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Photo: Mint

Should we subsidize universities?

The debate on the desirability of subsidies for higher education is an old one in economics

Even as the debate on the propriety of slapping sedition charges on students of Jawaharlal Nehru University (JNU) continues, many of the university’s critics have questioned the provision of taxpayers’ money to an institution which is allegedly a hub of “anti-national activities".

While such suggestions might smack of political vendetta in the current context, the debate on the desirability of public funding in higher education is not new by any means in economics. Spoiler alert: it is driven by reasons completely different from whether universities produce “patriots" or not.

The debate on using public money to fund higher education is linked to the question of how beneficial it is in the creation of a developed and egalitarian society. While most of the gains from higher education accrue to the person receiving it (in terms of increased incomes), it is also argued that an educated citizenry extends benefits to the society at large.

These gains include direct economic gains, such as research leading to the invention of vaccines and new technology, as well as indirect gains, such as an increase in tax collection, a more flexible workforce that can adapt to the changing demands of the market and greater appreciation of social diversity, leading to greater harmony.

Public provisioning of higher education can also serve as an important tool in reducing inequality. In a society where higher education is free, students born in both poor and rich families have an equal chance of augmenting their future earnings, which would not have been the case if access to higher education had been dependent on parental incomes or wealth.

This understanding was seriously questioned by the mainstream consensus, as exemplified by institutions such as the World Bank in the second half of the last century. In a 1986 paper, Emmanuel Jimenez of the World Bank questioned the equity argument of public provisioning of higher education.

Jimenez argued that the rich stood to gain more than the poor from public provision of services such as healthcare and education due to various factors. Despite free provisioning, availing of services entails private costs which the rich found easier to pay.

These could include cost of transport to a school/university or hospital or opportunity cost of time spent in availing the service.

A poor student might not gain from higher education as much as his/her rich counterpart because the latter’s family might use its clout to find a better job.

Governments typically spent more on higher education, the gains of which went more to the rich. An excess demand for such services could lead to rationing-based solutions (like entrance examinations) where the rich could have an advantage due to better access to resources. In countries where indirect taxes constituted the bulk of tax collections, the subsidies were more inequitable in nature.

In another World Bank research paper published a decade after Jimenez’s paper, Harvard economist Lant Pritchett questioned the assumption that improvement in higher education attainment led to an increase in incomes.

Pritchett’s analysis of cross-national data showed that, on average, education contributed much less to growth than would be expected in standard economic models. The paper gave three reasons to explain this phenomenon.

Although education might have increased private benefits, it could have led to socially unproductive activities as well. Government employees resorting to rent-seeking (corruption) was one such way. Pritchett termed this as education creating pirates in an economy.

Surplus supply of educated labour in the wake of sluggish demand leading to diminishing returns to an educated workforce and poor-quality education not generating any benefits were given as the other reasons for the low economic returns from education.

While the theoretical debate around such findings was never clinched (more on this later), they did have a big influence on the financing of higher education in developing countries, including India. The limited amount of fiscal resources available for spending on social services was the catalysing factor for such policy changes.

In a 1990 paper, J.B.G. Tilak and N.V. Varghese from the National University of Educational Planning and Administration, New Delhi, argued that given the lack of resources and private benefits that accrued from investments in higher education, India should stop using scarce tax resources on funding higher education.

Tilak and Varghese noted that the bulk of higher education financing was through public funding and suggested various measures like differential fee structures based on income levels and levying a graduate tax on employers hiring graduates.

The paper also made a case for distinction between different kinds of higher education, like business studies to be charged more than liberal arts. The paper also acknowledged the conflict between allocating money to higher education and elementary education.

Several policymakers shared those views and the 1990s witnessed a sharp cutback in education, especially higher education spending, with some estimates suggesting a decline in spending in real terms. The policy change seems to have triggered sharp reactions.

In a 2004 paper published in the Economic and Political Weekly, Tilak’s arguments were very different from the ones made by him and Varghese in the 1990 paper. He argued that subsidies in higher education in India were not very different from what they were in other countries. Tilak also questioned the rationale of prioritizing between the need for public funding for different categories of education.

He argued that there was little evidence to show that subsidies for higher education in India were less progressive than those for elementary education. The paper also questioned the efficacy of policies such as differential fee structures because of the uncertainties surrounding how much resources could be mobilized through such a policy and the risk that it may lead to wrong and excessive exclusion. Such debates in India are far from settled even today.

Any debate on state funding of higher education is incomplete without reflecting on the experience of China, which has massively ramped up spending on higher education over the past two decades. A 2008 National Bureau of Economic Research (NBER) paper gives a thorough descriptive account of the rapid growth of China’s higher education as a result of the focus it has been given in the country’s 10th and 11th Five-Year Plans spanning 2001-10.

The paper notes the impressive growth in the number of graduates: 30% per year since 1999 and a quadrupling in their number in the last six years. It also gives some interesting ideas on the method for expansion and funding of higher education. The paper says that China has been devoting the bulk of its resources to what have been termed “elite universities". China’s higher education sector also saw a wave of mergers of small institutes and universities into larger universities and faculties.

In addition to government funding, Chinese universities have also been using funds generated from profits of university-owned companies. The paper also notes that for such a pace of expansion to be sustained, China would require its export boom to continue, which has been creating the demand for highly skilled manpower in the Chinese economy. It remains to be seen how China’s higher education would adjust to the current difficulties its economy is facing.

Given the high cost involved in providing higher education, limited or no public funding invariably means that students have to pay for most of the costs involved, often by taking loans. As many students in the US are discovering today, a bleak macroeconomic outlook may mean that it takes a long time for students to pay back the debt they are forced to take to fund their education.

The growing debt burden on account of a sharp increase in higher education cost and lack of growth in employment due to the recession has led to a huge increase in outstanding student loans in the US. According to US Federal Reserve data, the amount of outstanding student loans tripled between 2006 and 2015 in the country, and stood at more than $1.3 trillion.

Another comparison might put things in perspective. In 2006, student loans were just more than half of car loans, by 2015, they were 1.3 times the latter.

The growing student loan burden has had adverse effects beyond the stress it has caused to students and their families. In a 2013 opinion piece in The New York Times, Joseph Stiglitz argued that the increasing student loan burden was adding to the recessionary pressures in the US economy, as young graduates were being forced to cut down on their consumption and housing expenditure in order to pay for student loans.

Stiglitz argued that by making higher education more expensive, the US ran the risk of “foreclosing on our future as a nation", as human capital formation would suffer in the long term.

Another problem vis-à-vis costly higher education from private players has been the quality of education being provided. In many cases, even after spending large amounts of money, students are unable to find remunerative employment. While the problem is well acknowledged in both advanced and developing countries, precious little has been done to address this.

A 2007 NBER paper by Jesse Rothstein and Cecilia Elena Rouse from Princeton University gives another reason why the increasing reliance on self-financing of higher education could be detrimental for a society.

The paper used evidence from a university, which had substituted loans with grants, to examine whether there was any difference in the behaviour of graduating students. Since student loans form only a small part of the lifetime earnings of young graduates, conventional economics would not suggest any large-scale behavioural changes such as postponement of marriage or influence of career choices.

However, the results showed that every additional $10,000 of debt led to a 5 to 6 percentage point reduction in the probability of a student taking up low-paying jobs in sectors such as the government and non-profit sector, thereby suggesting a significant impact on employment choices.

The authors argued that given the already low share of students going into such sectors, even the relatively small change could make a big impact. Such studies show that the commercialization of higher education can actually bring down the social contribution potential of education itself and make it more focused on private gains, which are also not uniform for all.

The higher education sector in India is crying out for attention on all fronts: quality, quantity and access. The university system’s contribution to the nation-building process is crucially dependent on how it is to be financed in the days to come.

Given the scale of India’s higher education sector, an effective policy would require that the ongoing debates and experiences of various models of higher education functioning are critically examined. A flawed debate on nationalism only detracts attention from the serious questions on higher education facing us today.

Economics Express runs weekly, and features interesting reads from the world of economics and finance.

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