State versus Private Ownership: the case of higher education in transition

Transcription

1 State versus Private Ownership: the case of higher education in transition ALENA BUŠÍKOVÁ, ĽUBA HABODÁSZOVÁ, ANDREJ PIOVARČI Vysoká škola manažmentu Abstract: This presentation revisits the old debate of pros and cons of state versus private provision of public goods with the emphasis on higher education. We draw heavily on the work of Andrei Shleifer (State versus Private Ownership, 1998) who outlined main arguments for delineation between private versus public ownership of productive assets used for producing public goods including an option of outsourcing of public goods provision to private sector. These arguments include contractual problems, incentives to innovate, and market conditions, such as competition allowing for an effective consumer choice, and reputation building. By reviewing these arguments in the context of higher education, we then discuss how they hold in transitional economies. Not surprisingly, we find that the main argument for the choice between public and private provision is heavily affected by institutional environment, a claim which we evaluate by examining international data. Key words: higher education, transition, state ownership, private ownership, institutions 1 Introduction In this work we reopen the question of state versus private provision of public goods. To narrow the analysis we concentrate solely on the provision of tertiary education, particularly the provision of business education or related social sciences. This choice is affected by the scope of the analysis, authors experience, but also by the availability of data that we intend to use. Similarly, we believe that this debate is worthwhile in the context of higher education given the most recent experience of transition economies, particularly an increase in the number of private providers and the lukewarm attitude of general public towards private provision. Therefore, the analysis here attempts to contribute to the ongoing debate of the nature of reforms of higher education in the region. At the same time, we would like to stress that a number of issues related to other public goods, and also other types of education, such as technical or medical schools, are not considered. Broader analysis may lead to different conclusions than ours. This work rests heavily on the paper by Andrei Shleifer (2) in which he outlines main arguments regarding the cost-benefit analysis of state versus private provision of public goods in general. We do not deviate from the main arguments or the conclusion of Shleifer s work. We view our contribution in more in-depth discussion of factors affecting the choice between public versus private provision of higher education, and emphasizing issues relevant to a transitional economy. 2 The benevolent government The starting point of Shleifer s analysis is to consider two main options of provision: first, the higher education as a type of public good is provided by the government that is concerned about the social welfare (benevolent government). Second option is the provision by a private provider who has clear incentives to generate private returns ignoring positive externalities. The standard argument for provision by the state is that given the presence of positive externalities, a private unregulated market would not deliver an optimal amount of any public good. In case of education, the argument mentioned by Shleifer is that private schools, particularly elementary and secondary schools, would be too selective, not accepting problematic students, thus not allowing for a larger and optimal number of people to have access to primary and secondary education. In higher education the issue of suboptimal provision is likely to be not in terms of a lower enrollment, but instead in terms of lower quality. Hence, the need to maintain some degree of regulation from the benevolent state is unavoidable as it is with other types of public goods or externalities in general. In the presence of positive externalities, the government provision is not automatically the better option. The government, if it can clearly define, measure and enforce desirable outcomes, may contract with a private provider and even pay for the service depending on the size of externalities. For example, in case of primary and secondary schools the government is likely to pick up most of the bill due to large externalities. The contracts with private providers, or more broadly regulation, would specify requirements in terms of observable quality, 231

2 enrollment and various other outcomes that the government wishes to include in the socially desirable first best outcome. In other words, the strength of the support for universal public good state provision is undermined if we allow for such contracts or regulation to exist. Obviously, this is a purely theoretical argument. Contracts are inherently incomplete in nature, the government will not be able to contract all future contingencies with respect to investment, for example. The problem may be somewhat alleviated if the state does not pay for the service, but nevertheless regulation in itself leads to all sort of problems. For example, rules may be too tight for effective implementation of innovation. Next, changing contracts as a response to changing environment too often is costly for both parties and may be coupled with resistance of stakeholders. In addition, enforcement and monitoring may be difficult and costly. This is clearly visible in the experience of public sector schools in post-communist countries, where the performance criteria themselves are not the center of the debate. Instead, it seems that it is the enforcement of the quality measures that is more problematic. However, the most important problem with respect to the contractual ineffectiveness in our debate is the inability to capture non-contractible quality. The claim is that a private provider will have an incentive to lower cost at the expense of reducing this component of quality. Despite various attempts to measure quality of outcomes in education, the objective criteria used are still debatable, even though some international consensus exists (see the section on data analysis). In other words, despite the presence of objective criteria used in contracts, such as faculty research, a number of student/faculty ratio, etc, there is still a strong component of unmeasurable quality that cannot be explicitly contracted (such as meaningful delivery of the curriculum, tacit knowledge transfer, respect for education, admission office friendliness etc). To summarize, the inability to capture non-contractible aspects of quality in contracts or regulation of private providers may us lead to believe that the government should remain the sole provider of higher education. This would ensure that the incentive to cut corners and reduce the non-contractual aspects of quality are reduced, if not eliminated 1. However, one has to consider the main advantage of private providers in having stronger incentives to innovate and thus to increase efficiency and qualilty. This is simply due to the fact that any return to innovation, either in terms of cost reduction or quality improvement, is recouped fully by the private owner. In case of state ownership, even with the existence of incentive contracts, innovation is difficult to encourage explicitly. We believe that the experience of the communist regime in its inability to sustain innovation is sufficient evidence of this claim. Hence, we continue building the argument that the choice to delegate provision of public goods, such as education, to a private contractor will rest on the tradeoff between the cost of reducing non-contractible quality and the incentives to innovate, if innovation is desirable. We argue that the room for innovation in education is stronger than the threat of reduction in non-contractible quality. The general mode of learning has not changed for over several centuries up until fairly recently. A rapid increase in the use of technology in classroom, adapting programs to needs of employers by providing narrow specializations, now widespread use of online education and very recent experimentation of mass online courses are the most vivid examples of the potential to innovate. These examples are clearly showing that the cost of provision can be lowered and similarly the quality can be improved as well. We leave the details of the debate on the degree of improvement in the effectiveness of these new modes of education to another research paper in order not to interfere with the main idea of this presentation. But we wish to stress that innovation remains very strong argument in favor of private provision of education. Moreover, the argument in favor of private provision can be further extended by external factors, or institutional factors, such as existing competition between providers leading to an effective choice for consumers if we assume low switching cost (such as mechanism for credit transfer). In addition, reputation building is another mechanism that can reduce the temptation to lower quality for a private provider. This argument has much support in the liberal camp basically claiming that the only role of government should be to provide the rule of law and to protect the private property. If these two main public goods are effectively provided, 1 Certainly, we do not automatically assume that the state provision guarantees non-contractible quality of education even with the benevolent government. At the same time, problems of governance including incentive contracts and agency problems are equally important for both state and the private owner. The question then is which ownership structure is more likely to achieve more effective governance. These issues, however important, are outside of the scope of this paper since the conclusions are not expected to differ from the current ones once the governance is included. The conclusions may differ in case if for some reason private owners had more difficulty implementing effective governance, which is not supported by available evidence. However, in transition this issue is worth further research. 232

3 competition and the desire to build long run reputation may serve as effective alternatives to government regulation of education. In other words, providers will have lower incentives to cut corners if they violate contracts with their customers or optimize only in the short run. However, one has to acknowledge the presence asymmetric information in education. Education can be possibly placed in the category of experience goods, which implies that a customer may learn about the quality only after purchasing the product or service. The role of government in this case can be then concentrated on reducing the informational asymmetries by providing information and general transparency about all providers including state universities, such that consumer may make informed decisions. In order to convince potential customers of objectivity of such information, this function can be delegated to an entity composed of all stakeholders, such as employers, existing customers, etc. To conclude this section, we state that the private provision of higher education is preferred since 1. the need to innovate is strong 2. the incentive to reduce non-contractible quality is limited by i) competition among providers leading to an effective consumer choice ii) reputation building mechanism 3 How does this fare in the context of transition non-benevolent and corrupt government Following Shleifer s analysis, next we turn to the non-benevolent government. In this case, it is recognized that the government, or better politicians, follow their own self-interest. This is manifested by their desire to maintain political support, which leads to suboptimal outcomes from social point of view. Examples are numerous; we refer a reader to the vast literature on inefficiency of public sector including a brief summary by Shleifer (2). In transition the desire to implement unpopular reforms would be even lower. Adding widespread corruption to the equation further undermines the case for state provision. We assume here the most extreme case of non-benevolent and corrupt government, perhaps with dilettante politicians. There are doubts if state provision of any public good will be effective, as we may currently witness poor performance of state firms and public good provision in post-communist countries. Simultaneously, it is unreasonable to assume that corrupt politicians following their own agenda would be effective regulators, needless to comment on their ability to determine an optimal size and scope of regulation. However, opening the option to private provision leaves all sorts of other problems. It is no longer an issue of non-contractible quality that private providers have incentive to reduce, but in this case also contractible quality and all other aspects that would be a normal part of effective regulation. It may as well happen that valuable resources are wasted on playing the government, formally following whatever rule is in fashion without much concern for what the socially optimal outcome may be. In the extreme, we can imagine private providers bribing politicians to ignore regulation or to set rules that are supporting reduction in both observable and unobservable quality. In this environment, even benevolent private provider does not enjoy any benefit of long term planning, has to participate in bribing in order to succeed in political competition and is forced to use valuable resources on minimizing the impact of confusing and often absurd government regulation. Frictions in the system have obviously disastrous long term consequences in deterioration of positive externalities from the society s point of view and negative consequences from a consumer s point of view in a form of inefficient investment. In addition, due to low transparency the information about the true situation is obscured. In this environment, can we then rely on external factors along the arguments from the preceding section (competition and reputation building) to achieve an outcome at least remotely distant to the socially optimal one? One can question if the degree of competition in transitional economies is sufficient to provide any incentives to maintain the quality. The public consensus in Slovakia is clearly on the side of too many schools in existence at the moment, so it may be politically infeasible to support more providers. We leave this question open. Measuring the degree of competition would require measuring student mobility, for example. In our preliminary opinion given anecdotal evidence, there is not enough competition among business schools, or schools providing related education. Further research may shed more light on the determinants of competition in education. Furthermore, reputation building, as another external factor pushing private providers to socially desirable outcome, is undermined by frequently changing dubious rules for private providers, unclear enforcement of existing unsystematic regulation and inability of the government to start any meaningful reform. Again, the 233

4 question here would be if the private providers, and as a matter of fact public providers as well, can effectively embark on a path of reputation building without much damage caused by unpredictable interference of the government. Again, our personal opinion would be leaning towards this possibility as fairly viable. At the same time, the need to innovate or at least implement innovation along world trends locally still exists and it is possibly higher than ever. Given the current distortions in the educational system in transitional economies, our main question remains and that is which provider is in a better position to implement innovations? In our opinion, the answer is fairly straightforward. Any return to innovation, cost reduction or quality improvement is clearly recouped fully by private owner, whereas such benefit is only partially recouped by a public sector employee. For that reason, we claim that private providers have stronger incentives to innovate compared to public providers. Moreover, in the context of transition, public universities struggling with publicly provided budgets and under political interference may not be in a position to use limited resources for innovation, such as online education. With the non-benevolent government unable to maintain meaningful oversight of performance of both public and private schools, it may be suggested that reliance on the market mechanism to get closer to social optimum is needed. Particularly, we advocate that regulation should be scrapped to a bare minimum, if any, and free unregulated market supply should be unleashed. We leave out the mode of such a transformation to further research. Particularly, issues including the option of the method of possible privatization of public schools, the government support of private providers, possible voucher scheme and the like, may be considered in more detail. 4 Data Our main support for private schools rests in their ability to innovate faster with higher flexibility achieving higher efficiency and quality together with consumer satisfaction. In addition, with meaningful regulation and supportive institutional framework (commonly labeled in the literature as helping hand type of the government), the advantage of private providers is even stronger since competition and reputation building reduce the incentives to cut corners. We turn to available data to investigate the ranking of business schools in the United States and then in the world. We concentrate on the ownership structure to see the proportion of private versus public schools. First, we look at the United State in order to control for the impact of varying institutional factors. The universities in the United States are known for their high quality, but here we look if this quality is equally likely to achieve in private and state sector. We are aware that the regulatory framework for both public and private schools may differ from let s say European schools. Nevertheless, the question of ownership remains interesting. The following table shows the proportion of private schools in the subgroup of all 448 master's programs in the ranking of the best business schools in the US. The criteria for ranking include quality assessment rated by peers and recruiters, placement success and students selectivity. The complete ranking (100 schools) is in the appendix. Table 1 Best Business Schools in the US proportion of private ownership Considering Proportion of private out of the subgroup Top 100 schools 0,44 Top 50 schools 0,5 Top 20 schools 0,7 Top 10 schools 0,9 Source: Calculated based on data from US News and World Report, 2013 We see that the number of private schools is not significantly higher than the number of public schools while considering the top 100 schools. However, moving towards the top of the ranking, the proportion of private schools is increasing. Among the top 10 business programs only one of them is associated with the public 234

5 university (University of California-Berkeley). This first look at the data roughly supports the claim that the private ownership, at least with respect to business programs, delivers better quality. 2 Then we turn to the international ranking using Shanghai ranking for the top 50 social science programs in the world. The ranking criteria are alumni and staff winning Nobel Prizes and Fields Medals, highly cited researchers, articles indexed in Social Science Citation Index (SSCI), percentage of articles published in the top 20% journals (1). The full ranking is again in the appendix. Here we show the proportion of private schools narrowing the selection from the 50 top programs to 10 top programs. Again, the private schools do not dominate initially, but the pattern changes once we move towards the top of the ranking. All private schools are located in the US. Only 8 schools (16%) are non-us. Table 2 World Top 50 Social Science Programs proportion of private ownership Considering Proportion of private out of the subgroup Top 50 schools 0,4 Top 20 schools 0,5 Top 10 schools 0,8 Source: Calculated based on data from ARWU, 2012 This preliminary data analysis leads us to a hypothesis that the institutional environment becomes the necessary condition for efficient private provision of education. The presence of effective regulation of the helping hand government is the main mechanism in which private providers can take advantage of generating and recouping returns to provision of higher education. This is further supported by the sufficient time horizon that allows for reputation building, such as in the case of the US, simultaneously developing market alternatives to the state oversight in the form of accreditation committees and self-regulatory coordination leading to an effective consumer choice (for example, credit transfers). It is then not surprising to see that this competition has spilled over to public schools as well. For that reason we may see a large number of successful public universities in top rankings. But notice that in the world rankings, it is precisely the US universities who dominate. This again points out to the importance of the long term impact of the benevolent institutional framework on the private provision. In the final table, we look at the proportion of American schools in international ranking (in ARWU Shanghai ranking). This is indirectly testing the impact of institutions ignoring ownership. In other words, higher proportion of American schools independent of ownership, as the table 3 shows, indicates that the ownership is not the most important determinant. Rather the quality of education is driven by the healthy coexistence of various factors, in the context of our discussion ownership and institutions. Table 3 Proportion of US schools in Top 50 Universities Considering Proportion of American schools out of subgroup Top 50 schools 0,84 Top 20 schools 0,85 Top 10 schools 1 Source: Calculated based on data from ARWU, Conclusion This short presentation discussed factors affecting the choice between state and private provision of higher education as outlined by Shleifer (2). We emphasized that the need for innovation in higher education exists and dominates over the possibility of deterioration of non-contractible or currently measured quality. Primarily for 2 Here we do not discuss validity of ranking criteria. Similarly, we do not select along more narrow criteria. This can be a helpful extension of this discussion in further research. 235

6 this reason we conclude that the private provision of higher education should play a significant role and deserve more attention in the debate about the nature of reforms of tertiary education in transitional economies. Lot of issues remains unanswered and left for further research. These include but are not limited to the specifics of the reform of the current system, issues regarding objective measurement of quality of provision beyond the currently used variables and measurement of private and public returns to innovation identifying the most significant improvements. Similarly, we did not open a question of complete scrapping of state provision that could be achieved by partial or full scale privatization, voucher scheme and the like, leaving the question of a possibly optimal mix of both modes of provision open. We also left out more detailed discussion of informational asymmetries that have an impact on consumer choice, thus reducing the role of competition that remains a crucial complement to the governmental oversight. In our conclusion we stress the importance of institutional framework in the debate of the role of private providers of higher education. Including the option of the non-benevolent and corrupt government not primarily interested in maximizing social welfare following the literature on transition, we point out that any meaningful reform of higher education is unlikely to succeed without a reform of the government. Literature 1. ARWU (2012). Academic Ranking of World Universities in Social Science Center for World- Class Universities of Shanghai Jiao Tong University. Retrieved from: Cit. [ ]. 2. Shleifer, A. (1998). State Versus Private Ownership. NBER Working Paper No. w6665. Retrieved from: Cit. [ ]. 3. U.S. News and World report. (2013). Best business schools, Retrieved from: Cit. [ ]. Contact: Alena Bušíková, M.B.A., PhD. Vysoká škola manažmentu Panónska cesta Bratislava abusikova@vsm.sk Ing. Ľuba Habodászová, M.A., PhD. Vysoká škola manažmentu Panónska cesta Bratislava lhabodaszova@yahoo.com Ing. Andrej Piovarči, PhD. Vysoká škola manažmentu Panónska cesta Bratislava apiovarci@vsm.sk 236

7 Appendix US Business Schools Ranking (USA, 2013, Source: U.S. News and World report ) # Institution Owner # Institution Owner 1 Harvard University private 51 University of Massachusetts Amherst (Isenberg) public 1 Stanford University private 52 Case Western Reserve University (Weatherhead) private 3 University of Pennsylvania (Wharton) private 52 Sout hern Met hodist Universit y (Cox) private 4 Massachusetts Institute of Technology (Sloan) private 52 University of Georgia (Terry) public 4 Northwestern University (Kellogg) private 52 University of Missouri (Trulaske) public 6 University of Chicago (Booth) private 56 Babson College (Olin) private 7 University of California Berkeley (Haas) public 56 George Washington University private 8 Columbia University private 58 Temple University (Fox) public 9 Dartmouth College (Tuck) private 58 University of Alabama (Manderson) public 10 New York University (Stern) private 58 University of Connecticut public 11 Duke University (Fuqua) private 61 Northeastern University private 12 University of Virginia (Darden) public 61 Louisiana State University Baton Rouge (Ourso) public 13 Yale University private 61 Rutgers, the State University of New Jersey New Brunswick and Newark public 14 University of California Los Angeles (Anderson) public 61 University of Pittsburgh (Katz) public 14 University of Michigan Ann Arbor (Ross) public 61 University of Utah (Eccles) public 16 Cornell University (Johnson) private 66 University of Arkansas Fayetteville (Walton) public 17 University of Texas Austin (McCombs) public 67 Tulane University (Freeman) private 18 Emory University (Goizueta) private 67 University of Oklahoma (Price) public 19 Carnegie Mellon University (Tepper) private 67 University of Tennessee Knoxville public 20 University of North Carolina Chapel Hill (Kenan-Flagler) public 70 Baylor University (Hankamer) private 21 Washington University in St. Louis (Olin) private 70 College of William and Mary (Mason) public 22 Indiana University Bloomington (Kelley) public 70 Iowa State University public 23 University of Minnesota Twin Cities (Carlson) public 73 University of California San Diego (Rady) public 23 University of Washington (Foster) public 73 University of South Carolina (Moore) public 25 Georget own University (McDonough) private 75 Auburn University public 26 University of Southern California (Marshall) private 75 CUNY Bernard M. Baruch College (Zicklin) public 27 University of Notre Dame (Mendoza) private 75 University at Buffalo SUNY public 27 Georgia Institute of Technology (Scheller) public 75 Virginia Tech (Pamplin) public 27 Ohio State University (Fisher) public 79 Fordham University private 30 Brigham Young University (Marriott) private 79 Syracuse University (Whitman) private 30 Rice University (Jones) private 79 Texas Christian University (Neeley) private 30 Vanderbilt University (Owen) private 79 Binghamton University SUNY public 30 Arizona State University (Carey) public 79 University of Colorado Boulder (Leeds) public 34 University of Wisconsin Madison public 84 Bentley University (McCallum) private 35 Texas A&M University College Station (Mays) public 84 St. Louis University (Cook) private 36 University of Florida (Hough) public 86 San Diego St at e Universit y public 37 University of Rochester (Simon) private 86 University at Albany SUNY public 37 University of Maryland College Park (Smith) public 88 Thunderbird School of Global Management private 37 University of Texas Dallas public 88 North Carolina State University (Jenkins) public 40 Boston College (Carroll) private 88 Oklahoma State University (Spears) public 40 Boston University private 91 University of Miami private 40 University of California Davis public 91 University of Oregon (Lundquist) public 43 Michigan State University (Broad) public 93 DePaul University (Kellstadt) private 44 Purdue University West Lafayette (Krannert) public 93 University of Tulsa (Collins) private 44 University of Arizona (Eller) public 93 University of Kentucky (Gatton) public 44 University of Iowa (Tippie) public 96 Pepperdine University (Graziadio) private 47 Wake Forest University (Babcock) private 96 Rensselaer Polytechnic Institute (Lally) private 47 University of Illinois Urbana-Champaign public 96 University of Houston (Bauer) public 49 Pennsylvania State University University Park (Smeal) public 99 University of San Diego private 49 University of California Irvine (Merage) public 99 University of Cincinnati public 237

8 Academic Ranking of World Universities in Social Science (Source: ARWU, 2012) World Rank Institution Country Total Score Ownership 1 Harvard University 100 private 2 University of Chicago 92.1 private 3 University of California, Berkeley 79.9 public 4 Massachusetts Institute of Technology (MIT) 79 private 5 Columbia University 77.6 private 6 Princeton University 76.7 private 6 Stanford University 76.7 private 8 Yale University 74.5 private 9 University of Pennsylvania 73.4 private 10 New York University 70.8 public 11 University of Michigan - Ann Arbor 64.4 public 12 Northwestern University 63.7 private 13 University of Minnesota, Twin Cities 62.3 public 14 University of California, Los Angeles 62 public 15 The University of Texas at Austin 59.7 public 16 London School of Economics and Political Science 59.1 public 17 University of Oxford 58.9 public 18 Carnegie Mellon University 58.2 private 19 University of Cambridge 57.6 public 20 Arizona State University - Tempe 57 public 21 Duke University 56.7 private 22 University of Maryland, College Park 56.1 public 23 Pennsylvania State University - University Park 54.8 public 23 University of Wisconsin - Madison 54.8 public 25 University of California, San Diego 53.8 public 26 University of Washington 53.1 public 27 The Ohio State University - Columbus 53 public 28 Indiana University Bloomington 52.9 public 28 University of North Carolina at Chapel Hill 52.9 public 30 University of British Columbia 49.8 public 31 Michigan State University 49.7 public 32 Vanderbilt University 49.6 private 33 Boston University 49.2 private 34 University of Southern California 48.9 private, not-for-profit 35 Washington University in St. Louis 48.7 private 36 Cornell University 48.6 private 37 University of Illinois at Urbana-Champaign 46.3 public 38 University of Rochester 46.1 private 39 George Mason University 45.6 public 39 The Johns Hopkins University 45.6 private, not-for-profit 41 Brown University 45.5 private 42 McMaster University 45.3 public 42 University of Virginia 45.3 public 44 Florida State University 44.7 public 45 Emory University 44.4 private 46 University of Toronto 44.1 public 47 University of Warwick 44 public 48 University College London 43.7 public 48 University of Pittsburgh 43.7 public (state-related) 50 University of Arizona 43.6 public 238