, a flow variable, which is the most commonly used indicator of education development, reflecting the current level of efforts of the countries for the development of higher education, shows very unequal development of higher education between the several countries of the region. The ratio ranges between one per cent and nearly 70 per cent in Asia-Pacific countries.
Jandhyala Tilak: Higher Education and Development Table 2 Gross Enrolment Ratio in Higher Education in Asia and the Pacific Latest Year in the 1990s Gross Enrolment Ratio (%) <5 6-10 11-20 21-30 31-50 >50 Afghanistan China Armenia Hong Kong Georgia Korea Bangladesh India Azerbaijan Cyprus Israel Australia Brunei Oman Bahrain Lebanon Japan New Zealand Cambodia Indonesia Macao Kazakhstan Lao Iran Philippines Singapore Maldives Kuwait Qatar Uzbekistan Myanmar Kyrgystan Thailand Nepal Malaysia Turkey Pakistan Mongolia Turkmenistan Sri Lanka Saudi Arabia Viet Nam Syria Yemen Tajikistan PNG UAE Samoa Fiji
Source: Based on Unesco (1999).
Higher education has expanded well in the East Asian tiger economies and a few Central and West Asian countries, the gross enrolment ratio being comparable to that in some of the developed countries. The gross enrolment ratio in Korea, Singapore, Hong Kong, Thailand, Australia and New Zealand is above twenty per cent. Countries like Indonesia and Malaysia are rapidly expanding their system, but still the enrolment ratios are only around ten per cent. By contrast, all countries in South Asia and also those in Southeast Asia like Cambodia and Viet Nam have very low enrolment ratios. Viet Nam and Myanmar have had universal primary education for a long time. Even in the 1980s the gross enrolment ratios in primary education were above 100 per cent. They also have high literacy rates among adults (above 80 per cent). Yet they could not progress. Similarly, though Sri Lanka could attain a high level of performance in school education, economically it is still poor. This may be because Sri Lanka and these other countries have not paid adequate attention to higher education. For example, in Sri Lanka higher education is extremely restricted and secondary school graduates have to wait for 2-3 years in a queue for admission in higher education. Higher professional and technical education is much more restricted (see Tilak, 1996). All this suggests that primary education is not enough for economic development. It
does not provide the wherewithal necessary for economic growth. On the other hand, it is clear that higher education is critically important for economic growth. As earlier research (e.g., Tilak, 1989) has shown, gross enrolment ratios in education (GER) can be expected to have a positive effect on the level of economic development. In the production functions, time lag is also allowed, which yielded meaningful results. Here, using the data on 49 countries of the Asia Pacific region,1 GDP per capita in 1999 is regressed on enrolment ratio around 1990.
Table 3 Regression Estimates of Higher Education on Economic Development in Asia Dependent Variable: ln GDP/pc Eqn. Higher Adjusted RDegrees of F-value Education Intercept Coefficient R-Square Square Freedom Variable 1 2 GER HEA 3.3904 3.3943 0.0162 (4.005) 0.0195 (3.917) 0.2628 0.3911 0.2464 0.3469 16.038 15.343 46 28
Note: Figures in parentheses are t-values All coefficients are statistically significant at 99 per cent level of confidence. Notation: GDP/pc: Gross Domestic Product per capita (PPP 1999) GER: Gross Enrolment Ratio (per cent) around 1990 HEA: Higher Education Attainment (Proportion of population with higher education) (latest: 1990s)
We note that the regression coefficient is positive and statistically significant at one per cent level (Equation 1 in Table 3), indicating a significant effect of higher education on economic growth of the nations.
Table 4 Higher Education Attainment in Asia Pacific (% of Adult (25+ Age-Group) Population having Post-Secondary Education (Latest available in 2001/02) New Zealand 39.1 Israel 11.2 Iraq Mongolia 23.4 Turkey 10.8 Viet Nam Philippines 22.0 Bahrain 10.3 Pakistan Korea 21.1 Brunei Darussalam 9.4 Indonesia Japan 20.7 Singapore 7.6 Myanmar Taiwan 17.8 India 7.3 Maldives Cyprus 17.0 Malaysia 6.9 Afghanistan Kuwait 16.4 Macao 5.9 Bangladesh Hong Kong, China 14.5 Solomon Islands 5.6 Sri Lanka Qatar 13.3 Thailand 5.1 China Kazakhstan 12.4 Fiji 4.5 Cambodia Tajikistan 11.7 Nepal
Source: Unesco (1999).
4.1 2.6 2.5 2.3 2.0 1.7 1.6 1.3 1.1 1.0 1.0 0.6
All the countries in the Asia Pacific region are considered on which required data are available. Data are largely collected from Unesco (1999), UNDP (2001), and World Bank (2000). 6
The stock of adult population with higher levels of education (HEA) is an important indicator of the level of development of higher education. This stock indicator represents the cumulative efforts of a country in the development of higher education over the years.
Figure 1
Higher Education Attaiment in Asia & the Pacific, 1990s

Nepal Cambodia China Sri Lanka Bangladesh Afghanistan Maldives Myanmar Indonesia Pakistan Viet Nam Iraq Fiji T hailand Solomon Islands Macau Malaysia India Singapore Brunei Darussalam Bahrain T urkey Israel T ajikstan Kazakastan Qatar Hong Kong, China Kuwait Cyprus T aiwan Japan Korea Philippines Mongolia New Zealand
(% of Adult (25+) Population with higher Education
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20
30
40
50
Table 4 presents the higher education attainment ratios (HEA) for countries in the Asia-Pacific region where this information is available. In Nepal only 0.6 per cent of the adult (25+ age group) population have higher education; the corresponding ratio is more than 30 times higher in Japan, Korea and Philippines and 60 times higher in New Zealand. While Nepal and Cambodia figure at the bottom of the list of the countries in the region with respect to this indicator, in several developing countries of the region, the corresponding figure is less than five per cent; only in a few countries it is more than ten per cent (Figure 1). In contrast, in the USA nearly half the adult population has higher education! This attribute is also expected to have a stronger effect on development, as the population group considered here forms a part of the labour force; it indeed forms an important and even a large part of the skilled and educated labour force. The larger the stock of population with higher education, higher could be the economic growth.2 Equation 2 in Table 3 gives the corresponding results -- the regression estimates for the relationship between higher education attainment and GDP per capita. As expected, this gives a better result, with a higher coefficient of determination, and the variable has a
Instead of proportion of population, proportion of labour force with higher education could be expected to be more strongly related to economic growth. But such data are available for a tiny number of countries in Asia Pacific. 7
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higher effect, as the value of the coefficient suggests. Both the equations make it clear that higher education makes a significant and positive contribution to economic growth. Hence, it may not be proper to assume that its role is insignificant. It may be argued that simple regression equations of economic development on education suggest only correlation between the two, and not necessarily cause and effect relationship. Such an argument is partly pre-empted here, by allowing a time lag for higher education to cause economic development. Secondly, we also find very few countries with high levels of higher education being economically underdeveloped, while all the economically rich countries have not necessarily advanced in the development and spread of higher education. In the rapidly technologically changing world, technology makes a significant difference to the economic growth of the nations. UNDP (2001) developed a technology achievement index (TAI), based on the degree of creation of technology in a given economy, the extent of diffusion of old and recent innovations, and human skills. The level of achievement in technology critically depends upon the level of higher education in a given economy. After all, it is higher education and research that help in developing new technology; and it is higher education and research that contributes to innovations and in their diffusion. So one can expect a very strong effect of higher education on the development of technology in any society. In fact, the level of achievement in technology may be a close indicator of economic growth itself. Most countries with high enrolment ratios in higher education became leaders in technology, with high levels of achievement in technology, as shown in Table 5. The converse is also true: a large number of countries with low enrolment ratios (say less than ten per cent) are marginalized in the area of technology. Those with medium level of enrolment ratios, nearly 20 per cent, like Singapore and Hong Kong have indeed become potential leaders in technology.
Table 5 Higher Education (GER) and Technology (TAI)
Technology Achievement Index High Medium Low (>0.5) (0.4-0.5) (<0.4) New Zealand, Korea, Philippines High (>20) Australia, Israel, Japan Thailand, Cyprus, Medium (11-20) Singapore Hong Kong Syria Iran, Indonesia, Malaysia, India, Sri Low (<10) Lanka, Nepal, China, Pakistan Source: Based on UNDP (2001) and Unseco (1999). Gross Enrolment Ratio
A few countries like Philippines and Thailand with medium and high levels of enrolment ratios are classified by the UNDP (2001) as dynamic leaders. The rest who did not expand their higher education systems well, are indeed marginalized. We find not even a single country with a low enrolment ratio (less than ten per cent)
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in higher education to have achieved high or medium level of achievement in the technology index.
Table 6 Regression Estimates of Higher Education on Achievement of Technology in Asia Dependent Variable: ln Technology Achievement Index (TAI) Eqn. Higher Education Adjusted RDegrees of Intercept Coefficient R-Square F-value Variable Square Freedom 1 GER -0.7405 0.0143 0.570 0.545 22.552 17 (4.749) 2 HEA -0.6535 0.400 0.357 9.335 15 0.0152(3.055)
Note: Figures in parentheses are t-values
0.8
Technology Achievement Index
Figure 2 GER in Higher Education and Achievment in Technology (with a logarithmic trend line)
0.4
0.0 0 20 Gross Enrolment Raio 40
The relationship between higher education and technology could be shown statistically as well. The simple coefficient of correlation between enrolment ratio in higher education and technology achievement index in the Asia and the Pacific countries is as high as 0.8 and that between technology and higher education attainment it is 0.65. Though the number of observations is small, the simple regression equations estimated here (Table 6) and the trend line shown in Figure 3 do show a very strong and statistically significant effect of higher education on the level of achievement of technology. Higher Education and Social Development The above rates of return and regression coefficients do not capture several non-economic benefits of higher education. Most studies on the relationship between education and development indicators, such as human development, health, life expectancy, mortality rate, poverty, etc., concentrated on literacy and school education. Rarely has the role of higher education been examined in this context,
probably on the presumption that higher education does not have any role in this. Such an assumption is widespread. In order to present a brief idea of the relationship between higher education and a variety of aspects of well being, simple coefficients of correlation are estimated (Table 7). All coefficients of correlation between higher education and development indicators in the Asian countries have expected signs whether it is in relation to gross enrolment ratio (GER) or in relation to higher education attainment (HEA).
Table 7 Coefficients of Correlation between Higher Education and Social Development Indicators GER (around HEA (Latest Between n 1990) [54] year) [34] And Human Development Index (1999) 49 0.60309 0.55183 Gender Development Index 42 0.63454 0.55238 Gender Empowerment Index 11 0.60562 0.65397 Life Expectancy 54 0.52611 0.54091 Infant Mortality Rate 50 -0.46108 -0.46099 Total Fertility Rate 54 -0.56698 -0.47447 Poverty (International) 15 -0.56614* -0.29956+
Note: Figures in [ ] refer to number of valid countries for which data are available; N: number of observations; r: coefficient of correlation Poverty (International): % of population below the line of income poverty of $1) * statistically significant at 5% level; + not significant even at 10% level; all others are significant at 1% level.
Second, most coefficients are also statistically significant with high t-values. An exception is the coefficient between higher education attainment and poverty. All the other coefficients are significant at 99 per cent level of confidence; except the coefficients relating to gender empowerment index and poverty, which are significant at 95 per cent level of significance,3 indicating that higher education is also positively related to several human development indicators, in addition to economic development. Higher education is found to be very significantly related to the human development index and also to the gender development index. Higher the level of higher education in a society, whether in stock or flow forms, higher can be the level of human development, through its influence on two main components of human development index, viz., the life expectancy, and GDP per capita. It is not only life expectancy that is significantly related to higher education, but also infant mortality, another measure of health is significantly related to higher education. Higher education helps a lot in reducing infant mortality rates, as people with higher education would be more aware of the need for preventive health care measures and also would be aware of the availability of general healthcare facilities, leading to
3
In both cases, number of observations considered is very small, due to non-availability of data on the respective indicators. 10
sound decision making within households regarding healthcare. Higher education can influence health of the population in a different way as well, through provision of skilled medical manpower to the society, thereby improving the quality and quantity of medical manpower in the society. Similarly, the effect of higher education on fertility rates can also be twofolded: higher education may bring in attitudinal changes on the need to reduce fertility rates for development on the one hand, and secondly, prolonged education, i.e., enrolment in higher education may delay marriages, and lead to reduction in fertility rates. For example, Japan and Korea with highest levels of higher education have somewhat lowest levels of total fertility rates, 1.4 and 1.5 respectively. In contrast, the total fertility rates in Nepal and Cambodia where hardly one per cent of the population has higher education; the fertility rates are 4.8 and 5.3 respectively. Finally, the relationship between higher education and poverty. Data on poverty levels are very limited. Hardly on 15 out of 49 countries in the Asia Pacific region we have data on poverty ratio, i.e., per cent of population living below the intentionally defined poverty line of US$ one per day. The estimated coefficients of correlation do suggest that poverty is inversely related to the level of higher education. The relationship between poverty and gross enrolment ratio in higher education is negative and the coefficient is statistically significant; but the coefficient between poverty and higher education attainment is not significant, though negative as one expects. In general, one can argue that while basic education may take people out of poverty, this can be sustained well by secondary and higher education, which help in upward mobility in social and occupational hierarchy and offer better economic opportunities. Thus, one can note that higher education has a very signifying role in the development of the societies in terms of economic development, human development, gender-biased development, improvement in health, life expectancy, and reduction in fertility, infant mortality and poverty. Though in general it is true that there exists a two-way relationship between higher education and development, the way and the facets of development analysed here, highlighted the one-way relationship, viz., the contribution of higher education to development. For instance, it does not sound logical to ague that reduction in infant mortality rate or improvement in life expectancy leads to development of higher education significantly. Similarly, current national income may influence the growth of enrolment in the future, but enrolments a decade ago in higher education cannot be argued to be influenced by the current levels of national income, particularly in modern times, when rapid socioeconomic developments are taking place. In short, though the statistical analysis used is very simple, the group of countries is highly heterogeneous, and that there can be several factors influencing economic growth in addition to higher education; nevertheless, it indicates a strong and positive
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relationship higher education clearly influencing development.4 This relationship can be expected to hold true in case of most other developing as well as developed countries and regions of the world. After all, Asia-Pacific region represents a good world sample, consisting the most developed and the least developed economies, the largest and smallest nations, and the most traditional and modern as well. Public Policy and Development of Higher Education Despite increasing awareness of the contribution of higher education to development, many developing countries have not expanded their higher education systems adequately, due to a variety of factors -- social, economic, political and cultural. However, one of the most important factors relates to public policies on the expansion of higher education. Several developing countries continue to pay inadequate attention to higher education. Two major areas of public policy are worth examining here. They are the financing of higher education, and privatisation. 3. Financing Higher Education Education Subsidies: The Rationale Education is publicly provided by every nation. The dominance of the State subsidies is an outstanding feature of most education systems. Such a unique position is shared only by a very limited range of goods and services such as national defence, internal security, courts, police, etc. Even in those cases, where education is not publicly provided, it is subsidised by the State. Education, including higher education, is heavily subsidised by the State in almost all the countries of the world -- not only in developing countries, but also in developed countries (see Blaug and Woodhall, 1979; OECD, 1990; Tilak, 1993d; 1997b). Conventionally why education has been given such a treatment? There seems to exist a powerful persuasive economic logic, and a social, political and historical rationale for this.
Case for Public Subsides for Education
There are several arguments in the literature that justify public subsidisation of education: Education is a public good (Vaizey, 1962; Eckaus, 1964; Blaug, 1965; 1970, p.107; Levin, 1987; Tomilnson, 1986), producing a wide variety and huge magnitude of externalities. Consumers of education confer external benefits on those not acquiring education. The social benefits of having a large higher educated population go beyond the increase in GNP. It is also argued that social benefits of education cannot be reduced to individual self interest (Levin, 1989). Hence by taxing those who receive these benefits and subsidising the provision of education, the welfare of both groups, and thereby the society as a whole, can be improved. The externalities include improvement in health, reduction in population growth, reduction in poverty, improvement in income distribution,
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This is also confirmed by intra-country studies (e.g., Tilak, 2001b).
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reduction in crime, rapid adoption of new technologies, strengthening of democracy, ensuring of civil liberties, etc., and even dynamic externalities, which are necessary for technical progress and economic growth and to arrest diminishing marginal returns.5 These positive externalities constitute a powerful justification for public subsidies (Nerlove, 1972). The externalities or the uncompensated benefits from education are regarded to be legion. (see Bowen, 1987; Snower, 1993; Wolfe, 1995; Solmon and Fagano, 1995; Behrman and Stacey, 1997; McMahon, 1987, 1999). Even Friedman (1955, pp.124-25) provided a strong case for public subsidisation of school education to capture external benefits. In the absence of public subsidies, social investments in education would be at under-optimum levels. Further, when viewed democracy, reduction of crime, economic growth, redistribution of resources etc., as other public goods, it is important to note that education helps in their fulfillment (see Lott, 1987).6 In the literature basic education is considered as a pure public good, and higher education at least as a quasi- or semi-public good. A closely similar aspect is education is also a merit good (Musgrave, 1959; see also Arcelus and Levin, 1986). It is a merit good, consumption of which needs to be promoted. People could be ignorant of the benefits of education, or may not be appreciative of the value of education, or may not be able to foresee the implications of their investment decisions in education, and may be unwilling to invest in education. But governments are expected to have better information than individuals or families, and should be wiser and more able to look into the future and accordingly take wise decisions regarding investment in education. The important aspect is that not the others, but the individual recipient him/herself benefits to a greater extent than he/she is aware of. For instance, the effect of education on wages may be known, but the likely impact on productivity in general, on family health and nutrition, ability to make decisions regarding one self, or about his/her family members relating to education, employment etc., is less likely to be anticipated and understood. In other words, it is highly implausible, to argue that individuals can be represented as economic agents who can be relied on to make choices that are in all cases rational; or that they are infinitely clear headed about how to go about realising their goals, and that they are capable of foreseeing all of the consequences of their actions, and can discover which is the best strategy to service their chosen ends (Lane, 1993). It is widely held that governments would be wiser than the individuals in understanding the implications of investing in education. Consumer ignorance is a typical case that necessitates public subsidisation. The provision for making education elementary education compulsory in several national legislations is based on the same principle. But consumer ignorance is not confined to basic education.
On dynamic externalities, see Schultz (1988), Romer (1986 and 1990) and Lucas (1988). See also Azariadis and Drazen (1990) and Behrman (1990) for a discussion on technological externalities. Lommerud (1989) provides further justification for public subsidies to education in terms of lifetime utility that includes value for social status. 13
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Thirdly, subsidies in education are advocated on the grounds of providing equality of opportunity. Ensuring equality of opportunity in education to every one irrespective of not only social background, but also economic background is considered an important function of the modern State. It is held for a long time and by many that it is necessary to provide free education at all levels and also to subsidise students living expenses in postsecondary schooling so as to guarantee equality of educational opportunity (see Blaug and Woodhall, 1979, p. 352). Education is found to be an effective instrument of equity. In the absence of public subsidies, only those who could afford to pay would enroll in schools. The concern for equality of opportunity has led to almost universal agreement that the government should subsidise education. A strong argument accepted by many in support of public subsidies is the existence of imperfections in capital markets. As Arrow (1993) observed, imperfections in capital markets and asymmetric information are possible justifications for the public subsidisation of higher education. In several developing countries markets are incomplete and credible markets do not exist (Joseph Stiglitz). Education credit markets are also incomplete (Kodde and Ritzen, 1985). Imperfect capital markets inhibit students from borrowing against the uncertain future returns of higher education. Problems of offering human capital as collateral, lead to under investment in education, especially among the poor families. People may not prefer to borrow to invest in education, whose gestation period is relatively very long, and may not be ready to take risk of investing in education, whose economic benefits are not certain. Risk associated with human capital investments could be difficult to diversify and could be very high to the society. For the individual, the risk of not completing a given level of education, or facing the risk of falling market value of his education are indeed high. Even more importantly, the lenders would be understandably reluctant to accept risk backed only by uncertain future incomes of the reluctant debtors (Arrow, 1993). Hence the need for public subsidies. Fifthly, education is a sector, which is subject to economies of scale, or increasing returns to scale. Average costs of providing education declines as enrolments increase. If a production process is characterised with decreasing average cost condition, it may be more efficient for government to operate this process. Further, higher levels of education can be particularly subject to this phenomenon. University systems, scientific equipment, libraries, etc., cannot be used on a small scale. Hence it may be more efficient for government to produce it and provide it free (or at a price equal to the marginal cost) (Colclough, 1996). So government monopoly of education, including higher education, is viewed desirable, compared to allowing many producers in the field. There are several other arguments: pubic subsidies are necessary to protect democratic rights, to promote cooperation instead of competition, to promote national values, and so on. Arguments Against Public Subsidies Of late several questions are being raised on the rationale of public subsidies in general and subsidisation of education in particular, and within education, more
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particularly higher education. The several arguments against public subsidisation of education are essentially of three kinds: efficiency arguments, equity arguments, and pragmatic considerations. First, much opposition to public subsidisation of education, particularly higher education, has emerged from estimates of rates of return to education, as already stated. The social rates of return are found to be consistently lower than private rates of return to education, and hence it was recommended that public subsidies could be reduced, and individuals could be asked to pay for their education either substantially or marginally (Psacharopoulos, 1994; World Bank, 1994). Secondly, is argued that public subsidisation of education produces perverse effects on distribution. It is argued that, public subsidisation of education, especially higher education, would be regressive, increasing income inequalities by transferring the resources from the poor to the rich, as the education (particularly, but not exclusively higher education) subsidies accrue more to the rich than to the poor (Psacharopoulos, 1977; Blaug, 1982, 1992; Mingat and Tan, 1986a, b; Jimenez, 1987, 1994; World Bank, 2000, p.80). Reduction in education subsidies in general is also advocated arguing that education subsidies, including some specific subsides in basic education, could be targeted to the poor only (World Bank, 1994, also 1997). Thirdly, governments in developing countries are increasingly facing resource crunch. Economic reform policies adopted in many developing countries, broadly known as structural adjustment policies also necessitate cuts in public expenditures across the board. Education is viewed as one sector, where public expenditures can be reduced relatively easily. While some efforts are made to preserve basic education from budget cuts, such efforts are not made in case of higher education. There are also several other arguments. Public subsidisation is not needed to promote equity or to promote democracy (Tooley, 2000). It is also contended that with heavy subsidisation by the State, education institutions become vulnerable to government control; it is inefficient to give subsidies (in the form of grants to institutions) since it offers no incentives to allocate the resources efficiently; it may not be desirable to subsides higher education, while basic needs such as basic education and health care are not adequately funded; in other words, public resources get misallocated; etc. (see World Bank, 1995). It is also felt that reduction in public subsidies would not adversely affect the growth of education, as cost recovery measures can be adopted. Since demand for education, particularly higher education may not be price elastic, it is believed that cost recovery measures would not lead to any significant fall in enrollments; on the other hand, cost recovery measures would improve access, and also would lead to improvement in quality of education by reducing the baby-sitting role of education on the one hand, and making students more diligent about studies on the other. Given the high private rates of return, people will be willing to pay for education.
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An Assessment of the Arguments
The debate between the two sides, familiarly known as liberal versus neo-liberal groups, is intensifying in the recent years. How far are the arguments and counter arguments valid? While it may be possible to marshal enough evidence to argue on either side, there are some aspects that stand out very clearly in favour of public subsidies in education, which are rarely questioned. For example, even those who oppose pubic subsidisation of education recognise that education produces a huge magnitude of externalities.7 Even Friedman (1962, p.86) implicitly agreed that because of externalities, associated with education, it should be publicly financed. Though all the social benefits cannot be identified and measured accurately, there is still a consensus that they are substantial. The other aspects widely shared are: public good (and quasi-public good in case of higher education) nature of education, merit good nature, social investment nature of education, market imperfections, and economies of scale. Further, many arguments made against public subsidisation do not have unqualified support either from theory or empirical evidence. Based on sound economic reasoning, Vaizey (1962, p. 34) concluded long ago, publicly financed education is a legitimate end of public activity, even to extreme exponents of classical economic doctrine. (p.34) The case against public subsides in education in the recent years is based on the premise that governments in developing countries do not have adequate resources at their disposal, and that the scope for restructuring the public budgets, and thereby increasing the subsidies substantially to education is rather limited. This is not an argument per se against public subsidisation. Except quoting the figures relating to budget deficits, or those relating to external indebtedness, and the corresponding debt service charges of the developing countries, this premise has rarely been critically examined. Arguments are made for restructuring pubic budgets by withdrawing resources from unproductive sectors and their reallocation towards education (e.g., UNDP, 1991, 1992). Some research also exists that shows that education expenditures are affected by military expenditures, indicating a clear trade-off between public expenditures on defense and education. Patterns of public expenditures in developing countries also show that the governments are not as much starved of resources as of lack of priorities and political will, especially in case of higher education. There is a general argument that higher education subsidies are regressive. It is also stated, that subsides to higher education accrue to the better-off sections of the society, while those to primary education accrue to the masses (Bowles, 1971; Selowsky, 1979; Meerman, 1979; Jallade, 1974; Dasgupta and Tilak, 1983; also see Tilak, 1989). It is argued that pubic subsidisation of education produces perverse effects on distribution (Psacharopoulos, 1977), a finding that was proved wrong by Ram (1982). Ram has concluded in a cross-country analysis, there is little evidence in favor of the postulate of a
7
There are very few who do not recognise externalities of education. For example, according to West (1965) the externalities are completely unimportant. Schultz (1972) opined that many benefits go to the concerned student only; and Newman (1985, p.24) feels that a large proportion of benefits of higher education goes to a relatively small group pf students. 16
significant disequalizing effect of public subsidy to higher education. If there is such an effect at all, it appears to be stronger in the DCs than in the LDCs (pp.45-46). Torstel (1996) further showed that public subsidisation of education would even correct distortions in taxation and hence it is efficient to subsidise education. In a careful review of several studies, and after standardising their results, Leslie and Brinkman (1988, p.118) found that higher education in most cases does contribute to progressivity and moreover that when the analytical methods employed are most advanced, progressivity is found without exception. It is also widely shared that any withdrawal of public subsidies would certainly make the system worse, more regressive. On the other hand, it is also noted that markets are cumulatively and inherently inegalitarian in relation to the distribution of resources in society. Further, as Johnson (1984) demonstrates, it may be justified to tax the poor to finance higher education of even the rich, because of the externalities, associated with higher education (of the rich), which can be relatively rich in a permanent income sense. The poor (or less able) also realise a portion of the gains from the rich (or more able) receiving higher education. It is also recognised that education subsidies need not necessarily be regressive per se. It depends upon the nature, type and kind of subsidies. For instance, if subsidies that are expected to be targeted are universally available to all, it may produce adverse effects and vice versa. The type of subsidies, e.g., grants to institutions versus grants to students, may also matter in this context. It is also felt that the solution to regressive effects of subsidies lies in progressive taxation system, rather than in eliminating or reducing the subsidies. The use of the estimates on rates of return to education in support of arguments against pubic subsidies is also found to be not proper. First, the high levels of private rates of return may not even sustain themselves long, as already experienced by some countries, reducing the students willingness to pay. Secondly, private rates of return will decline if public subsidies are drastically reduced or altogether withdrawn, making investment in education unattractive from individual point of view. Thirdly and more importantly, it is now well noted that the social rates of return to education are not true social returns: except for tax benefits, no other social benefits are considered in the estimation of social rates of return to education. Hence, it is contended that rates of return cannot be used to argue against public subsidies (e.g., see Task Force on Higher Education and Society, 2000, p.39) or even for any sound public policy in education (Majumdar, 1983). Further, properly estimated social returns could be much higher than not only the earlier estimates on social rates of return, but also higher than the private rates of return (see, e.g., McMahon, 1999; also Weale, 1992, 1993). There are also a few who feel that education may not qualify to become a public good, as the criteria of non-exclusion and the free-rider do not apply. It is mentioned that ones admission to a school may mean denial to somebody else, as the number of places in schools could be restricted (see Eicher and Chevaillier, 1993, p.478). What is important is to check the applicability of the criteria of non-exclusion
17
and free rider not to consumption of the service (admission in school), but to receipt of the benefits of education. After all, people who have not gone to schools cannot be excluded from getting benefits of having educated population in the neighbourhood. Lastly, it has to be noted that many of those who argue for increased cost recovery in higher education do not oppose public subsidisation per se; on the other hand, since there is limited scope for increased public spending, it is argued that additional resources can be mobilised through a variety of measures (e.g., Mingat and Tan, 1986). They also recognise that public subsidies can increase efficiency (e.g., Arrow 1993).8 As Blaug (1983, p. 126) summed up long ago, market failures consumer ignorance, technical economies of scale, externalities in production and in consumption, public good, and inherent imperfections in capital and insurance markets -- inhibit the attainment of Pareto optimality in education investments.9 Hence the government has to subsidise education. Governments subsidise education, not just for efficiency, but also for reasons of equity, and various other social and political objectives. Hence, as Eicher and Chevaillier (1993, p. 480) observed, even if theoretical justification is weak, it would probably be a mistake to curtail sharply pubic subsidies to education. To conclude, there is not much disagreement on the economic rationale of pubic subsidies to education. As Vaizey (1962, p. 36) observed, the opposition to a publiclyfinanced system is a political opposition to paying taxes rather than an attitude ineluctably derived from the mainstream of economic reasoning. However, the important question is how much should be the subsidy. While some arguments such as pure public good and social merit good nature of basic education may suggest full subsidisation of basic education, many other arguments, e.g., quasi-public good nature of higher education, may only suggest partial subsidisation. Theory does not give any clues on the level of optimum As a result, countries follow different mechanisms and levels of public subsidy.10 subsidies to education, partly based on economic logic, and partly based on historical and cultural factors and social objectives, and mostly political considerations. So as Blaug and Woodhall (1979, p.351) concluded, it is vain to pretend, therefore, that we can appeal to any general principles that would specify an optimum level of subsidy to [higher] education, much less to general principles. Public Expenditure on Higher Education
Arrow (1993), however, adds that the gains in efficiency are at the cost of inequities which may take the form of elitism, which needs to be checked though appropriate policies. In case of higher education, Blaug agrees that of the above, externalities and imperfections in capital and insurance markets are relevant. 10 Cost-benefit analysis is regarded to be a useful tool in this regard to estimate optimum level of subsidies, but only in case of those sectors where accurate informa6iton is available on social and private demand functions, cost functions, and the weights the society might attach to distributional objectives. See, e.g., the Appendix 2 in Srivastava and Rao (2002).
9
18
In most countries of the Asia-Pacific region, higher education receives less than one per cent of GNP. It is only in the tiger economies of the East Asia, oil-rich west Asia and Australia and New Zealand that the corresponding proportion is above one per cent. It is less than 0.2 per cent in quite a few developing counties such as Bangladesh, Myanmar, Lao and Tajikistan (Table 8). These statistics indicate the relative priority accorded to higher education in different countries.
Table 8 Share of Expenditure on Higher Education in GNP (%) Myanmar 1994 0.14 Philippines 1997 Lao 1997 0.16 Kyrgystan 1996 Tajikistan 1996 0.16 Thailand 1996 Bangladesh 1996 0.17 Turkey 1995 India 1995 0.22 Mongolia 1996 Azerbaijan 1996 0.25 Iran 1995 Oman 1995 0.25 Uzbekistan 1993 Armenia 1996 0.26 Jordan 1994 Cyprus 1995 0.29 Georgia 1994 Korea 1995 0.30 Singapore 1995 Sri Lanka 1996 0.32 Hong Kong 1995 Vanuatu 1994 0.32 Syrian Arab Rep. 1996 Indonesia 1996 0.34 Saudi Arabia 1997 Pakistan 1997 0.35 Malaysia 1997 China 1996 0.36 Israel 1994 Japan 1994 0.44 Kuwait 1997 Solomon Islands 1991 0.52 Viet Nam 1997 Nepal 1997 0.61 Australia 1995 Kazakhstan 1997 0.61 New Zealand 1996
Source: Calculated by the author based on Unesco (1999).
0.61 0.75 0.79 0.87 0.92 0.92 0.92 0.93 0.96 1.04 1.08 1.09 1.17 1.25 1.38 1.51 1.54 1.68 2.12
Generally education, including higher education is financed by the State in most societies, including the Asian economies. However, in the recent years, there has been a steady decline in the public expenditures on higher education and several changes are taking place in the pattern of funding education all over the world in terms of the introduction of financial aid, student loans, and similar cost-recovery measures along with scholarships, vouchers and other protective measures (see Ziderman and Albrecht 1995). An overall shift is taking place from financing the provision (or supply) of higher education to financing the demand for higher education all over. Methods of mobilizing nongovernmental resources are being talked about essentially because of financial considerations (and in particular, because of the increasing inability of governments to meet rapidly rising social demand for higher education). Universities (including public ones) are being required to generate resources on their own, and as a result, many universities are making several innovations in the mobilization of nongovernmental resources. Systems of financing higher education are gradually
19
changing from one dominated by the state to one of multi-source funding, with the state taking care of the lions, but gradually declining, share with the stipulation that it would be supplemented by multiple channels, including fund-raising campaigns and donations by individual citizens, enterprises, and other social bodies in addition to student fees. Many countries are experimenting with alternative forms of financing and cost recovery mechanisms, some of which are described here. Cost Recovery in Education Discussion on cost recovery is of relatively recent origin. It is held for a long time that the benefits of education are vast and widespread, and in the long run the investments made in education are recovered by the society through increased productivity of the labour force and through consequent higher tax receipts by the government, and hence there is no need for any specific measures to directly recover the investments made in education. As Mishan (1969) observed, "higher education is an investment and will pay for itself; and will increase the earnings of the beneficiary students and the government will recover its costs through consequent higher tax receipts." But political and socioeconomic compulsions gradually paved way for search for direct measures of cost recovery in education under different garbs: first mobilisation of additional (public) resources, later mobilisation of nongovernmental resources, then diversification of finances, and now cost-sharing, cost-shifting, cost recovery, and user charges. Thus market and quasi-market principles have been brought to bear in education through, inter alia, measures like student fees, loans, and other forms of cost recovery, reflecting in all a steady march towards marketisation and privatisation. The term privatisation itself became an important slogan for the 1990s. Measures for cost recovery came into prominence essentially due to worsening economic conditions in general, and declining public budgets in particular, affecting the welfare state activities (Snower, 1993). Under such conditions, the levels of living of the people are also adversely affected with a high probability of pushing down the social demand for education. Introduction of cost recovery measures may accentuate this probability. Methods of Cost Recovery Important measures of cost recovery that are being currently discussed and/or being experimented with in several developing and developed countries include (a) fees, (b) loans, and (c) earmarked taxes. Student Fees One of the most important methods of cost recovery is introduction or enhancement of student fees in education. The general prescription is in favour of introduction and/or enhancement of fees in higher education, though it is not confined to higher education. The low price elasticities of demand for education (Jimenez, 1987, pp. 80-81; 1989, p. 116) are quoted in support of the argument in favour of fees. But it may be noted that demand would be less elastic, only in cases of excess demand situations, i.e., situations
20
characterised by large unmet demand, supply being less than demand, e.g., higher education in many developing countries. In such situations, fall in demand by some (poor) due to introduction of cost recovery measures may be more than offset, as noted earlier, by increase in demand by others (relatively better-off students), resulting in no significant fall (or even in an increase) in the overall demand (e.g., Tan et al., 1984; Jimenez, 1987). But if the demand is deficient, as in case of primary education in most developing countries, where special incentives have to be introduced in order to fulfill the goals relating to universal primary education or 'Education For All' or 'Schooling For All', the price elasticity can be expected to be high.11 On price elasticities of demand very few detailed estimates are available.12 Jimenez (1989) could refer to estimates in Peru, Mali and Malawi. In all these three cases, and in many other cases (e.g., Chutikul, 1986 on Thailand, etc.), demand is found to be elastic to price (fee, or distance to school in Mali), though the elasticity is less than unity, i.e., an increase in fees necessarily reduces the demand for education. Several studies that concentrated on lower levels of schooling have found serious adverse effects of fees on overall enrollments and even in gross enrolment ratios. Though not many studies are available, this can be believed to be true in case of higher education as well. Further, income elasticities of demand are also important. Generally demand for education is found to be highly income elastic, even in the absence of direct cost recovery measures. The available evidence shows that demand for secondary and higher education is a monotonically increasing function of economic levels of living of population. While detailed estimates of elasticities are not available, in regression equations of enrollment in schools, income of the households turns out to be one of the important and statistically significant factors (with a negative sign). A high income elasticity obviously suggests that the demand for education of the poor would be reduced by increase in fees as real disposable incomes will further decline with introduction of cost recovery measures. Even if the overall demand is less elastic, it cannot be expected that it would be the same for demand for education of low income groups. Serious regressive effects of fees on poor families have been reported in a few important studies (e.g., Gertler and Glewwe, 1990 on Peru; and Colclough, 1993, p. 15). So while the overall demand may increase or remain the same even after fees are introduced, it is most likely that the composition of the enrollments changes in favour of the rich. Further, even if one does not observe fall in
Birdsall (1983a) shows that even when excess demand is not observed, user charges can be levied, and that it would increase access and equity in education. This is yet to be empirically supported.
12
11
Indeed very few detailed estimates on price elasticities of demand for education are available. Birdsall (1982) has reviewed several studies on determinants of enrollment or educational attainment, but many of these studies have not included a price variable. Jimenez (1989) also reported only a couple of estimates. Further, the elasticities are measured in response to small changes in fees. But substantial levels of increases in fees might as well produce high elasticity coefficients. For instance, Jimenez (1987, p. 82) calculated that significant increases in fees in Malawi would lead to decline in enrollments by 22-57 per cent in primary schools and by 52-91 per cent in secondary schools.
21
enrollments as a result of increase in fees, it is very likely that the probability of the out-ofschool children going to schools declines steeply with introduction of fees. While many, not all, seem to agree on the need to provide free primary education, not many people support free post-primary education. Generally, the arguments seem to be strong in support of fees in secondary, and much stronger in case of higher education. But these arguments overlook the inter-sectoral dependencies. It is to be noted that even if fees are nil or negligible in primary education, but if fee levels are high in secondary education, enrollments in primary education may fall, as primary education is demanded to secure entry not into labour market, but into secondary education. Similarly very high fees in higher education may reduce demand for secondary education, particularly in those societies, where secondary education does not provide any employment opportunities, and it is demanded mainly to go for higher education later. Though earlier a good number of countries used to provide higher education free, now except for a few countries (e.g., Brazil, Sri Lanka, Tanzania, Soviet Union and some east and west European countries) a majority of countries charge fees in higher education, some very small nominal amounts, and some reasonably large (see Eicher and Chevaillier, 1993, p. 465).13 Evidence on absolute levels of fees in higher education is limited. But he limited evidence shows that there exist wide ranges in fee levels across several countries and even within countries. Between different countries, fees per student varies between zero to US$ 5000 in 1987. Within the countries also, the range of variation is very high in Spain, Belgium, and Switzerland. They vary by discipline, by region, and probably by socioeconomic categories of student population. While there is no theory to determine the levels of fees, it is generally argued that fee levels in higher education in many developing countries are very low. As far as empirical evidence is concerned, fee levels and economic development do not seem to have any relationship. After all, even in many developed European OECD countries fees are small and that fee levels as a proportion of total costs in higher education are very less in several developed countries than in many developing countries, as shown later. Strong advocates of cost recovery plead for full cost recovery from the students,14 and many for very substantial levels of cost recovery. Theoretical justification for full cost recovery in higher education is extremely restricted. But in practice, governments do allow private higher education institutions (and also even primary schools) to not only recover full costs, but also to reap profits. For instance, 'profit making educational institutions' has become a recognised category of educational institutions de jure in the USA and de facto in a few other developed and developing countries (Geiger, 1986; Tilak, 1994b). Many also
13
Some countries have abolished and reintroduced fees in higher education. For example, tuition fees having been phased out in Australia in 1974, but were reintroduced in 1989. Again only when contested by others, it was stated that higher education would have to be excluded from general arguments in favour of full cost recovery in social sectors (Jimenez, 1989, p. 112).
14
22
favour and some countries do practice full cost-recovery from the foreign students.15 Theory however does not justify full cost recovery from the students, as the rationale for subsidisation of education in general, and at least partial subsidisation of higher education in particular, is obvious on many counts.16 At least three kinds of subsidies are identified as necessary in higher education: 'allocative efficiency subsidy', 'external benefit subsidy', and 'welfare subsidy' (Judge, 1990). Many seem to agree with Mishan (1969) when he stated that "it is not necessary that the students bear the full cost of higher education" and seem to favour partial, but substantial, cost recovery in higher education.17 There is no method to determine the desirable rate of cost recovery in higher education. But one can learn from wider cross-national experience. It is important that cross country comparisons on fee levels and their share in education finances need to be interpreted with caution, because the incidence of fees varies very significantly between different countries. Except for a few scholarships offered by the government, and hidden public subsidies in terms of low fees and charges, students in developing countries have to bear the full costs of education on their own, while in advanced countries, students do bear substantial amounts, but the non-government and the non-student sector of the society also share the costs significantly.18 As Hough (1992, p. 1356) noted, fees in US, Spain, and Japan are met out of public subsidies. Much of the fees in US are recouped by students and their parents though important loan and grant schemes, in addition to through part-time work. Fees in UK were paid not by the students but by the local education authorities, which, in turn, receive part of their funding from central government. "Virtually all of the fees for home first-degree students are paid out of central government funds" in UK (OECD, 1990); so tuition fees, or increases in tuition fees, even full cost fee as advocated by Lal (1989) in UK are of no consequence at all, as bursaries equivalent to full costs are paid to the students by the government (Johnstone, 1992, p. 1504). But in many developing countries the incidence of fee burden squarely lies on the students and their parents. As Hough (1992, p. 1357) further clearly noted, "most developing countries have been able to provide little in the way of financial assistance for students, who have had to be supported by their families." There are no recent detailed estimates on cost recovery in education. Available evidence shows that the rates of cost recovery in higher education vary widely between
15
Many countries like England experienced significant declines in enrolment of foreign students, after full cost recovery policies were introduced in 1980, and now several countries reassess their policies (Woodhall, 1987). See also Blaug (1981) and Winkler (1984). This may suggest that demand for education by the foreign students is highly price elastic (see Woodhall, 1991c). But they may also be due to changing policies of the developed as well as of the developing countries on student flows. For some arguments, in addition to the conventionally made ones in this context, see, e.g., Kang (1991), Kodde and Ritzen (1985), Johnes and Johnes (1994), and Johnson (1984). For instance, in India some argue for 50 per cent to near full cost recovery in higher education (see Rao, 1992; Dandekar, 1991). See for a discussion, Tilak (1993a, b). However, UGC (1993) and AICTE (1994) favour only 20-25 per cent cost recovery. See Johnstone (1986) for details.
16
17
18
23
zero per cent in Sri Lanka and 50 per cent in Korea. It is quite interesting to note that rates of cost recovery in advanced countries are not high: they are less than 20 per cent, in fact less than 15 per cent, except in case of Spain (Table 9). In this sense, the rates of cost recovery in many Asian and other developing countries are somewhat comparable to those in the advanced countries and hence the general presumption that higher education in developing countries is heavily subsidised by the state may not be true. The rates of cost recovery in private higher education institutions in some of the Asian countries are alarmingly high: it is 50 per cent in Taiwan, 66 per cent in Japan, 82 per cent in Korea and 85 per cent in the Philippines. With such high rates of cost recovery, private higher education may be out of reach to a majority of the students belonging to weaker economic strata.
Table 9 Share of Fees in Costs of Higher Education in Selected Countries (per cent) Public/Predominantly Public Developing Countries* Nepal 1986-87 Share 4.4 5.8 Thailand 1991 >20.0 6.9 Taiwan Pakistan Colleges Univs. (Gen) Univs. (Tec) China Hong Kong 1998 1988-89 1997 Philippines Indonesia 1990 India Vietnam South Korea Vietnam Jordan Chile 1984-85 1993! 1985 1993! 1993! 1990 1985 1991 1987-88 7.4 1.9 1.3 17.0 6.5-12.1 18.0 10.9 13.0 >20.0 15.0 >20.0 49.6 >20.0 >30.0 38.5 Private 24 Australia Japan Soviet Union USA 7.0 Germany Italy Canada Netherlands Spain United Kingdom Universities Polytechnics 1970-71 1988-89 1982-83 1987-88 early 1980s 1969-70 1984-85 1970 1990 1987 1999 12.6 6.4 15.0 14.0 0.0 15.1 14.5 2.0 9.8 2.1 18.6 Developed Countries Norway France 1987 1975 1984 1986 1989 mid 1980s 1985 mid 1980s Share 0.0 2.9 4.7 0.0 7.3 12.0 12.0 20.0
Taiwan South Korea Philippines
Late '80s 1985 1977
50.0 82.3 85.0
USA
1969-70 1984-85
38.6 38.7 75.8 65.8
Japan
1971 1985
Note: .. Nil or Negligible; * around 1980, unless otherwise mentioned. Source: Tilak (1997b; 2001a); Bray (2000); Catalano et al (1992); Woodhall (1991); Asonuma (2002) and Department of Education, Australia (2001)..
This would indeed create serious problems of equity, if these countries have higher education systems that are predominantly private. The rate of cost recovery in private higher education in USA is quite low: less than 40 per cent. Private institutions in USA generate sizeable resources from non-governmental and non-student sources. But in Asian countries, education is funded either by the government or by the students in the form of fees. The non-governmental and non-student sources do not seem to exist. The levels of cost recovery in higher education are higher in developing countries in Asia than in many advanced countries. But again, it is in these countries that the arguments for higher and higher levels of cost recovery are being proposed. It is well known that in several European market economies the rate of cost recovery through fees is negligible (OECD, 1990), compared to some universities in Africa, particularly South Africa, Lesotho and Botswana (see Saint, 1992: Tilak, 1997). Hence, the rate of cost recovery though fees in developing countries cannot be expected to be very high. Fees as a ratio of GDP per capita is much above 200 per cent in Brazil and Indonesia, and it is 642 in China and 755 in Paraguay (OECD, 2002, 107). The dangers of high cost recovery are to be noted. Even if it is feasible to raise cost recovery rates to higher levels, it has to be seen whether it is desirable from the point of view of equity in higher education and the manpower needs of the developing economies. After all, the need for 'democratisation' or 'massification' of higher education is being increasingly felt everywhere. On the whole, private higher education is financed mostly by the students in the form of fees, and public universities are mostly financed by the state. Exceptions are very few (e.g., Korea). But all systems of higher education are undergoing rapid changes, increasing their reliance on fees and other private finances. The profit syndrome is spreading all over. Secondly, in the context of discussing the rate of cost recovery, it is also necessary to take into account students' private (household) costs of education -- direct and opportunity costs. In the absence of information on household costs, it was generally felt to be negligible. Now the available evidence makes it no more tenable to argue that household costs are insignificant, and that higher education is provided free in several developing and developed countries.19 Students (and their parents) pay not only tuition fees, but also several other kinds
19
See Johnstone (1989, pp. 31-39) for some evidence on a few developed countries.
25
of fees, such as application fee, registration fee, 'special' fee, examination fee, re-evaluation fee, laboratory fee, eligibility fee, transfer fee, convocation fee, fee for marks (grade) sheets, etc., all of which are being subject to steep raises in the recent years. Further students' costs include direct money costs on not only fee, but also non-tuition costs such as text books, transport, and other out-of-pocket expenses, and secondly the opportunity costs. Available evidence shows that students and/or their families incur considerable costs on both categories. For example, in India of the total social costs (sum of students' costs and institutional costs, net of transfers) of higher education, students' direct costs constitute about 30 per cent, and opportunity costs another 50 per cent; so that in all, private costs form more than 80 per cent of the total social costs of higher education, while the corresponding figure was 43 per cent in USA. Recently OECD (2002) reported that private/household expenditures as a proportion of total costs of higher education forms 21 per cent in China, 27 per cent in Argentina, 35 per cent in Jordan, 45 per cent in Peru, 48 per cent in Indonesia and as high as 73 per cent in Chile. It is interesting to note that in some developing countries (e.g., Thailand, Zimbabwe, Columbia and India), households share a greater part of the expenditure on education than in developed countries (Netherlands, France, UK, Australia and USA). In general, in developing countries the households share a greater proportion of the costs of education than in the developed countries. Fees, opportunity costs, and other private costs are important, as though elasticity of demand for education to fee increases may be less, the elasticity of demand with respect to some kinds of private costs could be very high. Student Loans The second most important cost recovery measure that is being talked about refers to student loans. Loans are also viewed as an important measure to accompany fee reforms, so that the poor students who cannot pay high fees do not opt out of higher education, but rather take loans, go for higher education, get jobs, and pay back the loans when they can. Loans are regarded as an important equity measure as well as a strategy to improve efficiency (Blaug, 1970; Woodhall, 1983; Psacharopoulos and Woodhall, 1985; Mingat et al., 1985).20 Of late, in addition to 50 and odd countries where the loan programme had been in practice (Albrecht and Ziderman, 1991, p. 3), many other countries constrained by the unavailability of public resources, and influenced partly by international thinking, began showing interest in student loan programs.21 That the loans shift the burden from the present generation (government or parents) to future direct beneficiaries has more appeal. In contrast to mortgage type loans that involve repayment of fixed equal amounts in regular installments, irrespective of earnings levels of graduates, the income contingent loans that require payment of a given proportion of
In some countries (e.g., India) the loan programme is known as loan scholarship scheme, as it is viewed as a measure of equity.
21 20
See Woodhall (1989b, 1990, 1991a, b, 1992) for details on several countries.
26
graduates' income as loan repayment, sell better as they are more based on the principle of ability to pay. Barr (1988) argued that income contingent or income related loans would be "fair, efficient, cheap, administratively simple, easy to understand, flexible and politically attractive. It would have major impact on access and expansion."22 In an important study, Woodhall (1983) enumerated the benefits of the loan schemes, most of which are common to the claims made in favour of general cost recovery measures, that the loans would increase access to higher education, reduce the extent of redistribution of resources from the poor to the rich, increase diligence and efficiency of the students, and provide for flexibility in the use of loans (for full time or part time education, for education in government and private institutions, etc.), compared to other methods of financing like the grants. Woodhall (1989a) argues that the loans do not necessarily discourage low income students or women from pursuing higher education, and argues in favour of loans as against grants (in UK).23 There are several problems associated with student loans. First, in many societies, psychologically, loans in general are not welcome. When needed, poor people may not mind borrowing for investment in physical capital, or other productive sectors that have shorter gestation periods, or consumer durable goods (Maynard, 1975), or even for necessary consumption activities like marriages, but not for 'invisible' human capital formation, whose benefits cannot be identified, if identified cannot be comprehensively quantified, even if they can quantified, they are not certain, and even if they are certain, they flow after a long gestation period. Concerns about increased levels of student indebtedness have both psychological and socioeconomic dimensions, which led to reforms in Sweden where every student over the age of 16 years gets a loan. Further, the view that grants to students need to be preferred to loans is also receiving appreciation in Sweden and other countries (see Morris, 1989; and Shackleton, 1993). Secondly, loans involve both higher perceived and higher actual personal costs than others (like grants) (Colclough with Lewin, 1993, p. 172), which would affect the demand for education particularly of the poor families as students from lower socioeconomic backgrounds would be reluctant to saddle themselves with debt burden (e.g., as reported in case of Jamaica; World Bank, 1993), thus entrenching further the inequalities in access to education.24 As the Robbins Committee (1963, para 647) warned long ago, the loans would have "undesirable incentive effects." Thirdly, the credit market in several developing countries is not well developed to float educational loans. The lending financial institutions seek security which the economically weaker students, for whom the programme is mainly meant for, may not be
22
See also Barr (1991) for a review of loan programmes and reforms in the same in a few developed countries. In fact, Woodhall (1989a) favours a balance between grants and loans.
23
24
The argument that income contingent loans do not compromise on access (Hope and Miller, 1988) is difficult to accept; they can at best offer bet method of repayment of loans only.
27
able to provide. The inability to borrow may negatively influence preferences for higher education. As a result, as Alfred Marshall (1890) noted, imperfect capital markets lead to under-investment in education. As also recognised by many (e.g., Pigou, 1920; Friedman, 1955; Nerlove, 1975; Stiglitz, 1986, p. 309), most types of loans require collateral provisions that provide lenders compensation in the event of default of loan. Hence loans may not be available to the poor due to problems of repayment particularly in economies characterised by imperfect capital markets on the one hand, and low standards of living on the other. Though capital market does exist to some extent in some countries, it is not adequate to float educational loans efficiently.25
Table 10 Student Loan Programmes and Government Losses in Selected Countries Government Loss (%) on account of % of Rate of Year Students Recovery Country Default & with (%) Default Administration Administration Loans Mortgage Loans Columbia I Columbia II Sweden I Indonesia USA Hong Kong UK Norway Denmark Finland Brazil I Brazil II Jamaica I Jamaica II Barbados Kenya Canada** Chile Japan Venezuela Honduras 1978 1985 1988 1985 1986 1985 1989 1986 1986 1986 1983 1989 1987 1988 1988 1989 1989 1989 1989 1991 1991 25 20* .. .. 100 59 .. 19 1 1 .. 6 .. 3 28 26 7 80 .. .. 76 38 62 61 41 43 30 33 56 46 94 65 84 62 18 94 31 69 51 98 53 11 9 8 10 12 4 11 15 6 6 4 6 8 8 15 9 6 13 9 10 20 87 47 70 71 53 47 41 48 62 52 98 71 92 70 33 103 37 82 60 108 73 13 53 30 29 47 53 59 52 38 48 8 21 8 30 67 -3 63 18 40 -8 27
Income Contingent Loans
25
See also Arrow (1993, p. 9).
28
Australia Sweden II Note:
1990 1990
81 ..
52 30
5 3
57 33
43 67
I and II refer to situations where the loan programmes underwent reform. * 1985 ** Quebec Rate of cost recovery refers to average loan recovery ratios, as a percent of loan amount, default and administration costs. Source:Albrecht and Ziderman (1991, p. 5 and p. 15; 1993, p. 80) and World Bank (1994a, p. 47).
It is also feared that student loans would work as a 'negative dowry', and accordingly will have serious adverse effects on enrolment of girls in higher education in not only UK (Robbins Committee, 1963, p. 211), but also in many other developed and developing countries where dowry is an important social phenomenon, and also in those countries where it is not, but husbandal obligations are an accepted phenomenon. The most important problem faced with respect to student loans in most developed and developing countries, relates to non-repayment of the loans, as show in Table 10. That default rates are high, and the losses to the government are abnormal in several developing countries, are well documented by Woodhall (1990, 1991a, b, 1992). Every student in Kenya, for example, gets the loan, and the loss to the government on account of defaults is as high as 94 per cent, i.e., 94 per cent of the loan amount is not recovered. Costs of administration of loans, i.e., costs incurred on personnel and office expenses on administration and attempts to recovery, are also very high. While costs of administration of income- contingent loans seem to be small (e.g., in Australia, and Sweden), costs of administration of mortgage type loans are quite high, as shown in Table 10. If such costs are added to the loss to the government on loans, the total loss amounts to 103 per cent in Kenya; and that loss increases by 20 per cent points in Honduras (53 per cent due to default and 20 per cent due to administration, the total loss being 73 per cent of the total loan amount) (Albrecht and Ziderman, 1991, p. 15). Even in some Latin American countries like Colombia, where the modified scheme was believed to be yielding adequate returns, the rate of recovery as per cent of total costs (value of loan amounts and administrative costs) was only 53 per cent in 1985, that too after some reforms were introduced in the system. But reforms in loan scheme did improve rates of cost recovery in some Latin American countries like Columbia, Brazil and Jamaica; but still the default rates and losses to the government are high.26 Further, Albrecht and Ziderman (1993, p. 83) estimated that in some of the countries characterised by the highest public sector cost recovery in the world, governments recover only between two per cent (Colombia) and 14 per cent (Quebec, Canada) of instructional
26
Based on simulations of behavioural responses, Mingat and Tan (1986c, p. 282) conclude that the potential rate of cost recovery is substantial under what appears to be bearable terms of repayment of loans in Asia and Latin America, but not in Africa. In fact, it may not be feasible at all to recover 100 per cent of the investments made in loans. For example, World Bank (1993, p. 183) estimated that given the need for subsidization of interest rates and longer periods of repayment, the recovery of loans in Latin America and Caribbean countries can at best be in the range of 40-75 per cent.
29
costs from loan recipients. "Governments are actually spending large amounts of money on student support in addition to institutional subsidies" (Albrecht and Ziderman, 1991, p. 20). Worries about student indebtedness led to lowering of interest rates in Sweden. Many countries also provide interest-free loans. But low or zero rates of interest make student loans more 'inefficient': with increase in costs of administration, and along with increase in prices, the loans carrying negligible or nil rates of interest, and payable for a 10-14 year time period as is the case in many countries like India, and several European countries, the efforts to recover loans were found to be highly cost ineffective.27 Now a days student loan programmes operated by commercial banks, based on banking and commercial principles are introduced in a few countries (e.g., India). Loans may also be regressive. The loan funds created with the help of public resources, may be available more to the rich than to the poor, for the reasons mentioned earlier. Further, it is also well noted that they would work against enrolment of women in higher education. The net gains from student loan programmes are believed to be not substantial. There cannot be any savings in public expenditure in the short and medium term periods. In fact, the governments have to allocate more public resources for higher education in the form of student loan funds. Colclough (1993, pp. 209-10) has estimated that if loans were typically taken to cover four-years of study with a 20-year pay-back period, the government would not recover even 50 per cent of the initial generation of student loans until 14 years after the starting of the scheme. This is exclusive of rebates for unemployment etc., and defaults. Barr (1993, p. 725) has estimated that the programme in the UK produces "no cumulative net savings for at least 25 years." After a thorough review of 24 loan programmes in 20 countries, Albrecht and Ziderman (1991, p. iii) concluded that "in general, developing country loan programs to date have not reduced significantly the government's fiscal burden for higher education" and that the scope for increase in effectiveness of the programme is also restricted.28 Hence, the student loans cannot be a short term or a medium term solution to the problems of resource scarcity in higher education, and given, inter alia, the levels of defaults, loans can never become self financing. On the other hand, they can indeed be "expensive enterprises" (Albrecht and Ziderman (1993, p. 86). Finally, by fixing the amortisation as a percent of income, student loans in effect, become a tax (e.g., graduate tax), if the incidence of both the tax and the loan can be confined to the graduates/loanees only, the main differences being that unlike loans, the tax does not carry the feeling of indebtedness. Thus, there are at least two basic inherent weaknesses underlying the philosophy of loans. The concept of student loans assumes strong relationship between education, employment and earnings. When education does not guarantee employment, and as
27
For the same reason, some (Johnstone, 1986) argue in favour of grants or direct subsidies as against interest-subsidized loans. Even though Alrbrecht and Ziderman (1991) conclude about the developing countries, their own analysis confirms that the conclusion is equally applicable to developed countries.
28
30
repayment of loans (mortgage/fixed repayment loans) becomes compulsory, people from relatively poorer sections will be worst affected. Secondly, the very nature of loans assumes the ability to repay, which would be inversely related with the economic well being. Hence loans may adversely affect equity in and access to education, in addition to producing no significant net savings. The first problem can be avoided by shifting policies in favour income contingent loans as against fixed repayment loans; but not the second problem. On the whole, it seems that while investment in higher education yields high rates of return, investment in loans for higher education may not yield good fiscal returns, i.e., to the government that makes investment in loans. As the OECD (2002, p. 92) rightly concluded, most student loan schemes have been difficult to sustain. Earmarked Taxes As against public financing of higher education out of general tax revenue, it is increasingly argued in favour of recovery of costs of education through earmarked taxes, i.e., through taxes specifically meant for education. Among such proposals that are being discussed or adopted in a few countries, at least three kinds can be identified as follows: i) The Payroll Tax While in case of fees and loans, the costs of higher education are planned to be recovered from the students, there are other measures that aim at recovering the costs from the users of the graduates. One such specific measure is payroll tax, also referred to as employer tax (Albrecht and Ziderman, 1991, p. 42), a tax through which government investment in higher education is recovered from the beneficiaries, viz., the employers. Specifically a payroll tax is an education specific tax to be levied on those who use the educated manpower. The basic argument is that the employers who employ higher educated labor force should be required to share the costs of production of this high skilled 'human capital', that is useful for the employers in production. Just as the private enterprise pays interest for the physical capital, it seems justified to require the private sector to pay for the production of human capital, or interest on human capital, in the form of a payroll tax. In effect, particularly professional education may be financed out of earmarked taxes like payroll tax levied on manufacturing industry and trade. The taxes could be levied based on the wage bill referring to the skilled labor force employed, or number of graduates employed, and tax rebates can be given if the firms take responsibility of providing education and training to its employees. The amount of tax to be levied needs to be based on the cost of education and the number of graduates employed. Since the payroll tax is linked to the cost of education, the rate of tax also has to vary depending upon the type of graduates employed. In general, one can expect that the payroll tax for employing an engineering graduate will be proportionately higher than the same for employing a graduate in arts. Once the employers start paying the payroll tax, the resources thus accrue to the education system are hoped to form a reliable and continuous source of financing education in the years to come. Payroll tax is not extensively practiced. It is in practice in quite a few countries, but more specifically in case of financing training, not higher education (see Ziderman, 1989;
31
Middleton et al., 1994, pp. 121-26). Albrecht and Ziderman (1991) refer to two cases that come very close to payroll tax: one in Ghana where employers of graduates who have taken student loans, contribute 12 percent of wages to the national security fund, which is redirected to the education budget. Secondly, in China employers de facto repay the loans taken by the students. Further, Eicher and Chevaillier (1993, p. 467) cite the case of France, where payroll tax allows the firms to pay a proportion of tax as an unrestricted grant to institutions of their choice. The tax is compulsory but choice exists in case of method of payment. The main drawback of payroll tax, however, is that it might work as a dis-incentive to employers to employ graduates. Depending upon the elasticity of substitution between several levels/types of graduates, employers may tend to employ a 'cheaper' graduate, or an under graduate, or a secondary school product. This may aggravate the problem of educated unemployment,29 unless education-productivity relationship becomes very strong, and the elasticity of substitution between several types of higher education is less. Thus this puts a burden on human capital intensive units, and the employers may try to substitute human capital for the physical capital on the one hand, and on the other, higher educated with the lower educated. Hence, Whalley and Ziderman (1989) argue that use of such taxes is less alluring because of weak links of formal education to labour market conditions. Secondly, it will have a serious impact on the salaries of the graduates. Employers in all probability try to shift the incidence of the graduate tax to the graduate employees, through lower salaries, in which case there may not be much difference between loans (discussed earlier) or graduate tax (discussed below) and payroll tax, but for other aspects such as scope and extent of recovery, etc. ii) Graduate Tax Alternatively, as Glennerster et al (1968) proposed, a graduate tax could be levied on the graduate him(her)self -- the graduate paying a proportion of his/her income for a part or whole of his/her working lives, as a kind of repayment for the costs of his/her education. Such a tax is argued to be better than other kinds of cost recovery like fees and loans. There is no indebtedness, which is a characteristic feature of loans; there is no 'negative dowry' in it for women to feel discouraged; like direct taxes it could be progressive -- income contingent, and compared to the other types of earmarked taxes like the payroll tax discussed above, there is no question of shifting the tax incidence.30 Colclough (1990) and Albrecht and Ziderman (1991) further show that the possibility of revenue generation is higher in case of payroll and graduate taxes respectively than in case of loans, besides being more equitable. Ziderman (1989) argues that compared to other taxes, such a tax may be relatively more efficient. Since the experience with graduate/payroll tax is rather limited, it is yet to be seen how far it can be efficient in general. But its appeal seems
29
Colclough (1990) however argues that it would make the employers economize the use of graduates.
30
One example of such a tax is the proposed, but not implemented, graduate income tax in Argentina. See Gertel (1991, pp. 76-77).
32
to be strong, though economic theory, in general, does not favour earmarked taxes compared to general taxes.31 But the difference between such a tax, and a well-designed income tax seems to be not much clear, except for the earmarking of the graduate tax. For example, Arrow (1993, pp. 9-10) makes almost a similar suggestion: a higher income tax rate for higher educated workers, and this was argued to be "the most practical way of securing the repayment." Friedman (1962, p. 105) also argued the same: the graduate individual should be required to pay a specified proportion of his earnings in excess of specified sum for each unit of additional earnings ($1000), which could be combined with income tax. Further, some graduate taxes and fees look alike in nature and effect. For example, the deferred fee charges introduced in 1986 in Australia amount to graduate (education) tax; and the graduate tax introduced in 1989 provides a choice to pay an "up-front" fee on entering higher education or pay the tax. iii) Educational Cess In comparison to payroll tax, educational cess has been in vogue in several countries. Cess is an earmarked levy, payable by all members in a given region, and its revenues are to be used for a specific purpose, education in case of an education cess. But educational cess is not restricted to the households having students currently (or in the past) enrolled in schools, or the direct users of graduates, but is extended to all in a given region, or to a specific group in a given region. e.g., all agricultural land owners are levied an educational cess. Usually a cess is levied as a small fraction of some other tax. For example, a cess for public financing of libraries is attached to professional tax or to urban property tax. In rural areas cess is levied as a proportion of land revenue. However, education cess is used largely for school education. However, some argue now a days in case of higher education too. For example, in China an education levy32 has been charged since 1986, which amounts to 16.7 per cent of total expenditure on basic education in China in 1988 (Ahmed et al., 1991).33 In India an education cess was levied earlier in several states. It was imposed, collected and used by local governments, largely as a surcharge on land revenue, for the development of school education. The experience was not satisfactory in terms of the revenue generated and it was subsequently abolished.34 Recently, AICTE (1994) proposed an education cess on industries in India for technical education and research and development activities. The proposal is under consideration. Quite a few countries have some kind of levies or taxes earmarked for education.
31
See McCleary (1991) for a recent survey.
32
This is a surcharge on the amount of product tax, value added tax and business tax paid by work units and individuals. See also Tilak (1993e).
33
Its abolition was also attributable to the declined role of local governments and the declined role and/or abolition of land revenues. Now proposals are being made for its revival.
34
33
One advantage claimed by the proponents of education cess, in addition to generation of additional revenues, is that since these revenues are generated and are also used at local levels, it is claimed that the potential for their efficient utilisation is high. Secondly, it is claimed that it ensures community participation in education, which will improve the internal efficiency of the system by making teachers accountable to the community. Both the claims lack empirical evidence. Many economists have remained skeptical about earmarked taxes. Theory of public finance provides only limited justification for earmarked or special taxes, as decisions regarding raising resources and decisions regarding allocation of resources ought not to be linked, and as earmarked taxes produce a rigidity in the allocation of resources, and a rather unalterable prioritisation of public choices. For the same reason, the resource allocators generally do not favour earmarked taxes. But educational planners and policy makers argue that by assigning revenue from specific sources to education, expenditure on education can thereby be increased. Earmarked taxes may protect education from shifting allocations, inefficiency and corruption, and assure minimum levels of finances. Thus as funds for education from general tax revenue are subject to cuts, earmarked taxes would form a "sure source of funds for education, [and they have] to be preferred to general fund financing" (Panchamukhi, 1989, p. 44). But earmarked taxes like education cess, imposed on all households could be regressive in principle, though the effect could be small in practice as the cess is generally a very small amount; but if they are selectively imposed the revenues could be very less. In fact, if they are selectively imposed, say on the households whose children go to schools, the distinction between fees and earmarked taxes disappears.35 Generally earmarked taxes and cesses have a very limited tax base. Also Glennerster et al (1968, p. 34) concluded that "even at the highest rate that could be justified revenue builds up [from graduate tax] fairly slowly. A [graduate] tax is therefore no immediate solution to the problems of financing higher education." Hence revenue from these sources would remain supplementary to, not substitutes for general tax revenue, as a means of financing of education. In case of education particularly, earmarked sources typically provide a small fraction of the total requirements and the education sector has to depend upon allocations from general tax revenue, making the role of earmarked taxes insignificant. Further, low levels of revenues along with huge costs of administration and collection often make the whole system of earmarked taxes economically inefficient (McCleary, 1991). Further, there is a danger of the flow of the revenues from earmarked taxes into the general pool of tax revenues, resulting in no net gain for education sector in specific, unless some specific and highly effective measures are adopted. All cost recovery measures are also inherently inequitable, and the higher the degree of cost recovery, the higher will be their effects on inequities. Some measures can be made less inequitable by properly designing loans and scholarships; but that would result in less net
35
Even though Penrose (1993) argues that compulsory fees and earmarked taxes are the same, they become the same only in such cases.
34
revenue. Further, few governments could succeed in increasing cost recovery without deterring access of the lower income population to education. Some advocates of cost recovery are aware of it. For the same reason, they suggest the need for scholarships along with their proposals for cost recovery, to protect to some extent, the poor from withdrawing from education. Generally a strong case exists, even in those systems where education is provided free and no direct cost recovery measures are employed, in favour of scholarships/grants, which are direct subsidies to the students to meet direct costs, and even opportunity costs in certain cases. The case for scholarships becomes stronger -- both in terms of the coverage of student population, and the amount of scholarship -- with the introduction of direct cost recovery measures. But generally fees are levied (or made known) at the time of entry into higher education, while scholarships are awarded during studies, i.e., after one gets the admission. In this sense, unless scholarship programmes are highly imaginatively designed, fee reduces the access of the poor students to higher education, and scholarships will not be able to correct it. Further, it is likely that in most developing countries, cost recovery measures are introduced/administered efficiently as revenues are generated, but subsidy schemes like the scholarships, including loans, may not be administered so efficiently, resulting in accentuation of inequalities. Particularly targeting of scholarships has been problematic and inefficient in developing countries. Hence universal subsidisation is preferred to targeting of subsidies. Moreover in recent years a clear shift can be noted from scholarships to loans. But the problems of loans are well known. To conclude, all measures seem to have certain strengths and certain weaknesses. At the same time, all these measures, if well designed, seem to be only marginally different from each other. Taxes, particularly earmarked taxes, are nothing but deferred fees. In principle, there may not be much difference between a package consisting of high fees and loans as one mechanism and free or highly subsidised higher education plus general direct and/or specific taxes like graduate/payroll tax as an alternative package. While in principle both should yield the same, administrative efficiency and scope for progressiveness should lead us to favour the latter package. In other words, progressive taxation, and funding education, including higher education, out of general and specific tax and non-tax revenues, may still be the best option. All others are only second best solutions. 4. Private Higher Education Another closely related and important issue of concern in the development of education in the last quarter century refers to private higher education. Private education is not a new phenomenon in many countries, though modern private education is of recent origin. Many of the private institutions are privately managed, but are funded by the State to a substantial extent. 'Complete' or 'pure' private institutions may now be very few in number; but they are rapidly increasing in number. Unfortunately, data are not available to make such a distinction and to find out the exact share of 'true' private sector in education. State support to private institutions is quite common.
35
Private higher education institutions in education have been growing rapidly in all countries. The private sector meets a large part of the demand for higher education in Japan and Korea: its share in total enrollment in higher education is above 70 per cent in Japan, Korea, and Taiwan. As high as 73 per cent of all universities, 84 per cent of all junior colleges in Japan are private, enrolling more than 70 per cent of total students in these institutions in 1992. Korea provides yet another example of extensive higher education operated by the private sector: 84 per cent of higher education institutions and nearly 80 per cent of higher education enrollment were in the private sector in 1993. Private higher education institutions in Taiwan outnumber public institutions 2 to 1, capturing 70 per cent of the enrollment. The share of private enrollment in higher education in Japan, Korea, and Taiwan are among the highest in the world; and no country except the United States has enrollment in private institutions adding up to more than 10 per cent of the total enrolment in higher education, and even there the figure is only 10 per cent. In a sense, the Korean and Japanese experience combined seems to be in sharp contrast to the traditional welfare-state approach -- not to mention the traditionally important role of the state in the provision of education that dominates the pattern of educational development in European economies such as the United Kingdom, Sweden, Switzerland and Italy, and in the United States and Canada as well. Many other economies in East Asia -- Singapore, Taiwan, Hong Kong, and China -- do not rely on private financing to the extent that Korea and Japan do. Hong Kong was able to resist pressures to allow the establishment of private universities. The private (independent) higher education sector is emerging slowly in China and a system of non-government-run higher education institutions is gradually taking shape, as non-state or private (or sponsored) institutions begin to take root. In Singapore, which has a very limited role for the private sector, the government takes the bulk of the responsibility for higher education. But the quality aspects of private higher education do not seem to be satisfactory. Despite flourishing growth and government support, private institutions have failed to become top-quality institutions such as the ones founded in the United States. This shows us what happens when quality controls are weak and profit motives dominate other considerations. That universities in Korea are found to be producing half baked graduates,36 and those in India IT coolies (Rao, 2000), necessitating huge investments by the government and the industry in R&D. As private universities cater to the demands of the large population, neglect of public higher education goes unnoticed. More importantly, since higher education is allowed to be guided by market signals, most higher education institutions tend to concentrate on professional fields. As Clark (1995, p. 159) notes, humanities and social sciences are thrown aside; doctoral programs in not only social sciences but also in physical sciences are surprisingly weak, most advanced-level education is
36
Kim Linsu, in Far Eastern Economic Review (May 14 1998, p. 48). 36
radically underdeveloped, and the research-teaching-study nexus has become highly problematic. This is already being noted in many countries including India. This is believed to be mostly attributable to the dominant role of industry or private sector in higher education. It is generally felt that rapid growth in public sector spending on education has resulted in rapid growth in public sector enrollment everywhere, including in East Asia, and that such a relationship between private sector investments and enrollment in private institutions (or total enrollments in all institutions) cannot be found. On the whole, the private sector is rapidly growing in size, and most public policies or the lack of the same are conductive for its growth. In many countries of the world, the private sector has come to play either a limited or predominant role in higher education. In some countries, the origin of privatization can be traced back to a few centuries. But privatization has assumed greater significance as a policy strategy of the development of education in recent times, essentially, but not wholly, due to stagnating -- and in some countries declining -- public budgets for education, and increasing social demand for higher education, manifested in slogans like 'higher education for all' (Roderick and Stephens, 1979), and ideological shifts in public policies.. There has been remarkable growth in privatization during the last two to three decades in several countries of the world. The number of private colleges and universities has increased, and enrolments in private institutions increased at a much faster rate than in public institutions, enrolments in private institutions increased by several times in many countries. In a good number of countries the share of enrolments in private education and the number of private institutions as a proportion of the total number of institutions are more than half of the total. Private education has grown, essentially to meet excess demand and differentiated demand for higher education (James, 1987). First, the social demand for higher education exceeds the public supply, and the private market seeks to meet the unsatisfied demand. Secondly, demand for different quality (presumably high quality) and content in education (such as, for example, religious education) also contributes to the growth of privatization. On the supply side, private entrepreneurs are ready to provide higher education either for philanthropic or other altruistic motives, or for profit. The dividends could be quick economic profits, besides social and political gains. Myths and facts about privatization The case for privatization of higher education exists mostly on the basis of financial considerations. Public budgets for higher education are at best stagnant, and are indeed declining in real terms, more particularly in relation to other sectors of the economy. Privatization is also favoured on the grounds that it would provide enhanced levels of internal and external efficiency of higher education, and higher quality of education; and as the private sector would have to compete with the public sector, the competition would result in improvement in quality and efficiency not only of private education but also even public
37
higher education. In the long run, due to economies of scale, private institutions provide better quality education at lower cost than public institutions, as in Japan. On the other hand, privatization is opposed on at least three sets of grounds. The existing market system does not ensure optimum social investment in higher education, as externalities exist in the case of higher education, which is a 'quasi-public good'. The market system also fails to keep consumers well informed of the costs and benefits of higher education. It is likely that the costs of private education are much higher than public education as in the United States and the Republic of Korea. Finally, a private system of higher education is also insensitive to distributional considerations, and in fact contributes to socio-economic inequalities. Accordingly, public education is not only superior to private education, but private institutions cannot even survive without state support. Sophisticated arguments based on hard core evidence are rarely made in favour of privatization (Breneman and Finn, 1978, p. 6). Without empirical evidence, all the arguments, however well-formulated and articulated, remain as 'myths'. A few myths are examined here: One of the most common myths is that there is huge demand for private higher education, as private education is qualitatively superior to public education. But the available evidence shows that the higher quality of private education compared with public higher education is exaggerated. Even the availability of space per student and other facilities are reasonably higher in public universities than in private universities in many countries. For example in Japan private universities spend less than half of what public universities spend per student. It is I only in the United States that the difference is in favour of private universities. All this should indicate that quality differences are indeed more favourable to public than to private universities. Yet private universities may sometimes show better results in final examinations, as essentially they admit only the best prepared students with better socioeconomic background. However, 'graduation of the "best" graduates is not by itself a proof of the "best" education' (Levy, 1985, p. 454). Even if the quality of output is taken into consideration, that is, internal efficiency, measured in terms of academic achievement, success rates, drop-out rates, failure rates, etc., private education does not compare favourably with public education. Even with respect to the school sector, studies (e.g., Willms, 1987) have found that the advantage of private schooling with respect to academic achievement for an average student is not significant, as reported earlier (Coleman et al., 1981). The limited evidence available on higher education leads us to question the beliefs regarding the superiority of private education. In the Philippines, while the private sector increased accessibility to education to the people, it was found to have contributed to a deterioration in the quality and standards of higher education to such an extent that many people argued for a halt of the public laissez-faire policy in the growth of higher education and for the expansion of state supported institutions (Tan and Alonzo, 1987, p. 159). In Brazil and Peru, the quality of private higher education was once described as 'disgraceful' (Levy, 1985, p. 453); perhaps it is same even now. In India, except for those institutions recognized by the public sector, private colleges, which receive no aid from the government, have been increasing in number essentially due to the
38
existence of excess demand for higher education, particularly from the upper classes and those who fail to gain admission to government colleges. Rarely is the quality of these institutions regarded as superior. Their growth also has to do with the fact that people tend to equate high fees with a high quality of education (Breneman, 1988). Above all, many nonelite private universities and colleges were created, as is the case in some Latin American countries, to provide job-related training, rather than higher education per se. It is also argued that as the private sector has to compete with the public sector, the efficiency of the former and, equally important, the efficiency of all higher education, including public, improve significantly. But in countries where mass private sectors prevail, or in countries where private sectors play a peripheral role, there is little scope for competition, and as a result, the private sector may turn out to be very inefficient, and even economically corrupt. Thus the arguments on efficiency and quality of private higher education do not withstand any close scrutiny. Secondly, it is widely believed that graduates from private universities receive higher rewards in the labour market in the form of lower unemployment rates, better paid jobs and consequently higher earnings (Jimenez and Tan, 19876; Patrinos, 1990). In short, the external efficiency of private higher education is argued to be greater than public higher education, which would explain the growth of privatization. But the empirical evidence does not support these assumptions. Unemployment rates among graduates from private universities are generally higher than those from public universities in many developing countries. Estimated rates of return, a summary statistic of the external or labour-market efficiency of education show that public higher education pays better than private higher education. Another important myth widely shared is that private institutions provide considerable relief from financial burden to the governments, as they are self-financing. But as well known, most private institutions are not totally private, at least from a financial standpoint. They receive huge subsidies from the State. It is not only state-aided private institutions, but also other private education institutions receive subsides hidden subsidies in the form of land and material at confessional rates, tax exemptions etc. In all, private institutions do not provide any relief to the government in the form of saving of public of resources. If there is any relief to the government, that is very small, and there is no relief to the people, as these institutions charge huge amounts as fees. Rarely private institutions make any investment of any significant magnitude from their own sources. Fourthly, it is felt that the private sector responds to the economic needs of the individual and society, and provides relevant types of education. 'The major advantage of private universities has been in responding more quickly and efficiently to market demands' (Balan, 1990, p. 17). But what is the reality? In most countries, private higher education institutions offer mainly low capital-intense disciplines of study. It is true that not only are there few private universities involved in research activities, but they are also involved in providing cheap commercial and vocational training as in the case of several Latin American countries, or in the case of 'parallel' colleges in Kerala in India (Nair and Ajit, 1984). When the potential for economic profit is high, the private sector entered into professional fields
39
and opened engineering and medical colleges, as in India many with poor infrastructure (Kothari, 1986). On the whole, research and broad educational needs of the economy are barely served by the private sector. Private institutions tend to provide more personal and fewer social benefits to students. The private sector responds to market demands, but only in the short term, while 'improvement of schools requires long-term planning - not the quick alteration of a commodity to meet changing fashions' (Ping, 1987, p. 21). Fifthly, it is generally believed that private enterprise has genuine philanthropic motives in opening private colleges and universities, which are by definition part of the 'nonprofit sector'. They also make huge investments in higher education. This is no more the case. Private institutions are largely funded either from students' tuition fees and charges or from public subsidies. Very few private institutions make any investment from their own resources. These institutions are in fact operated in a kind of seller's market, recovering the full costs plus profits from some source or other. Profit maximization seems to be the single most important principle of private sector in higher education. Philanthropy, charity and education development were once upon a time guiding factors to the private sector. But with increasing marketization of the economies, these aspects have gone into oblivion. The role of private finances other than fees, such as donations, endowments etc., is not at all significant. In the United States, however, tuition charges account for only slightly more than one-third of the total costs. Private institutions are involved in disguised profit-making operations in almost all countries, including Brazil and India. The private colleges that receive little public support in India expect huge donations and capitation fees, and charge abnormally high fees, ten to twenty times higher than those charged by government colleges. While universities and colleges are, by definition, non-profit institutions, these private institutions do not merely cover their costs, they also make huge 'quick profits', which are not necessarily reinvested in education. Educational considerations hardly figure in this context (Tilak, 1990). As a result, higher education is subject to vulgar commercialization. It is also claimed that private higher education can improve equity in education, by providing access to many more students, who, otherwise, would not have gone to higher education. It is important to note that private universities are created mainly to protect the elitist character of education, and to keep the masses away form higher education. As private institutions outnumber the public institutions over the years, the government feels no need to establish new public universities, and as a result, the weaker sections of the society would get permanently marginalized. It is generally noted that private education is elitist, and caters to the needs of the wealthy. For example, I have hypothesized earlier (Tilak, 1986), largely based on evidence on the school sector, that the benefits of education in private institutions -- costly and presumably of high quality -- accrue largely to the elite (as the private sector caters mainly to the needs of the elites), while the benefits of education in public schools -- which are generally compelled to choose quantity rather than quality and, accordingly, provide inexpensive education -- mostly for the masses. Private universities generally serve a privileged clientele; caters to the needs of the wealthy. The democratization of public
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higher education has reduced considerably the elitist character of higher education. The social elitism attached to private higher education was found to be one of the most important factors in the growth of an elite private sector in higher education in Latin American countries (Levy, 1985). The private institutions lent an elitist or secular-elitist character to higher education. On the whole, however, as fees in private universities are very high compared with public universities, only the relatively well-to-do opt for private higher education; and 'public universities continue to be the first choice for many' for educational and financial reasons (Levy, 1985, p. 454). A closely related myth well argued by many is that privatization of higher education improves income distribution, as public funding of higher education, with all its 'perverse effects' is generally found to be regressive (Psacharopoulos, 1977; Blaug, 1982). Again, systematic research has shown that it is not true. As evidence from Japan, one of the few countries to have carried out elaborate investigations on this issue, shows, public universities seem to have higher redistributive effects than private universities in transferring resources from the top income quintile to the others. In many countries, the growth of privatization can be attributed largely to the failure of public universities, while private universities have certainly made positive contributions. Private universities in some countries, such as the United States, have contributed in important and unique ways to diversity, independence, quality, efficiency and innovation (Breneman and Finn, 1978, p. 6). In countries like Japan, each private university has its own identity, tradition, culture, etc. In contrast, public universities hardly offer any diversity or individual choice. In this sense, privatization increases the possibilities for individual choice in the type and quality of higher education. But 'the stress upon individualism, individual preference, at the expense of social responsibility and cohesiveness must be a matter of concern' (Ping, 1987, p. 291). The goals and strategies of the private sector in higher education are on the whole highly injurious to the public interest. First, the private sector has turned the 'non-profit sector' into a high-profit-making sector not only in terms of social and political power, but also in terms of financial returns, and as profits are not allowed in educational enterprises in several countries, private educational enterprises have resorted to illegal activities in education. When governments attempted to regulate profits by allowing state subsidies and restricting fee levels, all the private institutions found they had one thing in common - a demand for subsidies. In the first instance, state subsidies eased the financial crisis of the private universities, as in Brazil, and in the long run contributed to 'private enrichment at public expense. As a result of all this, many countries today have 'bastard' private-sector colleges, either illegally set up to do legal business, or legally created to do illegal work (Singh, 1983). Secondly, by concentrating on profit-yielding, cheap, career-related commercial studies, the market-oriented private universities provide vocational training under the name of 'higher education' and ignore 'broader higher education'. Private universities also totally ignore research, which is essential for sustained development of higher education. Thirdly, by charging high fees, private institutions create irreparable socio-economic inequities between the poor and rich income groups of the population. Private education is
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'socially and economically divisive' (Psacharopoulos and Woodhall, 1985, p. 144). Access to higher education by lower income groups is negatively affected by the rapid growth of privatization. It is generally felt that 'even if one assumes that the private sector is generally superior to the public sector, it does not logically follow that proportional expansion of the private sector would make for a better system' (Levy, 1985, p. 458). In short, private education is not found to be economically efficient, qualitatively superior, and socially equitable. Accordingly, it is feared that increased privatization of higher education would present more problems than solutions, as in case of Colombia (Patrinos, 1990, p. 169). Thus the inappropriateness of the market metaphor in higher education is abundantly clear. It should be noted that the power of the market forces is tremendous, as warned by many (e.g., Qiping and White, 1994). Once unleashed, they are not likely to be easily curbed. What they can do, can hardly be undone. Moreover, the changes they bring about will most probably stimulate still more market-oriented changes. The claimed potential benefits of marketisation like improvement in efficiency, resources quality, accountability, etc., need to be contrasted with the potentially serious dangers as the creation of an increasingly inegalitarian society, a fragmentation of knowledge, decline in quality and increase in costs, the overheated pursuit of immediate, short-term interests at the expense of long term social and intellectual needs of the society, etc. 5. Conclusions and Implications Higher education systems in many developing as well as developed counties are characterised with a crisis, rather a continuing crisis, with overcrowding, inadequate staffing, deteriorating standards and quality, poor physical facilities, insufficient equipment, and declining public budgets. More importantly, higher education is subject to neglect and even discrimination in public policy. As Verspoor (1994, p. 2) rightly observed, the crisis is in part the reflection of the economic adversity that many developing countries have experienced in the 1980s, but it is also a crisis of policy or very often, lack of policies (emphasis added). Higher education systems are undergoing rapid changes all over the world. Some have followed the British mode of welfare statism to some extent; others attach more value to individual economic gain (and thereby to the economic growth of the country) and expect the market to respond to economic incentives that higher education comes with;37 and a few others are indeed following ad hoc or no clear policies. Coherent long term policies for the development of higher education for development of nations are needed. National governments and international organisations have to clearly recognise the critical importance of higher education in development.
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At the same time it may be wrong to argue that the principle of individual choice, a principle that is assigned a lot of weight by the state in European and North American economies, has been the guiding principle of state policies in financing (or rather under financing or not financing at all) higher education in Japan and Korea. 42
It is important to note that no nation that has not expanded reasonably well its higher education system could achieve a high level of economic development. International evidence shows that all advanced countries are those that have a gross enrolment ratio of above 20 per cent. Among the advanced countries there is no single country, where higher education was not well expanded. In most developed countries higher education is fairly democratised, and is accessible to all. In fact, there are significant trends towards massification of the base of higher education. The gross enrolment ratio in higher education in advanced countries varies between 20 per cent and as high as 90 per cent. In contrast, in most of the developing countries, it is restricted to a small fraction of youth. No country could be found in the group of high-income countries with an enrolment ratio of less than 20 per cent. Thus 20 per cent enrolment ratio in higher education seems to be the critical threshold level for a country to become economically advanced. The world experience with the policies of globalisation and structural adjustment is also rich (Tilak, 1997a). Comparing the experiences of several countries, one may conclude that these policies succeeded only in those countries that have invested heavily in education, including specifically higher education. The converse is also true. These policies could not yield good results in those countries that have made low and inadequate levels of investment in higher education, reflected in low levels of educational levels of workforce, as in countries in South Asia, and also in Southeast Asia like Viet Nam, Lao, Cambodia, etc., and many countries in sub-Saharan Africa, compared to the countries in East Asia. After all, globalisation, including international competition, to be successful, requires highly skilled manpower, produced by higher education systems. Empirically, it was found that globalisation has contributed to reduction in poverty and inequalities in East Asia, but globalisation has not allowed South Asia's progress towards poverty reduction to continue at its previous pace (Khan, 1998). The reason could be found in the differences in investment in education, higher education in particular. Despite such an awareness, many developing countries are not able to accord due priority to higher education According to the predictions made by Unesco (see Chapman and Adams, 1998), many of the developing countries in Asia, and SubSaharan Africa will continue to be lagging behind the developed countries in the development of higher education and will have low enrolment ratios, unless significant policies of expansion of higher education are adopted. But for a couple of exceptions (e.g., Korea and Japan), large scale crosscountry evidence shows that higher education systems which are predominantly private, may not produce significant economic pay-offs, and certainly will not be able to contribute to the transformation of the developing economies into developed/advanced economies. The example of the Philippines in Asia, and in general, the Latin American countries collaborate to this. The role of the state is very important in providing and financing education everywhere. Excessive reliance of the governments on private sector for the development of higher education may lead to
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strengthening of class inequalities and even produce new inequalities, besides adding to the problems of quality. On the whole, it seems that initial government investments on a large scale are important in higher education; but only after some time, and certain level of educational and economic development is achieved, private sector may complement the state efforts in higher education. This also depends upon the role of the private sector in economic development in general. The East Asian sequencing of funding -- huge public funding first, and then only some private funding -- is quite important.
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Tilak/Brazil Seminar Hr Ed & Dev
The paper partly draws from the authors earlier research (Tilak, 2003, 1997b, and 1991).
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INTERNATIONAL SEMINAR: UNIVERSITY XXI

Brasilia, Brazil (25-27 November 2003)

HIGHER EDUCATION AND DEVELOPMENT

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Higher Education and Development* Jandhyala B G Tilak

Jandhyala Tilak: Higher Education and Development

Private 18.2 18.8 19.5 11.6 27.8 19.0

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Higher Education Attaiment in Asia & the Pacific, 1990s

(% of Adult (25+) Population with higher Education

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

0.0 0 20 Gross Enrolment Raio 40

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

This is also confirmed by intra-country studies (e.g., Tilak, 2001b).

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

An Assessment of the Arguments

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Taiwan South Korea Philippines

Late '80s 1985 1977

50.0 82.3 85.0

38.6 38.7 75.8 65.8

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Income Contingent Loans

See also Arrow (1993, p. 9).

Jandhyala Tilak: Higher Education and Development

Australia Sweden II Note:

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

See McCleary (1991) for a recent survey.

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Kim Linsu, in Far Eastern Economic Review (May 14 1998, p. 48). 36

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development

Jandhyala Tilak: Higher Education and Development