Transition from Regulatory to Market-Based Systems of Higher Education Maureen McLaughlin World Bank June 6, 2006

Reforming Higher Education in Central Asia for the Market Economy All Central Asia country reports show a gradual adoption of policy and legal frameworks for reorganizing higher education in terms of market economy demands. –Moving from the regulatory system in place at the time of the transition in early 1990s to a more market-oriented approach. Organization of presentation: –Outlines characteristics of regulatory models and market-based approaches. –Examines two different countries with market-based systems – United States and New Zealand—to examine specific policy changes involved in moving towards more a market-based system.

Characteristics of Regulatory and Market-Based Approaches Regulatory Approaches Highly centralized Government makes and enforces decisions –Defines rules and regulations –Input-based with strong audit function Heavy reliance on public funding Limited role for the private sector Little autonomy for institutions Little choice for students in deciding where to enroll Little attention to outcomes --for ex, labor market outcomes, graduation rates Limited information and data Lack of transparency Rigid and nonresponsive to changes in society and economy Market-Based Approaches Highly decentralized Government sets the framework and provides incentives –Structures policies to provide incentives for desired results –Output and outcome-oriented results with accountability Increased reliance on private funding Strong role for the private sector Extensive autonomy for institutions Significant choice and flexibility for students to choose where to enroll Strong attention to outcomes –for, ex, labor market outcomes, graduation rates Extensive information and data High degree of transparency Responsive to changes in society and economy

Continuum from Regulatory to Market-Based Systems Continuum from Highly Regulated to Market Based Systems—for example –Highly regulated: Former Soviet Union countries –Market-Based Approach: United States –In between: New EU member countries Western European countries –New Zealand: example of country that moved rapidly from regulatory to market model in late1980s/early 1990s

Higher Education in the U.S. A Market System Large, diverse, open, competitive –Long history of the market-based approach Significant choice for students—wide diversity of institutions Mixed public/private system Significant public and private sector funding Heavy reliance on student and family contributions— targeted grants for low-income students and student loans High degree of institutional autonomy—academic, financial and administrative—for public and private institutions Boards of trustees oversee institutions

Limited but Important Role of Government National level – –Equity agenda—support for students to pay costs –Incentive programs for change –Quality assurance framework –Research funding--competitive State level-- 50 different models –Guide and oversee public institutions –License programs –Fund public institutions –Ensure quality and accountability –Support economic development

Quality Assurance and Accountability Role of government—both national and state in US –Set up the framework and institutions; –Ensure accurate and transparent information; –Monitor performance of institutions. Accreditation—internal and external review –Independent agencies--Regional and specialized agencies –Accredit institutions or programs –National role—recognize accrediting agencies Set standards for recognition Emphasize outputs and outcomes in addition to inputs Information—powerful tool for students, society, institutions, government –For ex, Graduation rates, job placement rates, student loan default rates, pass rates on teacher licensing rates Required to be collected and published; also accountability –US News and World Report--independent

Public Funding State funding of public institutions varies widely in U.S— –High tuition, high aid models; low tuition, low aid models Funds provided to public institutions in many ways: –Lump sum, funding formulae, per-student basis, performance-based funding, etc –Many states are now experimenting with different approaches designed to encourage and reward performance –Set up funding system to support and encourage desired results Support for students—grants and student loans—largely subsidized at federal level and for students at public and private institutions –Student aid system designed to remove financial barriers to attendance for low-income or at-risk groups through grants and targeted subsidies in the loan programs (while students are in school and during the repayment period). Also early intervention programs to help low-income students improve their academic performance and increase the likelihood that they will be prepared for higher education.

New Zealand: Rapid Move to Market-Based System Sweeping economic, political and social reforms across the government in the late 1980s and early 1990s –Reduce government role and increase market forces –Response to deteriorating economic conditions and high unemployment Higher education increasingly necessary for labor market and knowledge economy Moved quickly from a more regulated system to a more market-based system –From heavily publicly subsidized higher education for a smaller number of students to less subsidized education for a larger number of students –From virtually free higher education for a limited number of students to higher fees and broader participation. –Introduced student loans with income-based repayment after leaving school –Funded institutions based on student enrollments –Increased institutional autonomy –Introduced performance-based funding of research Result: Very responsive system –Number of students increased dramatically –Number and diversity of institutions and programs increased significantly Making further adjustments now—take advantage of market system while avoiding the pitfalls—more attention to quality assurance and government priorities

Thoughts on Policy Changes for Central Asia Decentralize the system Provide autonomy to institutions in return for accountability. Move from input to outcome-oriented policies, including funding formulae. –Introduce performance-based and competitive funding for institutions and research. Institute fee policies with targeted funding for students to ensure equity. –Careful design of fee structure, student grants, and student loans. Set up framework for quality assurance and accountability –Especially important as system becomes more market-based. Increase relevance, quality and diversity of higher education programs. Collect and disseminate information—labor market outcomes, graduation rates, etc –To manage and guide the system, including performance-based incentives. –To help students to make decisions about higher education. Be transparent in all decisions—admissions, grading, graduation. Increase ties to private sector, including employers. Increase links between research and private sector.