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INTERNATIONAL HIGHER EDUCATION

Cost Sharing in Higher Education Financing: Economic Perils in Developing Countries

Carlo Salerno
Carlos Salerno is a senior research associate at the Center for Higher Education Policy Studies (CHEPS), University of Twente. Address: CHEPS, University of Twente, PO Box 217, 7500 AE Enschede, Netherlands. Tel: +31.53.489.2031. E-mail: c.s.salerno@bbt.utwente.nl.

Cost sharing, shifting part of the burden for financing higher education away from the state and onto students and families, is a phenomenon that has taken on global proportions. Nowhere, though, has it received greater endorsement than in the developing world and particularly in sub-Saharan Africa. A shortage of public funding, rapidly expanding enrollments, and strong endorsement from international aid agencies like the World Bank have all worked in concert to push cost sharing as the way for such nations to strengthen their fragile higher education sectors and spur economic growth.

The practice makes for sound economic policy, particularly on equity grounds. Investment in higher education yields significant private returns; and from an equity standpoint, whoever benefits ought to pay. Since both individuals and society reap the rewards from education, an equitable financing scheme implies sharing the costs. The potential gains from cost sharing are readily apparent in the success of its most ardent fans: Anglo-Saxon countries. Indeed one of the major strengths behind the American, British, and Australian systems is their universities’ ability to exploit this supplemental income and leverage their reputations through the purchase of high-quality faculty, talented students, and state-of-the-art facilities.

Yet what is good for the goose is not necessarily good for the gander. The introduction of cost-sharing mechanisms in developing countries has certainly generated much-needed revenues for perennially underfunded systems. At the same time, the unintended consequences stemming from the way it has been adapted to fit these countries’ unique economic circumstances raise serious concerns about the appropriateness of cost sharing as a long-term financing strategy.

Where Do the Problems Lie?
The term cost sharing subsumes many different practices and the debate surrounding it is as much political as it is economic. There are three fundamental differences between the phenomenon and its application in developed and developing countries. The first is its distribution across the student population. In places like the United States, all students at both public and private institutions receive some type of subsidy and pay some level of fees, whereas places like Ethiopia or Uganda tend to fully subsidize a small number of academically talented students and charge all other students the full cost. The second involves the funding recipients. Tuition revenues from cost sharing in developed countries have largely benefited public institutions; however, in developing countries publics garner some of the new private financing, but a substantial portion is channeled into the development of a parallel private higher education sector. The third distinction deals with the underlying infrastructure. Countries like the United States, the United Kingdom, and Australia have created schemes to make education nearly costless at the point of use and repayment manageable over time and under differing economic circumstances. Developing countries have introduced tuition but, lacking the relevant infrastructure, have done so without a functioning loan or grants scheme.

The first problem is that instead of promoting equity, cost sharing in developing countries discourages it. Taxpayers fund public services they can then use, but only a very small fraction of the public actually enjoys the benefit. And since that public subsidy is based on merit, those who do receive the subsidy are least likely to need it: the wealthy children who have attended the best primary and secondary schools. For the overwhelming majority of the college-going population, cost sharing effectively becomes “cost shouldering.”

Second, without the necessary support infrastructure, this particular form of cost sharing is also hindering developing nations’ overall economic growth. Annual tuition at public institutions may only run into the hundreds of dollars (and at privates in the low thousands); but when per capita GDP is less than $1,000, the up-front investment is remarkably high. Driven by the belief in what it can provide, cost sharing forces families to invest an unreasonably large percentage of their available income into education (particularly a small number of professional fields), which drives down consumer demand for goods in other areas of the economy. Rapid annual growth in the number of graduates may be lauded by many, but the high unemployment level among such individuals provides evidence that this mode of financing may in fact be responsible for depressing national growth by oversupplying labor markets while simultaneously depressing consumer demand.

The third and perhaps most interesting problem is that the additional funding is being channeled mainly to newly established private providers. Often referred to as “garage colleges,” most are small for-profits that open and close with alarming frequency and generally only offer professional programs in business, education, or computer science. From an economic standpoint, it is questionable whether such a large percentage of tuition funding ought to be allocated toward the provision of a narrow set of programmatic offerings at institutions that have considerable incentive to overcharge students and shirk on quality. Moreover, such a strategy does little to enhance access by encouraging a more even geographic distribution of higher education providers. For-profit privates’ most lucrative markets are the same populous areas in which the small numbers of public institutions operate.

Is There a Solution?
Unfortunately, identifying a more preferable alternative financing scheme is difficult. One obvious solution would be to design the current system of subsidies on the basis of need rather than merit. The difficulty, of course, is how to calculate need in such a situation. Another solution would be to more evenly distribute public subsidies or create a rudimentary loan scheme using nontraditional cost-recovery mechanisms (e.g., the introduction of promissory notes and tax deductions). Such a system will invariably lose money, but this must be weighed against the benefits it provides by increasing participation and freeing up current income that can be spent on strengthening other consumer markets.

Managing the relationship between cost sharing and private expansion is tricky. An effective quality assurance mechanism can help ensure that tuition fees going to private providers are invested in education activities rather than investors’ pockets, but it cannot encourage a for-profit-dominated private sector to provide loss-making yet economically crucial nonprofessional programs needed for meeting the national labor market’s needs. If the strategy is to support a private system, then more must be done to discover financial incentives that will encourage privates to offer a broader curriculum more capable of meeting the countries’ labor-market needs.

Private financing of higher education is clearly crucial to maintaining an efficient, quality-driven system, but it is not a panacea for the problems currently facing developing countries. The push for a more balanced mix of public and private funding is necessary, but the way it has been so whole-heartedly and rapidly embraced is disconcerting without further research on the economic consequences that cost sharing will have on developing countries in the long run.

[Online] Available: http://www.bc.edu/bc_org/avp/soe/cihe/newsletter/Number43/p7_Salerno.htm