Financing Higher Education

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)

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.

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)

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

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.

• 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)

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.

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 (guardian.co.uk, 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.

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.

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

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

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.

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

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

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

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).

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

Financing option and their relative merits and demerits (source: Orwig; 1971; et.al.)
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

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

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

References
Barr, N., 2006. Financing higher education: Lessons from developed economies, options for developing
economies, World Bank [online] December 2006
Available at: http://siteresources.worldbank.org/INTABCDE2007BEI/Resources/NBarr.PDF
[Accessed 25 Dec 2009]

Chitnis, S., 1972. Education for Equality: Case of Scheduled Castes in Higher Education, Economic and
Political Weekly [online] Vol. 7, No. 31/33, Special Number (Aug., 1972), pp. 1675-1681.
Available at: (http://www.jstor.org/stable/4361677)
[Accessed: 19/12/2009 12:54]

Department of School Education & Literacy, 2008. Annual report 2008-09, [pdf] New Delhi: Ministry of
human resource development, Govt. of India
Available at: http://pib.nic.in/archieve/ecssi/ecssi2008/ecssi_08_bg.pdf

Ghosh, J., 2006. Case for Caste-based Quotas in Higher Education, Economic and Political weekly [online]
June 17, 2006.
Available at: (http://www.cscsarchive.org/dataarchive/textfiles/textfile.2008-06-12.5428732022/file)
[Accessed: 20 December 2009]

Jessica Shepherd, 2010. Universities tell Gordon Brown: cuts will bring us to our knees. Guardian [online]
Monday 11, January 2010 21.51 GMT.
Available at: (http://www.guardian.co.uk/education/2010/jan/11/universities-gordon-brown-cuts-recession)
[Accessed 11 Jan 2005]

Jimenez, E., Patrinos, H. A., 2003. Curious George: the enduring Psacharopoulos legacy on the economics of
education in developing countries, Economics of Education Review [online] Volume 22, Issue 5, October 2003,
Pages 451-454.

[Available at: http://www.sciencedirect.com/science?
_ob=MImg&_imagekey=B6VB9-48W2NJ6-6-1&_cdi=5921&_user=121749&_orig=na&_coverDate=10/31/20
03&_sk=999779994&view=c&wchp=dGLbVtz-
zSkWz&md5=d1c69dd6f9f309da10749017387cd347&ie=/sdarticle.pdf]
[Accessed: 19/12/2009 12:54]

Johns, L. R., Goffman, J. I, Alexander, K., Stollar, H. D., 1970. Economic factors affecting the financing of
education. Florida: National educational finance project

Johnstone, B. D., 1998. The Financing and Management of Higher Education: A Status Report on Worldwide
Reforms. [online] Buffalo: State University of New York and The World Bank
Available at (http://www.bc.edu/bc_org/avp/soe/cihe/ihec/policy/financing_educatioN_WB.pdf)

Kapur, D., Mehta, P. B., 2007. Indian higher education reform: From half-baked socialism to half-baked
capitalism, Draft Paper, India Policy Forum 2007, The brooking Institution
Available at: http://www.ncaer.org/downloads/IPF2007/kapur-mehta.pdf

McMohan, W., Geske, T. G., 1982. Financing education: overcoming inefficiency and inequity. Illinois:
University of Illinois press

Mincer, J., 1991. Education and unemployment, NBER working paper series [online] working paper no. 3838
Sept. 1991.
Available at: http://www.nber.org/papers/w3838.pdf

Olaniyan. D.A., Okemakinde. T., 2008. Human Capital Theory: Implications for Educational Development,
European Journal of Scientific Research [online] ISSN 1450-216X Vol.24 No.2 (2008), pp.157-162
Available at: (http://www.eurojournals.com/ejsr_24_2_01.pdf)

Orwig, M., 1971. Financing higher education. Iowa: The American college testing program
Elena Moya, 2005. University of Cambridge taps bond markets to fund building projects. Guardian [online]
Tuesday 5 January 2010 18.15 GMT.
Available at: (http://www.guardian.co.uk/business/2010/jan/05/university-cambridge-fundraising-bond-market)
[Accessed 11 Jan 2005]

Psacharopoulos, G., 2003. The Social Cost of an Outdated Law: Article 16 of the Greek Constitution, European
Journal of Law and Economics [online] 16: 123–137, 2003.
Available at: Kluwer Academic Publishers (http://hdl.handle.net/10.1023/A:1024117632649

Psacharopoulos, G., 1996. Public Spending on Higher Education in Developing Countries: Too Much Rather
Than Too Little, Economics of Education Review,[online] Vol. 15, No. 4, pp. 421-422, 1996.
Available at: doi:10.1016/S0272-7757(96)00024-6

Psacharopoulos, G., forthcoming. Public vs. Private University Systems, Journal for Institutional
Comparisons

Available at:
http://www.eenee.de/portal/page/portal/EENEEContent/_IMPORT_TELECENTRUM/DOCS/EENEE-
SYMPOSIUM-DICE-PSACHAROPOULOS.PDF

Psacharopoulos, G., Patrinos A.H., 2002. Returns to Investment in Education: a further update, Policy research
working paper, Education Sector Unit [online] No. 2881, 30 sept 2002
Available at: http://www-
wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2002/09/27/000094946_02091705491654/Rendered/
PDF/multi0page.pdf

Psacharopoulos, G., Patrinos A.H., 1993. Returns to Investment in Education: a global update, Policy research
working paper, Education Sector Unit [online] No. 1067, 31 Jan 1993
Available at: http://www-
wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/1993/01/01/000009265_3961003230826/Rendered/P
DF/multi_page.pdf

Psacharopoulos, G., Papakonstantinou, G., 2005. The real university cost in a ‘‘free’’ higher education country,
Education economic review [online] Vol. 24 (2005) 103–108.
Available at:
http://www.sciencedirect.com/science/article/B6VB9-4C2NJ6H-1/2/0605db1e99970f89ce6e67594af1bc79

Psacharopoulos, G., 1985. Returns to Education: A Further International Update and Implications, The Journal
of Human resource, [online] Vol. 20, No. 4 (autumn, 1985), pp. 583-604.
Available at: University of Wisconsin Press, (http://www.jstor.org/stable/145686)
[Accessed: 15/12/2009 18:35]

Psacharopoulos, G., 1986. Financing education in developing countries: an exploration of policy options.
[online] Washington D.C.: The World Bank
Available at:
(http://www.eric.ed.gov/ERICDocs/data/ericdocs2sql/content_storage_01/0000019b/80/3a/41/36.pdf)

Psacharopoulos, G., 2008. Funding universities for efficiency and equity: research findings versus petty politics,
Education Economics [online] 16: 3, 245 — 260.
Available at : http://dx.doi.org/10.1080/09645290802338078

Somanathan, R., 2006. Assumptions and Arithmetic of Caste-Based Reservations, Economic and Political
Weekly [online] June 17, 2006.
Available at: http://nepaldalitinfo.net/wp-
content/EPWAssumptionsandArithmeticofCasteBasedReservations.pdf

Tilak, J., Varghese, N. V., 1991. Financing higher education in India, Higher education [online] Vol. 21, No. 1,
Higher Education in Developing Countries (Jan., 1991), pp. 83-101
Available at: http://www.jstor.org/stable/3447129

Tulip, P. (2007), "Financing Higher Education in the United States", OECD Economics Department Working
Papers, No. 584, ECO/WKP(2007)44, OECD Publishing.
Available at: http://oberon.sourceoecd.org/vl=1947128/cl=17/nw=1/rpsv/cgi-bin/wppdf?file=5l4bgf4200wl.pdf

The task force on higher education and society, 2000, Higher education in developing countries: perils and
promise, [pdf] Washington D.C.: The World Bank
Available at:
http://siteresources.worldbank.org/EDUCATION/Resources/278200-1099079877269/547664-1099079956815/
peril_promise_en.pdf

Woodhall, M., 2007. Funding higher education: the contribution of economic thinking to debate and policy
development, World Bank [online] education working paper series no.8
Available at:
http://siteresources.worldbank.org/EDUCATION/Resources/278200-1099079877269/547664-1099079956815/
Funding_HigherEd_wps8.pdf
[Accessed: 28 Dec 2009]

Financing Higher Education

Recomendados

Recomendados

Mais conteúdo relacionado

Mais procurados

Mais procurados (20)

Destaque

Destaque (7)

Semelhante a Financing Higher Education

Semelhante a Financing Higher Education (20)

Financing Higher Education