EDUCATION AND TRAINING:THE EUROPEAN ECONOMY’S BEST HOPE

11TH MUNICH ECONOMIC SUMMIT3-4 MAY 2012

RICK VAN DER PLOEGUNIVERSITY OF OXFORD

REFORMING EUROPEAN UNIVERSITY SYSTEMS:

STILL A LONG WAY TO GO

OUTLINE

I. Successes and failures of European higher education

II. Incentives, autonomy, differentiation and competition (Bologna, privatisation)

III. How to condition public subsidies?IV. More private funding: higher fees +

social loansV. Innovation and Growth (Lisbon

Agenda)

I. SUCCESSES AND FAILURES

Good system of secondary education and good average quality of universities in Europe with good accessibility regardless of socio-economic background

Tremendous growth in enrolment rates in higher education in the last forty years (doubling in last thirty years – from ‘1/10 to 4/10 and in future perhaps to 7/10’)

Quality of average incoming student has fallen? But “We want more than half of the cohort to belong to the top!” ??

Key problems

Global rankings of top universities contain few in Europe. Many of most talented dons and students move to US if they can. But is changing in recent years

Europe (not Scandinavia or Switzerland) is underfunded compared with US.

Europe suffers from overregulation (fixed and uniform fees, no selection, quota, red tape, etc.), ad-hoc historical funding schemes, culture of mediocrity.

Little competition between universities, not enough variety and not enough internationalisation

Universities in top 50 (2005)

US 20

Canada 3

Australia 6

UK 8

Hong Kong and Singapore

4

Europe excl. UK 5

Asia excl. HK/Singapore

4

TOTALTOTAL 5050

Huge growth in top Chinese universities: both in numbers in quality of teaching and research

Lord Adonis:7 million Chinese graduates, entire cohort of UK!

II. INCENTIVES, AUTONOMY, COMPETITION

Examples: 55 year rule and ’16 red tape laws’ in Germany, nepotism instead of meritocracy in Italy, overcrowded, dilapidated class rooms in France

Amanda Goodall: university presidents in US are top academics in their fields, much less so in Europe.

UK very different: select students at entry, external examiners, differentiation, autonomy, delegation, little red tape, highly international body of students and staff, ‘real’ Bachelor and Master degrees, differentiation, RAE, fierce competition for talent (Warwick, Sussex vs Royal Holloway), high and differentiated fees and salaries.

Netherlands: foreign students complete earlier and do much better than home students.

Selection and competition

Admission criteria are soft without strong selection, but not in UK, US and very small part of France.

‘Disco’ theory of universities (two-sided markets).

Attract brightest students so attract brightest dons, and vice versa.

Differentiate tuition fees?

Do not fix them. If they are too low, too much demand and ‘fun seeking’ students. Fees should reflect differences in marginal cost and not distort supply/demand. Avoid misallocation of students to courses.

Have discount for smart students (scholarships); fixed fees entail implicit cross-subsidy from smart to less able students

High fees for studies with a low elasticity of demand (e.g., local students) and high MC.

Peer or reputation effects encourage XD by selling below cost in order to be able to select smartest students and go for excellence.

Do Bologna reform properly

Reduces risk of choosing wrong study and encourages more demanding courses. More likely to finish study on time.

Encourages combination of studies (e.g., chemistry followed by law). More flexibility and permanent education.

Stimulates variety and diversity.Engenders competition between universities

at home and abroad of longer and of shorter degrees. Vote with feet.

Promotes international exchange and competition.

Transparency is a must

Michelin guides for higher educationInform prospective students about

private and public returns of studying.Public dossiers for appointments

(Norway).Research assessment .Lack of transparency bolsters power of

monopolistic universities. Hence, must improve competition and chances for new higher education institutions

III. HOW TO CONDITION PUBLIC FUNDING

Need more public-private competition with subsidies for private universities and high level of public funding (cf., Prof. Woessmann).

So need a greater share of private funding. Spending more public money is less important than more autonomy and more competition.

Avoid grade deflation and teaching to the test: need system of external examiners. Cherish teaching as well as research (witness UCL!).

Autonomy improves quality only if there is external examining; else grade deflation results (cf., prof. Woessmann).

Funding: some stylized facts

Increased demand is met by higher public budget in DK, GE and SW, higher fees in AUS, BE, FR, NL, NZ, US and UK, or falling grants in BE, NL and UK.

Countries with high public spending have tightened link between academic progress and eligibility for grants and loans: DK, GE, SW and NL.

Mostly input funding and insufficient incentives (but not in DK, SW and NL)

Tuition fees and subsidies bear no relationship to costs, are undifferentiated and centrally determined.

Partial correlations: need more research!!

Higher spending per student goes with lower student/staff ratios

Higher Pisa scores, lower student/staff ratios and students paying a larger share of their studies associated with less dropouts, shorter study lengths and bigger wage returns

Targeting funding at universities rather than students goes with less dropout (suggests grade inflation) and higher returns. Not much effect on study length

Higher share of loans rather than grants suggests higher enrolment, higher dropout, shorter study length and lower return. Reverse causation??

Funding and competition

Output versus input funding.Trade-off between incentives to reduce costs and

maintain quality (avoid grade inflation) versus containing monopolistic practices (reducing quantity/quality supplied).

More competition and level playing field improves trade-off, because market (not bureaucracy or funding schemes) disciplines universities.

So shift away from historical funding towards input funding (vouchers).

Base funding on less malleable criteria, safeguard quality (e.g., external examiners), increase transparency.

Size of public subsidy

High for merit studies, none for studies with only a market return, and negative for studies with rent seeking and signalling externalities (law, finance?)

Low if cost of public funds is highHigh if elasticity of student demand is lowLow for smart students with positive peer

or reputation effects (as universities have incentive to charge lower fees anyway)

Differentiate subsidy by type of student and type of study!

IV. HIGHER FEES AND SOCIAL LOANS

Compared to the US (and perhaps Scandinavia and Switzerland) need to double funding per student on average

But priority should be with preschool (Heckman), primary and secondary education.

So need to raise funds from sponsors (alumni, business) and students themselves.

To maintain accessibility for bright students from low income families, need Australian system of contingent loans.

Universities need more private funding

Estimated macro-Mincer returns same order of magnitude as micro-Mincer returns.

Coefficient of 0.70 on human capital in production function implies macro-Mincer returns of 5-6%: even a little less than micro-Mincer returns.

No evidence -- at current level of subsidies -- that public spending should be higher.

Gap between social and private returns is declining.Rising private returns warrant higher fees.Governments are starved of funds and must direct

scarce resources at primary/secondary education.

How to help students?

How to get students to pay much more of the cost of their study without harming access of higher education?

How to avoid students taking disruptive part-time jobs?

How to avoid subsidy going to less diligent, less talented students from rich families rather than to smartest students from poorer families?

Answer: income-contingent loans (ICL)

Avoid perverse redistribution

HE subsidies cause perverse redistribution. Equal tuition rates and barring private

investments means that education is taxed 100% above public levels of investment. Poor are worse off with smaller tax base and less income redistribution.

Education is over-subsidized from a fiscal perspective: graduates do not pay sufficient extra income taxes to recover all public subsidies.

Poor are better off with progressive tax systems or better primary/secondary education.

Towards income contingent loans

Correct capital and insurance market failures: else able but poor and risk-averse students cannot and will not take up large loans.

Access = loans + insurance. Students repay debt in income contingent fashion.

Condition on study effort, study costs, enrolment duration, etc. to avoid bad incentives (e.g., ‘fun’ studies, lower study/work effort) and adverse selection (‘good’ students don’t participate).

Funding default risks from general tax revenue (=subsidy) avoids adverse selection.

Interest subsidy? Distort saving, overinvestment.

V. INNOVATION AND GROWTH

Over last decade Europe’s annual growth in GDP per capita 0.4%-point lower than in US

This implies that fraction of Europe’s GDP per capita of that of the US will be more than a quarter less in a decade

For decades Europe was catching up with the US with relatively high growth

But both investment rate and K/L are still higher in Europe than in US

Problem is lack of competition, not enough R&D, and too little investment in education

New Empirical Evidence

Based on work by Aghion, Blundell, Griffith, Howard and Nickell using dataset on large number of UK firms

Industries that are close to world technology frontier are more R&D intensive

Firms have little incentive to innovate if not stimulated by competition, but too much competition stifles innovation as firms cannot reap the reward of their R&D efforts

Inverted U-shape of innovation intensity (patent rate) versus degree of competition

Cost in terms of innovation of having too little competition gets more severe as one approaches the global frontier

A higher entry rate of foreign firms in the market boosts TFP growth in industries that are close to the global frontier, but lowers TFP growth in industries that are far away from the global frontier

When European firms were catching up, lack of competition did not matter.

Now competition crucial for innovation!

Too much red tape (OECD evidence)

Regulation of product markets makes competition less severe, so less investment and less innovation

Productivity grows more slowly if services (telecom, energy etc.) heavily regulated

Growth in output per worker much higher if each country takes up most liberal standards in each industry: 1.8%-point in GR, 1%-point in CA, NO, PO and SP, 0.5%-point in US, FI and SW, and 0.2%-point in UK

Because red tape discourages FDI and especially weakens incentive to invest in IT

TO BOOST INNOVATION:

I. Invest more in higher education (but not necessarily by the government!)

II. More competition and entry on product markets (also on service markets!)

III. More developed financial sectors and markets to get venture capital for R&D especially for small firms

IV. More flexible labour marketsV. More pro-active macro policy (i.e., government

investment) over business cycle boosts demand and growth especially if financial markets are developed

VI. Get rid of unnecessary red tape

Further lessons

Do not try to pick particular technologies? Encourage across board knowledge-intensive industries and services. Tax breaks for R&D, also for small and medium sized firms.

Culture is important for location advantages – Richard Florida.

Hubs of knowledge-intensive workers are important.

Stimulate not only particular skills, but train people to take risks and be flexible.

SUMMING UP

Liberate universities: promote academic entrepreneurship (autonomy, differentiation, competition, internationalization)

Allow universities to charge much higher fees and to differentiate them by type of student and course.

Provide students with income-contingent loans and cover default risk out of general funds.

Only subsidise courses whose social benefit exceeds the private benefit. Less based on student numbers, inputs or outputs and more on academic excellence.

Improve incentives for dons and students.Foster competition at home & abroad (no historical funding,

vouchers, transparency, etc.)Growth requires innovation