April 30, 2007 | Volume 4, Issue 1
Funding Policy for Higher Education in Two Countries – A Comparison
This paper discusses the funding arrangements for higher education in the Philippines and Australia. It seeks to provide a contrasting picture of price regimes in these two countries. It will evaluate the two systems through the conceptual framework of the dominant theory on human capital.
Introduction
This paper discusses the funding arrangements for higher education in the Philippines and Australia. It seeks to provide a contrasting picture of price regimes in these two countries. It will evaluate the two systems through the conceptual framework of the dominant theory on human capital.
The paper is structured as follows: Part 1 will discuss the conceptual framework covering public provision of higher education, namely the human capital theory, and contrast this with the contending signalling view. Part 2 will provide some descriptive statistics on higher education in both countries. Part 3 will discuss the different modes of financing. Finally, Part 4 will evaluate the factors that give the funding structure shape in both countries.
Part 1: Conceptual Framework
This paper uses Gary Becker’s seminal work on human capital as the underlying framework for treating the funding policies for higher education1. Investments in education and training or human capital as posited by Becker can be likened to investments in equipment, fixed and financial assets, in that they produce returns over the life of the individual.
The returns come in the form of higher wages for the individual throughout his work life. These benefits are offset against the costs, including the direct costs of schooling as well as opportunity costs, or wages forgone during the period of schooling and the direct costs of schooling itself. When net wage benefits are discounted using a risk-free rate of capital and offset against training and education costs, the resulting value is the net return from human capital.
According to this life cycle approach to the investment in human capital, the factors that determine the size of the return are (a) the risk free rate of capital; (b) the number of years involved in schooling: (c) the direct costs of schooling; (d) the quality of schools; (e) the length of the individual’s work life; and (f) the wage differentials of schooled and unschooled workers.
Investing in human capital involves certain risks and uncertainties that are not present when investing in tangible assets. For instance, because human capital returns are reaped over the life of a working individual, these returns are contingent on that individual’s health and lifespan. The work-life of women in particular may contain long intervals in which they engage in non-market activity, such as childrearing, which will significantly reduce their net returns from higher education. Furthermore, human capital acquisition is non-transferrable. The benefits (and costs) involved in the model are internalised and incurred by the individuals making the investment. The decision to invest in human capital, although made privately, does have some positive spill-over effects that accrue to society2.
The quantity of a good provided through markets always falls short of the optimal level whenever positive externalities exist3. As a result, there is a strong case for the public sector to provide higher education for the sake of fostering economic growth4. Whether this involves public production (i.e. state-run universities) or public provision (i.e. subsidies and/or tax breaks to both private providers and recipients of higher education) is a matter of public debate and discussion.
The underlying assumption behind life cycle theories is that private individuals are induced to participate in higher education due to wage/incentive propositions signalled to them by employment markets5. The nature of these signals is again a matter of debate. It is unclear whether school programs actually impact human productivity and lead to higher wages, or whether they merely screen out less productive individuals and signal the inherent capacities of those that remain. If the latter condition holds, then participation rates should be driven more by family and personal traits, rather than the factors specified under Becker’s model.
The contending view to the human capital model is derived from Spence’s work on signalling and screening6. Rather than improving productivity, this view asserts that higher education merely performs a screening function that certifies innate abilities and signals employers of the quality of potential employees. Thus, rather than being sensitive to relative wages earned in the market, the decision to pursue higher education would be influenced by how easily individuals can acquire the “signal.” This is generally related to the initial innate abilities and wealth endowments of an individual, as well as the influence, professional background, and educational backgrounds of the individual’s parents.
Although the jury is still out on which model proves to be more accurate, some anecdotal evidence in Australia can be found to support the signalling view. For example, the abolition of fees by the Whitlam government did not result in significantly higher rates of participation from members of less affluent families for years after the policy was introduced7. This contradicts the underlying assumptions of the human capital view because one would expect increased participation in higher education once the cost of acquiring it was lowered. The irony here is that while the continuing persistence of inequity was consistent with the signalling view, the policy actors that designed the Higher Education Contribution Scheme (HECS) followed the human capital model to determine the incidence of public taxation and financing for higher education8.
Part 2: Descriptive Statistics on Australian and Philippine Higher Education
Select data from the Australian Bureau of Statistics and the Philippine National Statistical Coordination Board are presented here to illustrate the contrast between the two countries’ systems of higher education. Based on the data, participation rates in both countries were at the same level in 2000. The main difference lies in public investment in higher education, which is consistent with each country’s relative economic position.
It should likewise be noted that private spending on higher education in the Philippines outstrips public expenditures. This allocation reflects the structure of providers in the country. First, private providers cater to twice as many students as public providers. Second, the national government’s priorities place a greater weight on funding primary and secondary education.
Table 1
Comparative Descriptive Statistics on Higher Education9
| Item | Australia | Philippines |
|---|---|---|
| Number of students in ‘000, 2000 | 695.5 | 2,430.8 |
| Participation rates of 20–24 year olds, 2000 | 34.4% | 34.4% |
| Public investment, in AU$ Millions, 2000 | 12,100.00 | 442.84 |
| Public investment as % of GDP, 2000 | 2.04% | 0.40% |
| Private investment, in AU$ Millions, 2000 | 9,575.00 | 1,335.00 |
It is rather remarkable that, given the lack of public funding in the Philippines for higher education, it is still able to achieve the same rate of participation as Australia. The high propensity of Filipinos to acquire higher education can be attributed to the American colonial influence10. One of the legacies of the American colonial period is a strong cultural preference for higher education as an intergenerational investment and as a form of “insurance” for income loss on the part of heads of families. The willingness of private households to maintain spending on education despite the rising costs and diminished returns demonstrates their high elasticity of demand11.
On the other hand, a recent study of developed economies showed that Australia’s participation rates ranked rather moderately relative to those of other developed countries12. This might reflect Australia’s long period of economic growth that resulted in attractive employment opportunities and wages for non-graduates.
Part 3: Modes of Financing
In 1989, the Commonwealth government of Australia introduced a scheme known as the Higher Education Contribution Scheme (HECS) to fund places in higher education. HECS is an income contingent loan, designed to finance the growth of places in public universities by transferring a portion of education costs directly to students. Students participating in HECS are given the option of paying the fees upfront with a discount or deferring payment until later when personal income reaches a certain threshold.
In this sense, the program was a form of income-smoothing perfectly in line with Becker’s life cycle human capital model. Compared to the United States’ Social Security system, the HECS is pay-as-you go, but in reverse, meaning it is funded by the contributions of those who have already participated in and/or graduated from the system. Their (re)payments cover the education costs of those who are presently enrolled in the public university system.
Access to such funding is universal and is not subject to means or income testing. Prior to the adoption of this scheme, the Commonwealth’s share of total investments in higher education had ballooned and crowded out state funding after the abolition of private fees by the Whitlam government in 1974. The historical composition of funding source is presented in the table below:
Figure 1:
Composition of Spending on Higher Education in Australia Between 1939 & 1999
Figure 1
Image Not FoundA review of the HECS has noted the growth of university places throughout the 1990s and the higher rates and length of participation by the population in higher education, in keeping with the policy objectives of the program13.
In 1996, income thresholds for HECS loans were lowered, and this discouraged part-time study and participation by older individuals. The overall effect of expanding the number of places has been increased participation of individuals from low socio-economic households14. In 1997, a “differential HECS” scheme was introduced that divided courses into three categories, each with a flat price. In effect, a three-tiered price system was imposed with courses in higher demand being priced higher. This was in keeping with the earlier recommendations on price structure made by the policy framers of HECS. Aside from this change, the share of student contributions was increased to cover 50% of teaching costs. This scheme effectively sought to introduce some form of market-clearing and price-rationing into the system. In 1998, undergraduates paying full tuition were allowed to enrol in public universities provided that all federally supported places were filled and that such students would not exceed a quota of 25% of all places. Norton observes that despite the presence of subsidies, the number of students paying full tuition in Australian undergraduate programs continued to increase15.
In 2005, HECS was replaced by the Higher Education Loan Programme, which has three variants: HECS-HELP was for students enrolled in federally funded places, FEE-HELP was for full-fee paying students enrolled at public or private institutions of higher education, and OS-HELP, which was for students studying overseas16.
In contrast to this, the mix of delivery for higher education in the Philippines is skewed in favour of private, market-based providers. The use of administration charges in the state universities and colleges (SUCs) sector, with a high variability in fees charged and full tuition fees in the private education sector has led to a high level of diversity among educational providers. As a result, there is a great deal of variability in academic quality across different institutions, with a few state universities and sectarian private providers leading the way and a wide range of state polytechnics and small private providers trailing behind.
The limited number of seats at the top tier universities and the resource restraints of the public sector has a variety of effects, including rising tuition fees from leading private universities and the adoption of socialised tuition fee pricing at the premiere state university. The Commission on Higher Education (CHED) devolved its price controls over private providers in 1995, on the back of the market reforms of the 1990s17. The rapid rate of inflation from 1997 to 2000 occurred at the end of that era on the heels of the Asian Financial crisis18.
Because the Philippine Congress converted many of the provincial polytechnics into state universities, the national government’s ability to effectively finance the public university sector has been seriously diminished19. The creation of these State universities and colleges very often follows an irrational process driven by the patronage of congressional sponsors. Many experts, including Abueva, a former president of the premiere state university, recognise this as a problem that needs to be stemmed.
Numerous scholarship programs are in place, some of which are awarded on the basis of academic merit and subject to means and income testing of prospective recipients. These scholarship programs are usually targeted towards specific disadvantaged or professional group. There are also scholarships distributed according to Congressional districts that are allocated based on recommendations made by members of Congress20.
This somewhat fractured form of public investment in higher education will be analysed in the next part of this paper. However, at this point, we shall turn to private funding in the Philippines. As pointed out in the second part of this paper, private expenditures on higher education spending swamps public investment. The fees charged by private providers vary greatly21. Sectarian schools run by Catholic and Protestant organizations are considered to have an excellent track record in providing quality education. Thus, fees charged by these institutions generally are higher than non-sectarian schools. Courses leading to a professional licensure have commanded greater fees, all other things being equal.
Given the strong preference of Filipinos for higher education, a new vehicle for financing private higher education, the pre-need college fund has emerged along the same lines as mutual life insurance. It consists of monthly private household savings being invested in education policies (similar to forced savings) beginning when a child starts primary education. Upon maturity, the policy typically covers the full tuition of household dependents in accredited private educational providers. This type of forced savings was used as a means to counter the effects of inflation on tuition fees. This could be considered an intergenerational form of Becker’s model since the head of household making the investment bequeaths the proceeds to his or her offspring.
The full coverage (i.e. lack of limits clauses) prevalent in the pre-need educational fund industry has led to problems for its members when the financial crisis occurred shortly after the CHED deregulated tuition fees. The actuarial reserves of two dominant players were found to have reached negative or zero balances; this was due to the mismatch of actuarial reserves (based on expected claims) and actual claims made by planholders. This problem has been elevated to the national policy agenda, with proposals calling to reinstate some form of regulation in price setting for private tuition providers and proposals calling for the charter of the commission to be revised22.
Part 4: Perspectives and Criticisms
From a life cycle earnings perspective, the introduction of the HECS in Australia can be explained as a way for the government to ensure the consummation of value-creating investment decisions by private individuals and households. It can be seen as a way of correcting imperfect capital markets that are unable to provide credit on the basis of human capital or other intangible assets. Norton criticises the early version of HECS for being “conceptually, closer to a tax for attending university than a price in a market exchange.”23 His position is that full-fee places should be expanded to give a kind of consumer sovereignty to students, which would provide incentives for universities to expand the number of seats to satisfy unmet demand.
This raises the question, to whom should residual rights of control for universities be assigned?24 Traditionally, in a knowledge based organization such as a university, residual rights have fallen to the owners of intellectual property (i.e. academics) in the same way that profession-based organizations assign them to their most senior practitioners. The difficulty with Norton’s argument is that it sees the student as the sole stakeholder of the university. In reality, universities have a more diverse set of stakeholders whose interests need to be balanced. This would include businesses who hire and license the products of their research and development departments, alumni who contribute to their fundraising programmes, employers who recruit graduates and the society at large. The proposed loan scheme that Norton puts forward to “mimic commercial loans,” basing it on the applicant’s present ability to pay, is one that runs counter to the perspective of Becker’s human capital model as described above.
Such policy prescriptions are natural extensions of the present agenda of the New Public Management movement in Australia that seeks to reduce the size of government and allow private markets to dominate in the allocation of resources. The Wran Committee’s original recommendation assigned a private contribution ratio that was in line with an estimated fair return from higher education. Suspicions as to the public sector’s motives and doubts as to whether it posseses technical competence in performing such kinds of estimation underpin the philosophical stance of those calling for a reduced role for government in making such allocation decisions.
In the Philippines, the non-introduction of a universal funding scheme for higher education has followed a disjointed pattern of policy setting. This has in turn led to a dichotomous and fragmented mode of financing. The plethora of scholarship schemes can be characterised as a collection of ad-hoc measures seeking to redress social ills, by targeting specific groups and as a way to distribute entitlements through political patronage. The mode of public funding is more in keeping with the view of higher education as a means to address social inequity rather than as a vehicle for increasing economic performance25.
The emergence of privately managed college funds exhibits the propensity of risk pooling mechanisms to cope with the consequences of the government lacking the ability to fully fund higher education. The recent near collapse of two major college funds has demonstrated the inability for these instruments to completely shirt the risk. It should be noted that middle to lower income groups had been the main market for such funds, which has prompted legislators to tag this issue onto their agendas.
The Congressional Commission on Education, which framed the Philippine Higher Education Act and established the Commission on Higher Education, intended the CHED to be an agency insulated from political pressure or private interests. At the time of its adoption, the commission justified the devolution of pricing to private tuition providers on the basis that open competition would moderate price adjustments in the market for higher education. Subsequent events have demonstrated the limitations of such an assumption. As a result, proposed legislation seeks to restore administrative control over the commission to the Philippine President26. This can be seen as an admission of failure of the free market policy in this regard.
Conclusion
This paper has highlighted the roles that private markets and collective action have played in shaping the nature of funding for higher education in two countries, Australia and the Philippines. In Australia the original HECS regime was more in keeping with Becker’s Human Capital model and recognised the fact that public benefits did accrue to society in the cost-sharing ratio that it imposed. The focus of the New Public Management proponents in reducing government liabilities in the present dispensation of the scheme tends to disregard these positive spill-over effects. As such, in seeking to abdicate the role of collective action to market mechanisms, the policy advocacy will, according to Becker’s model, ultimately lead to a scheme that lowers the returns from schooling and eventually mutes the incentives for accumulating human capital. This could eventually lead to lower participation rates among those most at risk of dropping out, and in keeping with the signalling view, screen out those whose family incomes and initial resources were traditionally left out of further education.
The dichotomous and fragmented system of governance in the Philippines relies on markets and public provision in two separate systems of provision27. This situation mimics the socio-economic composition of those who demand such service in the two systems. It also reflects the institution of patronage in the political system, which sees the politician’s role as a leveller of social inequity through distribution of entitlements. In this kind of milieu, a publicly subsidized private education framework has been contemplated to address the need for greater access, which would essentially create a third system of financing higher education28.
It is difficult to imagine how such a scheme could be fashioned and legitimised since such a move would be seen as a way of diverting resources away from an already poorly funded public university system. An arrangement more likely to succeed is the voluntary, “adopt-a-school project,” already initiated at the primary and secondary school levels, that establishes partnering arrangements with private sector agents29. This program has been successful and is motivated by private industry’s belief that the positive spill-over effects of a highly literate and skilled citizenry is the key to their sustained performance and position in a highly competitive commercial world.
The likelihood of a policy transfer of the successful HECS model in Australia to the Philippines is doubtful given the significant differences in institutional structures and processes governing policy making in both countries. While in Australia, public funding of higher education has been premised on an economic rationale that seeks to optimise the allocation of productive resources, in the Philippines, it has been construed as a form of income transfer or wealth redistribution by political elites, which has naturally resulted in its under-provision.
1 Gary S. Becker. “Investment in Human Capital: A Theoretical Analysis.” Journal of Political Economy, Vol. 70, No. 5, Part 2: Investment in Human Beings (Oct., 1962), pp. 9–49
2 A more educated citizenry make for better voters, a resource that drives other forms of complementary investments in industries that are human capital intensive, which in turn leads to positive economic growth.
3 T. W. Schultz (1961). “Investment in Human Capital: Reply.” American Economic Review, Vol. 51, No. 5, pp. 1035–1039.
4 Paul M. Romer. “Increasing Returns and Long-Run Growth.” Journal of PoliticalEconomy, Vol. 94, (1986) pp. 1002–37.
5 For a recent evaluation on the estimation of returns to schooling, see Heckman, et al (2003).
6 Spence, Michael. “Job Market Signaling.” The Quarterly Journal of Economics, Vol. 87, No. 3. MIT Presspages (August, 1973), p. 355–74.
7 Meredith Edwards. “Paying for a University Education: HECS and Not Fees,” in Edwards, M., Social Policy, Public Policy: From Problem to Practice, Allen & Unwin, Sydney, 2001.
8 Although the notion of income contingent loans to fund higher education was originally suggested by Milton Friedman, whose views characterised the Chicago School (of Economics) in 1955, it was Gary Becker (also a faculty member of this school) whose pioneering work on human capital provided the framework for computing returns from schooling.
9 Data was culled from ABS and NSCB statistical reports.
10 Allan B. de Guzman. “The Dynamics of Educational Reforms in the Philippine Basic and Higher Education Sectors.” Asia Pacific Education Review, Vol. 4 No. 1 Education Research Institute (2003).
11 Between 1997 and 2000, expenditures rose by 44%, as documented by the Family Income Expenditure Survey published by the National Statistics Office in 2002.
12 Patrick M. Callan. “International Comparisons Highlight Educational Gaps Between Young and Older Americans” in Measuring Up: The National Report Card on Higher Education. The National Center for Public Policy and Higher Education(2006).http://measuringup.highereducation.org/commentary/introduction.cfm#_edn1, (accessed November 9, 2006).
13 May Martub Yew and Tom Karmel. “Expansion in Higher Education during the 1990s: Effects on Student Access and Quality (draft).” Research, Analysis and Evaluation Division, Department of Education, Science and Technology (2002).
14 Phil Aungles, Ian Buchanan, Tom Karmel, and Maureen Maclachlan. “HECS and Opportunities in Higher Education: A Paper Investigating the Impact of the Higher Education Contribution Scheme (HECS) on Higher Education (draft). Research, Analaysis and Evaluation Division, Department of Education, Science and Technology (2002).
15 Andrew Norton. “HELPless: How the FEE-HELP Loans System Lets Students Down and How to Fix It” Issue Analysis, No. 68. Centre for Independent Studies, 2006.
16 E. Tan. 2002. Philippine Institute for Development Studies-Philippine Economics Society Distinguished Speaker’s Lecture series. http://dirp3.pids.gov.ph/silver/documents/Tan%20paper.pdf accessed (November 6, 2006).
17 The Commission on Higher Education was created through the Higher Education Act of 1990 to regulate private providers and supervise some state-owned institutions.
18 Family Income Expenditure Survey, National Statistics Office, 2000. Press Release Number: 2002–170. Date Released: October 7, 2002. http://www.census.gov.ph/data/pressrelease/2002/ie00edtx.html#technotes (accessed November 9, 2006).
The results of the Family Income Expenditure Survey of 2002 noted that 44% inflation was observed from 1997 to 2000.
19 J. V. Abueva & D. B. Canlas & J. C. Magadia. “A Proposal for a PIDS Policy Research Agenda, 2005–2009.” Philippine Institute for Development Studies. http://dirp3.pids.gov.ph/about/rsd/PIDS_Research_Agenda_05_09.pdf (accessed November 9, 2006).
20 This refers to the CHED Special Study Grant Program for Congressional Districts. Another one exists for the Senate called, CHED-Senate Study Grant Program.
21 E. Tan. 2002.
22 At present nine house bills are being considered by the Educational and Technical Committee of the House of Representatives. These proposals range from the most drastic, i.e. imposing a moratorium of fee increases, to the more moderate, i.e. rationalise and regulate the setting of fees of private higher education institutions and to freeze any proposed increases in tuition and miscellaneous fees pending investigation (Reps. Liza Maza and Teodoro Casiño)
At present, two bills are pending before the House of Representatives seeking to re-constitute the commission as a department under the executive branch. These are HBs 2677 and 3603 – Renaming the Commission on Higher Education (CHED) as the Department of Higher Education and amending RA 7722 or the Higher Education Act of 1994.
23 Norton. 2006.
24 Armen Alchian and Harold Demsetz. “Production, Information Costs, and Economic Organization.” American Economic Review, 62 (1972), 777–97.
Residual rights of control refers to the right to make any decision concerning an asset’s use that is not explicitly assigned by law or contract to another party.
25 N. M. Castillo. “Education and National Reconstruction.” UNITAS, Vol. 60, No. 3 (1987).
26 See 9 above.
27 Paul D. Hutchcroft. Booty Capitalism: The Politics of Banking in the Philippines. Cornell, 1998.
28 Abueva, et. al. 2005.
29 The “adopt a school project” embodied in Republic Act 8525, as described by de Guzman, “has tapped into the local business sector and external funding bodies for assistance such as school building and facilities construction.”