Financing Higher Education


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Financing Higher Education

  1. 1. Student ID: 7198735 Word count: 4320 (excluding abstract and tables) Topic: - How developing countries finance higher education. Explain your answer For the ease of understanding, the essay can be read under following five major headings. Part -1 Establishing need for higher education and its finance Part -2 Financing reforms in developed countries and lessons to be learned Part -3 Financing options and reforms in developing countries Part - 4 Conclusion Part -5 Striking evidences - Case study of Indian higher education system (Source: Development in higher education financing; an international perspective by O’hare, 2006)
  2. 2. Abstract With the rise of Human capital focus in 1960s following empirical findings of Schultz and further empirical support by other economists, there emerged a growing concern in developing countries over higher education provision looking at the financial constraints on one hand and efficient and equitable provision on the other. Later decade saw a massive upsurge in the tertiary education enrollments in both developed and developing which forced state to look for other options like opening of private sector for provision of higher education, market based approaches for fiscal support (student loan, graduate tax, etc.), reforms in public finance and institutional restructuring. There emerges a very similar pattern in countries with varying political-economic condition and higher culture, and at entirely different stages of technological development. Although success is still half baked, and there is still a is long way to go, the case studies from both developed and developing countries clearly singled out key thrust areas like introduction of accessible income contingent student loans on market rate basis, discriminatory pricing of tuition fee based on affordability, prevalence of private sector with stringent monitoring at a decentralized level, engaging in entrepreneurial activities in order to attain self sufficiency, and opening up channels with alumni and other donations in order to make financial reform fully successful. Alas, a success case in financial reform must have support from various other frontiers like polity, economy, culture, technology etc. in a favorable policy environment like taxation policy encouraging graduate taxes and loans, and proper incentives for employers and market to function etc. Also, countries like India, the biggest democracy in the world; cases like caste based reservations, capitation fee for admission in private institutions and high political flavor in academics makes reform process most challenging.
  3. 3. Importance of higher education for developing countries It is due to Knowledge revolution, which firmed its roots, primarily after II world war, there has been a leapfrogging development in technological frontiers in various nations. Developing countries too have realized the importance of higher education in supporting and enhancing the process of economic and social development. As per World Bank (2000), the focus on primary education 1 is important, but an approach that pursues primary education alone will leave societies dangerously unprepared for survival in tomorrow’s world. Without improved human capital, countries will inevitably fall behind and experience intellectual and economic marginalization and isolation. The result will be continuing, if not rising, poverty. Democracy, for instance, has spread at the same time as the knowledge revolution has gathered pace which is a social externality of education2 (World Bank 2000). Higher education has never been as important to the future of the developing world as it is right now. It’s difficult to assert that higher education will lead to rapid economic development but it will go long way in sustained progress of mankind. (Source: - Work Bank 2000) With the established focus on higher education leading to rising enrollments with a simultaneous rise in state’s fiscal constraints, there is greater emphasis on finding alternative sustainable, efficient and equitable mechanism to finance higher education in developing countries which can usher development of human capital and support in economic growth of a nation. Education as human capital The differences among countries in their capital endowments, when both physical and human capital are taken into account under the assumption of factor prize equalization, go a long way towards explaining the difference in income per worker among them (T. W. Schultz 1971) which was 1 Interestingly in a study by Pssacropolous (2008), it has been established that social rate of return works on a narrow focus which currently excludes externalities. 2 This feature of education has led Miton Friedman Comment …the education of my child contributes to other people’s welfare by promoting a stable and democratic society (Davis 1970)
  4. 4. supported by empirical findings of George Makiw, David Romer, and David Weil, in extending Solow model with human capital (Charles I. J. 2002). The result of the empirical relationship forms the basis for Mincerian formulation explaining the increase in wages with every additional year of schooling (Charles I. J. 2002). In the statistical analysis that accompanied Solow’s study, the World Bank (1993) found that improvement in education is a very significant explanatory variable for East Asian economic growth. Objectives of higher education - Efficiency and equity as the major financing criteria It is easier to account for individual motives for pursuing higher education, including a desire to increase one’s social mobility. Arguably, higher education is propelled by all of the below mentioned considerations, but the financing criteria will depend in part on which considerations are paramount to the society keeping an egalitarian perspective. Informed citizen Advancement Social of opportunities civilization Balanced Student Budget Human Capital Freedom Academic Equity freedom Efficiency Objectives of higher education (source: - Howard R. Bowen, Claremont University Center, 1971) Efficiency and equity – welfare functions Amongst all the criteria’s, Efficiency and equity criteria are central to planning and financing of higher education. Notwithstanding the fact that efficiency and equity, are regarded as in conflict – that is, the trade off for an increase in equity is a loss in efficiency and higher costs, human growth criteria as propagated by Walter Mc Mohan (1982) go long way in explaining the theoretical approach towards attaining equilibrium. In his findings, Psacharopoulos (2008), efficiency and equity were regarded to be primary component serving social welfare and hence commented that the objective of provision of higher education must be to maximize the social welfare function. Max Social Welfare = Y α (1-Gini) β subjected to public spending ≤ T
  5. 5. Here, Y is GNP, (1-Gini) is equity, T is tax revenue constraints and α & β are value weights placed on efficiency and equity. •Improvements in efficiency, with no reductions in equity •Improvements in equity, Human Growth with no reduction in Criteria efficiency •Improvements in both efficiency and equity Equity Criteria •Commutative equity •Fiscal neutrality •Proportional equity •Positivism Efficiency Criteria •Accountability •Production function relationship •Cost/ effectiveness criteria •Cost / monetary criteria •Cost / “full” earning criteria •Cost / “full” private and social benefit criteria Figure.1 financing higher education -Human growth criteria (source Walter Mc Mohan 1982) Financing human capital - Investment criteria for higher education According to Schultz (1971), there are certain characteristics of human capital which must be considered before investing in higher education. • The human capital that is formed by higher education is far from homogenous. Parts of it are for consumption, and parts for production. Producer and consumer components too are of many different types. Allocating resources for higher education by lumping these factors would result bad allocation • The value of each type of human capital depends upon value of services it renders and not on the original costs; mistakes in composition and size of stock of each type, once made, are sunken investments. • The formation of most of these types of capital requires a long horizon as the capabilities students acquire are part of him during rest of the life. • Value of benefits of benefits of higher education accruing to students privately consists of future earnings and of future non-pecuniary satisfactions. • Although, human capital is as such cannot be bought and sold, it is relatively easier to estimate value of the producer service of this capital in terms of wages and salaries in the labor market.
  6. 6. • Human capital like reproducible material capital is subject to obsolescence. Hence education planning should search for ways and means of improving higher education by substituting long life for short life instructional components so that it can ride better the changing demands of high skills. Continuing education after graduation is a form of maintenance. • Capital formation by education sets the stage for thinking of education as an investment Based on the premise that higher education serves three essential functions i.e. discovering talent, instruction and research the central economic concept in planning and financing higher education should be rate of returns to investment (T. W. Schultz, 1971). Rate of return criterion and importance of externalities Psacharopoulos (1985, 1993, and 2002) while using Mincerian earning function method, identified rates of returns to investment in education across the nations. Although, the key findings illustrated the importance of primary education having the highest social highest social returns in all world regions, the private returns were found considerably higher than social returns because of the public subsidization of education. Also, interestingly, he found that the degree of public subsidy increases with the level of education considered, which has regressive policy implications. Out of one of the major findings, he found that social and private returns at all level largely decline by the level of the country's per capita income. 30% 27% 19% 17% 19% 20% 13% 11% 10% 0% primary secondary higher Private Social A wide social rate of return pattern (source: Psacharopoulos Private returns in investments in education by 2008 adapted and based on Heckman and Masterov 2005) income level (source: Psacharopoulos 1993) primary secondary primary secondary 40 40 30 30 20 20 10 10 0 0 % 299 2403 4184 13100 o n u e 299 2403 4184 13100 a S c r t f l i Per capita income ($) Per capita income ($) % o n u P e a v r t f i Private and social return: world averages (source: Social returns in investments in education by Psacharopoulos 2008) income level (source: Psacharopoulos 1993)
  7. 7. Although there has been a declining pattern of the rectums to education over time where all social returns have declined between 2 and 8 percentage points on average in a 15 year period, interestingly and noticeably, returns to higher education have increased by about 2 percentage points during this period. Subject Social Private Agriculture 7.6 15.0 Soc. Science, Arts & Human. 9.1 14.6 Economics & Business 12.0 17.7 Engineering 17.1 19.0 Law 12.7 16.8 Medicine 10.0 17.7 Physics 1.8 13.7 Science 8.9 17.0 Educational Level Social Private Primary -8.2 -2 Seconday -5.7 -1.9 Higher -1.7 1.7 Change in returns to investments in education over 15 years – percentage points (source: Psacharopoulos 1993) Returns to Education (% points) -1.7 Mean years of schooling 2.4 Change in returns to education over a period of 12 years: Returns to higher education by faculty (source: Mincerian Method (source: Psacharopoulos 1993) Psacharopoulos 1993) The author also finds that returns to higher education faculties, the lowest social returns being for physics, sciences and agronomy, and the highest private returns for engineering, law and economics. The findings of the exercise reinstate the strong position of university graduates in maintaining their private advantage by means of public subsidization at this level of education. Having less evidences on wide social rate of return which includes externalities (Psacharopoulos 2008), knowing the fact that higher education suffers from a variety of market failures which are beyond the control of market forces alone makes case for public investment in higher education, well established. The central theme of the financing higher education should revolves around the question of extent of public investment, the areas requiring public investments, at what levels and on to whom (D. Kapoor 2007). To address these questions, the central concern must be the context i.e. the society and its relative considerations amongst several objectives and constraints of higher education finance.
  8. 8. Higher Education financial reforms in (Source: - Work Bank 2000) developed nations Nearly in last 3 decades, there has been a shift from almost free higher education to the introduction of tuition fee including changes in student aid system and introduction of student loans to replace grants. In 1992, New Zealand introduced twin reforms: fees set by universities, with no constraint on fee levels; and student loans which (a) had income-contingent repayments, (b) charged Tertiary education students per one million domestic populations based on a positive real interest rate related to the 2002 estimations, OECD (source: Psacharopoulous 2003) government’s cost of borrowing, and (c) covered all fees and realistic living costs (Barr N. 2006 p.11). But the big bang liberalization ended up with political pressures as this model faced several roadblocks in terms of access to target subsidies, lack of perceived benefits of income contingent repayments. UK faced initial hitches with student loan as compare to European countries like Finland where proportion of women in HE was higher than in the U.K. at that time. Australia introduced Higher education contribution scheme (HECS) which is highly subsidized and the user contribution (20% of the cost) is income contingent. In 2001, Scotland and Wales abolishing upfront fee system introduced a deferred payment scheme by means of a compulsory contribution to a Scottish Graduate Endowment Fund. In 2006, UK introduced top-up system where payments were income contingent following HECS in Australia. In a recent case in the history of the UK, University of Cambridge is looking to raise a sum of £300m through bonds (, Tuesday 5 January 2010 18.15 GMT). Universities like Harvard and Yale, among other Ivy League institutions, regularly issue bonds or invest their endowments in the stock market to help pay for the rising staff and technology costs of academic institutions.
  9. 9. Education expenditure as a percentage of the GDP, 2004 (source: - Funding universities for efficiency and equity: research findings versus petty politics George Psacharopoulos, 2008) Reforms in Financing higher education –Prevalent options Public financing and evidences from developing countries Often, student/ parents face three fundamental issues Restructuring which requires state’s involvement, these are; of Institutions shortage of money, i.e. the student comes from a low- income family, shortage of information, e.g. the Supplementing revenues from mixed sources student is badly-informed about the benefits of education and training; information in this context includes aspirations, and shortage of education, e.g. attending a failing school. Financing Higher education-prevalent options (Johnstone 1998) Since higher education has both social and private returns, financing option should encompass wide variety of stakeholders which are taxpayers, graduates, students and their families, employers and other stakeholders.
  10. 10. Loan and graduate tax Also, financing option should not be seen in isolation as it requires a comprehensive Tuition fee Private sector restructuring w.r.t. three focal areas; Supplementing public funds with revenues from mixed sources, Reforms in public finances and restructuring of institutions. Entrepreneurial Philanthropy activities Supplementing public funds with revenues from mixed sources- (Johnstone 1998) Government Student and / or Alumni of International Sources Industries (Taxpayers) parents philanthropists cooperation Direct institutional contribution Indirect contribution via financial assisatace and subsidised loans Tuition fee Degree programs Non degree programs Student loans and graduate taxes Subsidised Unsubsidised Productive activities Services Consulting Research Laboratory tests Production of goods Agricultural products Industrial products Rental of Land and faciltites Donations Direct Indirect (lottery) Sources of financing higher education and contributions from various stakeholders (source: Jamil Salmi and Gabrielena Alcala (1998) Opciones para reformar el financiamiento de la enseñanza superior) Supplementing public funds with revenues from mixed sources a) Tuition fee Tuition fee is helpful in decreasing state fiscal constraints. High subsidies can harm access on the supply side, but their absence can harm the demand side of higher education. Lessons from developed countries suggest that big bang liberalization can be politically destabilizing whereas without liberalization, quality and access suffers (Barr N. 2006). For instance, the measure of partial cost recovery in Africa in tuition fee and almost full cost recovery in accommodation and food was widely accepted (Johnstone 1998). More importantly in the case of Tunisia (Millot 1997), where users contribute less than 1% of the cost of their education, the introduction of user fee increased the fiscal base for the universities. In Latin America, in 1981, Chile government, after introduction of structural and financial reforms introduced student fee in public institutions whereas in the rest of the continent fees continued to be almost nonexistent for example Argentina (Johnstone 1998). b) Discriminatory pricing A discriminatory pricing mechanism is sensitive to the costs of higher education on the one hand, and the economic ability of the students on the other. As per Tilak and Varghese (1991) a discriminatory
  11. 11. pricing would be relatively more efficient in generating additional resources, as well as equitable by taking care of the interests of the economically weaker sections of society. Facilitating redistribution from better-off to worse-off, discriminatory tuition fees are found to be controversial in Europe but less so in Central and Eastern Europe, and are taken for granted in the USA and many countries in Asia. c) Income contingent student loan and Graduate tax Envisaged to support the costs of higher education by the students themselves in the long run, income contingent student loans can ease the tradeoff by supplementing public funding with private finance. The effective recovery on student loans depends on the rate of interest, the repayment period, the rate of recovery (i.e., the prevalence of non-payment, or efaults), and the cost of servicing accounts (Johnstone 1998). In graduate tax, the students continue to get their usual subsidies in the form of low or no tuition and perhaps living grants, however, they incur obligations for greater income tax payments than would have been the case in the absence of their higher educational experiences. The idea of Student Loan and graduate taxes got success in limited degree as there are fundamental, structural and policy problem associated with student loans. There are also problems of effective recovery. Debt aversion is another road block in the success of student loans. In case of China, although student loan is supported by central government and the local authorities, however, there existed some difficulties viz., a cultural reluctance to borrow money, defaults resulting from the requirement that students repay loans by the time they graduate, lack of funding, etc. d) Employer tax based on recruitment Rather than student / family or the state bearing the financial load, employer shares a fixed sum from tuition with every student recruited from the Institution. It is also helpful bringing close ties in between institutes and industry. e) Entrepreneurial Activities Entrepreneurial activities bring autonomy while diversifying the income to increase financial resources. It also helps introduce a market sensitive institutional culture and cooperative links with business partners. The other benefits could be relevant training and work placements for students which enhance quality of higher education, reduce governmental dependency. Institutional entrepreneurship, in Russia and China, extends to the factories, farms, and firms that were owned and operated by the institution for the state, or that have been started in joint ventures with foreign interests or new native capitalists (Johnstone 1998). Mexico has focused on entrepreneurial, earning extra income involving faculty and students in this effort. African universities are recording profits through entrepreneurial activities. f) Philanthropy and Aid
  12. 12. With the enhanced industrial relationship and a strong alumni base, philanthropy can add up to institution’s funding base. There is a need to mellow down the religion bias (which is found in Indian and Chinese cases) of the philanthropic activity. Also, favorable tax treatment of charitable contributions must be done in order to cultivate philanthropy. Many developing nations like India, Argentina, and China exhibit a tradition of philanthropic activity. g) International cooperation International cooperation can help through strategies in financial autonomy for institutions. International cooperation can be anticipated in the form of investment support from international organizations promoting technology, International exchange programs exposing students to other part of the World, cooperation in designing curriculum for higher education, cooperation with institutions in the form of recruitments (example IIT's in India and entrepreneurial support from US) h) Private sector Proliferation of private sector institutions is a result of limitations of publicly funded institutions and a simultaneous burgeoning middle class's purchasing power. Although there are commercial motives and major quality and equity concerns, but so far, private has played an important role in provision of higher education developing countries. The proportion of students studying in private institutions in Latin America has been doubled in last 15 years (World Bank 2000). In Kenya the function of private educational institutions is not so much to absorb excess demand, as it is to enhance quality. In India, private expenditure on education rose 10.8 times between 1988 and 2004.
  13. 13. Percentage share of enrollment in private sector institutions, source: (World Bank 2000) i) Bond and Stock market This approach is less prevalent in the case of developing countries as it requires mature financial institutions in a country. Alternatively, there is a sheer need to develop stable and mature financial institutions in developing order to avoid perils of unregulated currency movements. Reforms in public financing a) Devolution of management and spending authority Decentralization allows a rational distribution of funds among higher education institutions and between disciplines addressing inefficiencies in the system. There has been prevalence of decentralized investment decision making in the form of lump sum budgets in both OECD and developing. A lump sum budget is assumed to be effective as institutional managers are likely to make better resource allocation in comparison to than ministerial bureaucrats and politicians. b) Budget reforms Reforms in budgets while tying it with performance budgeting criteria like degrees awarded in particular fields, average time to degree completion, performance of graduates or post graduate or
  14. 14. licensure examinations, success of faculty in winning competitive research grants, or peer-based scholarly reputation of the faculty etc. can bring efficiencies in the system while rationalizing the investments. Reforms in budgets for example in Argentina as part of the financial reform; World Bank has supported a Fund for Enhancement of Education Quality (FOMEC) as a competitive and transparent investment fund. Restructuring of higher education institutions a) Radical change Radical change brings restructuring, of the institution make them cost-effective; and the radical alteration of the mission and production function of an institution. It affects organization’s mission, skills and other attributes, as well as the number of workers employed for instance the universities in Russia have undergone financial downsizing resulted in a decrease in faculty compensation, closure of departments and programs, and the superimposition of a range of entrepreneurial activities involving both faculty and facilities (Johnstone 1998). b) Technology Technology as an engine of growth, being an endogenous parameter, is undoubtedly placed as one of the key elements of higher education finance. While investing in technology can help organize higher education better, and can reduce costs (e.g. distance learning etc., information technology and communications is equally important arena for investment), being costly to developing nations, on the other side, technology can be a barrier while competing with developing nations. With respect to technology In the last two decades distance education has rapidly expanded in Bangladesh, China, India, Indonesia, Korea, Pakistan, Sri Lanka, the Philippines, and Thailand (Johnstone 1998). Table-1 various stakeholders and their expected roles in higher education financing Stakeholders Role Government 1. Using tax revenues in paying that part of the cost of education which results in external benefits. 2. Should subsidies various courses based on their returns in private institutions and make stringent performance and monitoring criteria’s for private institutions 3. Should play an active role in reforming institutions like Banking, stock markets etc. Educational 1. Offer better incentives and transparency to students before choosing the institution Institutions 2. Offer a platform for both students and employers to match their expectations 3. Should offer greater options for financially poor students to engaging them in part time entrepreneurial activities Student / Parents Need to be much more aware and informed Private Should focus of standards of education rather than commercializing and making education work like Institutions another profit making venture. Society Well informed and educated enough to make their decisions Policy makers 1. Identification of returns on investment both private and social on various courses for higher education 2. Promoting favorable courses in a win-win situation both for students and society as a whole (higher returns on both social and personal front) 3. Extending transparent and equitable support to students in terms of choosing a favorable course evaluating future employment prospects and returns, various options for financing tuition and other costs, policies bridging demand and supply between employment sector and graduates
  15. 15. Employers / 1. Close tie ups with vocational courses Industries 2. Employer / recruitment tax can bring greater incentives for students to pursue higher studies Alumni / 1. Should donate generously for the welfare of their institution Philanthropy 2. Invest in technological up gradation International Assistance with strategy cooperation 1. Investment support from international organizations promoting technology 2. International exchange programs exposing students to other part of the World 3. Cooperation in designing curriculum for higher education 4. Cooperation with institutions in the form of recruitments (example IIT's in India and entrepreneurial support from US) Conclusion Developed countries in last three decades by shifting their focus from free higher education to user pay emphasized the need of private contributions to the tune of private returns in higher education by introducing tuition fee and other cost recovery mechanism like student loans and graduate taxes. Although there are successful cases across various financing mechanisms like Australia (graduate tax), the US (bond and stock, user fee) and the UK (graduate tax, student loan) but alone radical policy changes in financing were not sufficient in achieving success alas it required a comprehensive support like taxation policy, banking reforms, mature financial institutions etc. The reforms in higher education financing particularly in developing countries remained silent over several issues ranging from operational to policy front. In several instances, the move to marketise higher education resulted as an alternative to state’s limitations, but these institutions largely failed to offer any solution to equitable distribution of higher education. Also, in the prevailing institutional environment in developing countries, the quality monitoring of these institutions offers tremendous opportunity for rent seeking and profit seeking motives. While adopting privatization, there needs a clear cut division within developing countries, the first category should consists high growth (students seeking higher education) developing countries which can adopt privatization capturing student volumes entertaining competition while offering efficient and quality higher education amid state regulatory controls, the second category must includes rest of the countries which can offer initial subsidies (for initial years of higher education) or complete subsidies in order to address higher education volumes (incentivize students for higher education in the midst of other opportunities). Discriminatory pricing tries to address equity but efficiency and negative externalities largely remains unaddressed. Options like student loans and gradate taxes needs cultural, institutional and political support apart from taxation policy incentives. While student loans faced several issues ranging from cultural, accessibility to repayment, there are very few case studies for graduate tax as the idea is still in its conception phase for many countries. Entrepreneurial activities although benefits industrial tie- ups, a concurrent focus is required delivering higher education as a primary objective. Philanthropy and international co-operation go long way in assisting higher education financing and development in
  16. 16. developing countries so; this aspect must be nurtured properly. Actions like decentralization of spending authority, budgetary reforms radical change and use of technology brings efficiency in the system which can lead to equity by cross subsidizing the poor. In order to address financing higher education in a society, a life cycle approach (i.e. considering primary, secondary and tertiary education and further opportunities as a part of plan) must be taken, maintaining a trade-off between efficiency and equity. Policy makers must establish the relationship between higher education and objectives of the society. State support is required at various fronts from taxation policy to optimally subsidizing higher education to the tune of marginal social benefits, regulating private sector, reforming institutions like banking and finance, generating opportunities for graduates, responding to the equity concerns considering urban- rural, rich- poor, men-women in the society. Striking evidences A case of India The case of higher education in India, where bulks of students (nearly two-thirds) are enrolled in non professional courses, the costs recovered from students remained at roughly 5 percent during the entire decade. A noticeable upsurge in private institutions in India has been seen in professional courses like engineering and medicine. Also, it is established that these private institutions have political roots3 (Kothari 1986, p. 596). The majority of the issues faced by higher education loom largely with these concerns; First, high subsidy to professional courses is found to be inequitable with reference to representation by various other groups within social strata. Second, despite of 50% reservation for Scheduled caste, Scheduled tribe and other backward classes (SC/ ST and OBC) in higher education, they have remained educationally backward. This backwardness could be summed up in terms of four features, viz, poor enrolment, poor retention, enrolment in inferior institutions and poor performance. Interestingly, has been found that there is not only inequality between scheduled class and others but also amongst scheduled casts. Third, quality of higher education in public institutions faces major road blocks due to rising middle class’s purchasing power and vested interests in abroad education or from private institutions, the focus of higher education finance in institute of national importance, and the inability to increase spending paralleled by the biggest expansion of reservations in higher education. Having a complex system, interlinked within fiscal constraints, rising middle class, surging private institution with political back up and median voter politics, the issue with Indian higher education stands multidisciplinary. A single measure to finance higher education is unsustainable as it requires a simultaneous action from fronts like politics, economics, awareness of median voter, private sector 3 Nearly 95% of the private colleges in states like Maharasthra are 'owned' by politicians. With these private colleges, 'the system of interlocking interests of capital, educated elites, bureaucrats and politicians is thus mutually supportive and complete' (Kothari 1986, p. 596).
  17. 17. etc. Also, a policy of reservation is likely to be ineffective as long as reservation is not supplemented with measures that enable Scheduled Caste students to perform well and gain confidence regarding their own ability and merit. Table 2 All India growth of students’ enrollments (source: Devesh kapoor, India policy forum) Table 3 Students enrolled by academic disciplines 2002-2003 (source: Devesh kapoor, India policy forum) Table 4 Public expenditures on Higher education - share of GDP and total expenditures (source: Devesh kapoor, India policy forum) Appendix - A
  18. 18. Financing option and their relative merits and demerits (source: Orwig; 1971; Financing option for Strength Weakness higher education No / subsidized / In certain sectors which are national 1. Quality declines as real funding per student minimal fee importance, subsidies are a good declines incentive for higher enrollments Subsidies are a good incentive for poor to 2. Institutional rent seeking due to no competition participate in higher education 3. Regressive in nature as poor subsidizes rich Tuition fee (part or full Decreases state fiscal constraints 1. Works as a great disincentive for poor to enroll cost of education) in higher studies 2. Inequitable as this would serve as a barrier to those who can’t afford 3. Affording user fee is contingent on family income and not family liabilities. Also increases emancipation threshold 4. Regressive in taxation as those who pay taxes might not afford higher education Family income Reduces the financial barrier to students 1. Burden on state. contingent State Grant / Equitable as those who can afford, pay 2. Dis-Incentive effect- alters behavior so as to Discriminatory Pricing for their fee qualify for a larger grant. Emancipates students from their families 3. Reduces the incentive for middle and lower income parents to work and accumulate wealth 4. Relies highly on parents income but does not consider parent's liabilities Income contingent Shifts Reliance on future self income 1. Income contingent student loans are ineffective Student loan rather than current family income in enhancing revenue stream for the institution if state subsidized Eases the tradeoff by supplementing 2. May suffer from high risk of defaults if public funding with private finance. downstream side (job market) is not properly incubated 3. Accessibility to poor remains a big concern. Also, loan faces cultural barriers in developing countries. Graduate tax High earning graduates subsidizes low In a graduate tax, there is no immediate relief to earning graduates the Government’s current cash obligation for the support of the universities or the students, securing a stream of future income surtax payments, of highly uncertain present value. Student doesn’t pay anything while they Graduate tax comes with obligations for greater are studying income tax payments than would have been the case in the absence of their higher educational experiences. Payments defer until the students starts Graduate tax permits horizontal and vertical earning inequities (Barr N. 2006) Employer tax based on Shifts the part of financial burden both 1. Can work well in public institutions but not in recruitment from Institution and student to future private institution recruiter. Brings closer ties between institutions and 2. May create disincentives for employers to employment sector recruit from public institutions and rather they can recruit gradates from any institution where there is no recruitment tax 3. Can work well in limited sectors like engineering, economics with highest private rate of return 4. Limited to professional courses alone
  19. 19. Private Sector Private sector has offered a great relief to 1. Equity is a big concern when it comes to public sector institutions with the rising private sector service provision demand of higher education Provided a strong monitoring and a 2. Some cases of capitation fee have been decentralized regulatory procedure, registered from India which means there is private sector can produce greater greater need for monitoring and control efficiencies as compared public sector. 3. Private sector supply, if not regulated can change the demand pattern which can have serious implications over economy at large Entrepreneurial 1. Brings autonomy while diversifying Entrepreneurial activity at the cost of lost focus Activities the income to increase financial resources on curriculum can lead to decrease in quality. 2. Helps introduce a market sensitive institutional culture; relevant training experience is introduced for students; cooperative links are established with business partners who might become involved in curriculum guidance, work placements, and part-time teaching arrangements 3. enhance quality of higher education 4. Reduces governmental dependency 5. Adds to the value of the institution in terms of reputation and also relationship with the industry Philanthropy 1. With the enhanced industrial 1. Maintaining and updating huge alumni relationship and a strong alumni base, database can be a cumbersome task philanthropy can add up to Devolution of 1. Allow a rational and non political Can be inefficient, short sighted, and self-serving management and distribution of funds among higher as the supposedly more intrusive decisions of spending authority education institutions and between elected or appointed officials. disciplines 2. Helpful in addressing inefficiencies in the system by improving innovativeness and reducing costs Budget reforms Rational and non political distribution of Possibility of parochial decision making. funds; Requires efficient management of the resources at the university level. Correct major inefficiencies in the Increased "institutional isomorphism" or system; convergence of institutional forms and missions Help in improving innovativeness and reducing cost Restructuring of higher Radical change can lead to efficiencies in In places like Russia, radical change has proven education institutions- performance dangerous to the existing public sector radical change institutions. Technology Technology can bring efficiencies Being costly, it often becomes a barrier in particularly information and competition with developed nations communication technology Appendix - B Financing options – opportunities and threats Financing option Opportunity Threat for higher education
  20. 20. No / subsidized / 1. With the help of diversification of revenue source If subsidies are not supported with other minimal fee which can minimize the fiscal constraints, equity and sources of revenues like entrepreneurship, efficiency can be achieved. philanthropy, then system will generate 2. State subsidy promoting particular sector (like inefficiencies and inequity Technology) coupled with future prospects in job market can serve as an engine of economic growth Tuition fee (part Tuition fee must be potentially subsidized in order to Excessive marketisation would lead to or full cost of improve equity strong disincentives education) Family income 1. Remove disincentives to work by offering efficiency Dependency on parents contingent State wages to workers Grant / 2. State need to lay huge emphasis on other options in Discriminatory generating revenues Pricing Income contingent 1. Charging more nearly market based interest rates or Requires considerable care in designing Student loan at least government cost of borrowing. student loans 2. Need to improve the accessibility to loan by wide variety of options in market 3. Must be supported by government guaranteeing the lender in order to reduce risk premium 4. Cultural barriers must be removed 5. Need of an efficient collection system 6. Arranging collections through a government tax, withholding system-- as in the case of Ghana with the national security system; 7. Employing private collection agents as in Venezuela and Jamaica 8. Be large enough to cover tuition fees and, if possible at least part of living costs Graduate tax 1. Highly efficient tax system which is favorable in A system relies mainly on tax finance and offering initial incentives to students typically controlled by government, hence 2. Government would need to develop a credible and universities are not competitive, transparent mechanism by which extra revenue can be attenuating incentives to improve quality diverted to Higher Education. (Barr N. 2006). 3. The success of a graduate tax depends on the degree to which there can be confidence in any income tax system. Employer tax 1. Employers can structure their offered wages in such In absence of tax incentives and abundant based on a fashion that they can benefit out of the deal. This can supply of cost effective (cheap) talent recruitment increase competition within the industry. from other mediocre institutions, industry 2. Also, government can facilitate the tax structure by might get incentivized in recruiting them making it favorable for enterprises. which can pose a serious threat to the job market for other graduates. Private Sector Huge opportunity for private sector efficiencies if It becomes essential for government to proper incentives are in place like subsidies from bring transparencies of information government in tuition fee in making education regarding choosing a fairer option. equitable for students The role of the government is to make transparent standards and put in place adequate mechanisms to assess them, to accredit new institutions, and to maintain quality. Entrepreneurial Legalizing the entire procedure of entrepreneurship in Focus of higher education should not be Activities tertiary education in developing nations, and lost. supplementing it with the aid of good management, transparent procedures, clear rules, and discipline. Philanthropy 1. Need to mellow down the religion bias of the - philanthropic activity 2. Favorable tax treatment for donations
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