Tim Curtin
Affiliation: Visiting Fellow, National Centre for Development Studies, Australian National University
Address: 3 Magrath Place, Spence, Canberra, ACT 2615, Australia
email: tcurtin@dynamite.com.au
Telephone: 61-2-6259-5644

INTRODUCTION

There has for the last twenty years been a consensus amongst many governments of developed countries that more of the costs of university education should be funded directly by its beneficiaries, through one or other - or a combination - of up-front fees and deferred fees repayable as loans or through the tax system. The basis for this view is the belief that university education generates substantial personal benefits for its recipients, and that they should therefore be required to fund their studies, either as students, or subsequently through repayment of student loans or special taxes on graduates' income. The World Bank has acted on the same set of beliefs by requiring its client countries in the developing world to adopt the user pays policy, although this has also been part of its broader aims both to reduce total public spending and to have its clients switch public funding of education from the tertiary level to primary schools.

This paper examines first the merits of the underlying arguments for user pays in higher education. It then demonstrates how all tax systems automatically recover the costs of public investment in education through the direct correlations between levels of education, incomes and spending, and taxes. Finally it examines the impact of tuition fees and graduate tax systems on access, equity, and economic growth in developing countries. The paper's conclusion is that the negative effects of fees in higher education are an unnecessary burden on society, because of the automatic recovery of the costs of higher education through the extra taxes paid by graduates on their higher earnings vis a vis non-graduates.

There are perhaps five main arguments for direct cost recovery from recipients of tertiary education:

1. improved economic efficiency if the user pays principle is adopted;
2. enhanced equity if students reimburse the public costs of their higher education;
3. the much higher unit costs of tertiary education relative to schools, implying that public resources should be spent only on primary and secondary schooling;
4. incentive effect of fees on undergraduates' work efforts, encouraging abstention from political demonstrations that could have the effect of closing their universities, and
5. last - but dearest to the hearts of vice-chancellors and academics worldwide - the view that turning all public universities into self-financing institutions independent of governments, free to choose their student bodies, courses offered, and the salaries of faculty, would yield the greatest benefits for all (except of course those eligible students deterred from enrolling by fees or the debts incurred to pay fees).

ECONOMIC EFFICIENCY AND EQUITY OF USER PAYS

The first argument derives from economists' standard market forces model, that consumers of any good or service should be the ones who pay for it, rather than be subsidised by non-users. There are some obvious advantages from this general presumption against subsidies (defined here as provision of unrequited benefits), such as preventing abuse by "free riders", but chiefly that levying charges rations demand for goods or services to just the level that their users are willing to pay for themselves.

Application of this model to higher education is questionable, if only because access to that, unlike purchases of say potatoes, normally depends on applicants possessing relatively high abilities as measured by school leaving examinations or other tests. Any ethical grounds for assuming that ability alone should be the rationing mechanism matching demand to supply are an important but separate issue, to which we now turn.

The second argument - equity considerations - always tends to be emotive, but in the case of higher education the usual rhetorical question put by authors like Bruce Chapman ¹ and the World Bank ² - why should poor peasants and workers pay for services they never received themselves? - has little merit. In practice poor workers and peasants through no fault of their own rarely pay enough - if any - taxes to cover even the costs of the social services they receive themselves, let alone make any contribution to the costs of higher education. Even in developed countries like Britain and Australia non-graduates as a whole do not pay enough to cover the costs of the public services they do avail themselves of, whilst it is graduates who pay enough surplus tax over the costs of their consumption of all public services, including HE, to cover the net subsidies received by non-graduates. The same is even more the case in a developing country like Papua New Guinea where 90% of the working age population does not pay any income tax at all.³

NATURAL TAX YIELD OF GRADUATES' HIGHER INCOMES

The equity argument for direct cost recovery also ignores the correlation between graduates' higher average incomes and their consequent higher than average tax payments through most of their lives. Not even the founding father of human capital economics, Schultz, still less any of the thousands of his followers, ever noticed that the evidence that higher education is associated with higher earnings means it must also be associated with the higher tax payments that are a generally unavoidable consequence of higher incomes.⁴ Table 1 displays data on the relationship between levels of education and earnings in the USA and the 4 Commonwealth countries in the OECD in 1995. Figure 1 uses similar data for Australia to show the association between level of final education of the labour force and the basic income tax payable on that income.

The failure of most economists to take account of the extra taxes paid by graduates has left even those who are supportive of public investment in higher education to rely on the supposed "external" benefits to society, i.e. any intangible benefits conferred by graduates that are not reflected in their own earnings, such as valuable research findings that do not yield a commensurate return to the researcher. Given the difficulty of measuring such social benefits, it is curious that so little has been done to collect the much more readily available information on taxes paid by graduates vis a vis non-graduates like that depicted in Figure 1.

Moreover, apart from Becker, those who have discussed the economics of university financing have assumed that the private gains derived by graduates are measured by their pre-tax incomes. The Dearing Report in Britain and the West Report in Australia are entirely based on this assumption, following Blaug, Barr, Psacharopoulos, Chapman, Miller and Pincus, amongst many others.⁵

Yet whilst some of us may derive vicarious pleasure from the benefits other people derive from the taxes we pay (including VAT on purchases and taxes on dividends and interest derived from our savings), for all of us it is our after-tax income that perforce governs our spending and saving decisions. It follows that a more reasonable measure of financial benefit derived by recipients of higher education is the difference between their average after-tax net consumption and that of non-graduates. Likewise the gain to governments from their investment in higher education is the difference between the taxes paid by graduates and non-graduates. That has never been computed except by myself for Britain (1996), with results showing public investment in higher education is almost as profitable for the government as it is for the average graduate (see Table 2).⁶

HIGHER EDUCATION CONTRIBUTION SCHEME (HECS)

Australia's HECS was originally proposed to be set at a level of about half estimated per student costs paid to universities by the government, on the grounds that the "social" benefit of a graduate is about equal to the private benefit (before tax) so that a per student subsidy of half the public costs was reasonable; the 1997 changes to HECS partly reflected this notion as well as creating three different bands depending on discipline, Humanities A$3,330, Sciences,A$4,700, Medicine and LawA$5,500. However the designer of HECS, Bruce Chapman, seems to have overlooked the average student's contribution to his/her costs at university, in the form of forgone earnings whilst studying, which in Australia are much larger than the direct costs. With average earnings of young persons of university age (19-24) having just skilled vocational qualifications at A$20,000 p.a. in 1994-95, as against per student costs in higher education of A$9,000, the effective total cost of studying for a degree was A$29,000 p.a..⁷

Thus under HECS students not only forgo earnings but also pay at least half (more since 1997) of the costs of tuition. In effect HECS students now incur 85% of total costs (including forgone earnings) and through most of their earning life receive after tax barely more than half of their extra income vis a vis non-graduates. With income tax rates at 47% on earnings above the A$50,000 level that is achieved by most graduates in Australia (see Table 1), that is the effective tax rate on the difference between graduates' and non-graduates' average earnings. Marginal income tax rates in the UK and some other countries are not as high, but still generate substantial revenue from the extra income of average graduates vis a vis non-graduates.

Advocates of extending the HECS system to other countries (e.g. Chapman, Barr) are always at pains to emphasise that the income contingent provision for repayment of the fee-loan offsets the deterrent effect on those fearful of incurring debts before they start work. This view overlooks the fact that of course the conventional income tax does exactly the same - those graduates who for whatever reason ddo not earn enough to take them above the much lower income tax thresholds (A$5,000 in Australia, as against HECS's A$20,000) will also pay no tax.

USER PAYS AT PRIMARY OR TERTIARY?

The third argument, that Universities are too costly for public funding, and that because their costs per student are so much higher than those of schools, government funding should be limited to the cheaper schools, seems counter-intuitive, since if public funds are scarce, it would seem more sensible for governments to leave households to fund their children's schooling, since that is much more affordable to them than the costs of tertiary education. Typical per pupil costs of primary schooling in developing countries can be less than US$100 per pupil p.a., which even in the poorest countries would be affordable to many more families than higher education costs of up to $10,000 per student year (including living costs).

USER PAYS AND STUDENT PERFORMANCE

The fourth argument - only an hypothesis, since there is probably no hard evidence for it - is that making students responsible for their fees might make them focus more on their studies. This has some force in countries like Kenya, Zimbabwe, and Papua New Guinea, where a year without student strikes and university shut downs is rare indeed. However in such countries a scheme like Australia's HECS, which allows deferral of fees until the graduate is working and earning at least A$20,000 p.a. would probably not be a sufficient incentive to concentrate on studies (a student failing to graduate and never earning more than A$20,000 p.a. does not have to repay his/her HECS loan). Papua New Guinea's budget for 2000 introduced a more specific link between student grants and academic performance, with the level of award being determined by grades at the end of each semester, and this appears to be having an impact on students' work efforts. ⁸

Ancient universities have faced similar problems, and have dealt with them in part by demanding good behaviour bonds, refundable only upon graduation, but mostly by firm discipline. Such measures penalise just the disruptive students rather than the whole student body, unlike fees.

USER PAYS AND FISCAL AUTONOMY OF UNIVERSITIES

The final argument, that income from student fees would create greater autonomy for universities, is perhaps the strongest - but it need not require deregulation of fees. If the word "vouchers" could be used dispassionately, these would be seen to allow universities full financial autonomy, without reducing the State's role of ensuring access to higher education for all eligible students regardless of means, by transferring the State's financing from universities to students, and meeting the costs of fees by providing direct grants to ALL qualified students.

The United Kingdom operated what was very close to a voucher system until the mid 1980s, albeit without allowing the universities full financial autonomy in regard to salaries of faculty. But all applicant students accepted by universities received grants, paid directly to the university for tuition, and to themselves for living costs (subject to means testing of students' parents). Britain would by now have a full voucher system if the pre-1985 student grant system been retained but with universities being allowed to manage their own finances, including salaries, and with government retaining the right to:

1. oversee entry standards, to prevent universities maximising their fee income by allowing entry to all comers regardless of academic credentials, and
2. set a ceiling on the fee rates set by the universities but financed by the government through the vouchers (paid part in kind - tuition - and part in cash - living costs - as befoore) that would be made available to all qualified students (much like the various regulators have reserve powers over gas, electricity, and other charges of the privatised utilities in countries like Britain and New Zealand).

That pessimism is only plausible if government spending priorities are deemed to be engraved on granite - but the downgrading of higher education by many OECD governments, led by Britain and Australia, itself owes much to those who contend that it is either inefficient or inequitable - or both - for governments to finance higher education. If the consensus view of economists changed, along the lines argued here, then governments might in time also reassess their priorities and wake up to the revenue they forgo by not maximising the output of graduates. In particular those who believe that higher education makes inordinately large demands on the government budget - even though doubling current spending would leave its share of total public spending well below 10% in most countries (only 6% in Australia) - never explain what is so compelling about the other 90-95% of public spending. Nor does there seem to be recognition that per capita public spending on social security (23 % of GDP in Britain, 19% in Canada, and 15% in Australia, all in 1995) should fall as the number of graduates increases, since they tend to be (1) more seldom unemployed (see Table 3), and (2) more healthy - and to make more use of private than public medicine - than non-graduates.¹⁰

Offsetting the evidence in Table 3 for low graduate unemployment rates for graduates in OECD countries is that from some developing countries suggesting high rates of 'educated unemployment'. However a study showing growing graduate unemployment rates in Indonesia, due to the exceptionally rapid growth (10% p.a.) of output of graduates outpacing growth of the economy's demand for graduates, also finds that 'provided they did the right courses in better institutions, tertiary graduates faced relatively little difficulty in getting jobs'. ¹¹ (p.91).

ACCESS EFFECTS OF USER PAYS

The impact of HECS on enrolments in higher education in Australia has been much debated, and has relevance for other countries contemplating introducing similar income contingent student fee-loans. It seems clear that the ability to defer the tuition charge and then to repay it through the tax system only when post-graduation income exceeded A$20,000 (from 1997) has softened some of the disincentive effect, with enrolments continuing to grow strongly since 1989. Studies of the differential impact on young persons from lower socio-economic status households (SES) have produced mixed results. Some like Lamb show a negative impact while others like Andrews suggest that there has been no discernible effect - although even if there has been no decline, the lack of any increase in the already less than proportionate SES participation rates since 1989 should arouse some concern.¹²

The study by Andrews concluded that HECS was less significant than a variety of other social factors in explaining the lower SES group's apparent relative indifference to higher education. In a wealthy country like Australia, with average earnings of over A$30,000, even repaying full cost university fees would be relatively affordable to substantial numbers of graduates, despite raising their all-in (HECS plus income tax) marginal tax rate to over 50% for those reaching incomes of A$50,000 soon after graduation. The case is quite different in the general run of developing countries. The Structural Adjustment Programmes whereby the World Bank required its client countries to reduce public spending in general and on higher education in particular, by imposing user pays systems on higher education in countries like Kenya and Zimbabwe, excluded qualified school-leavers, alienated surviving student populations, and lowered standards in the universities, by starving them of the funding they need to retain competent faculty and maintain basic facilities like libraries and laboratories.

USER PAYS IN PAPUA NEW GUINEA

To examine these effects in detail, we turn to the less well known experience of the universities under user pays in Papua New Guinea - an experience that no doubt parallels that of Kenya, Tanzania, Ghana, Zimbabwe and others. Papua New Guinea's first graduates from the two universities established by the colonial administration emerged in 1970. By 1980 total enrollments had reached about 3,200 in 4-year degree programmes, and the annual output of graduates peaked at 800 in 1988.¹³

There has been no increase in enrolments and graduates since the 1980s, in large part due to the influence of the World Bank. The Bank first succeeded in persuading the government to discontinue funding for the universities' preliminary year, whereby they had provided on-campus matriculation courses in order to boost (by up to 50%) the numbers emerging (just 800 p.a. rising later to 1,000 with some support from the Bank) from the only four high schools that provided year 12 tuition.¹⁴ The Bank then used its leverage to limit enrolments by successive 'structural adjustment programmes' conditioned on the government raising fees and setting ceilings on its funding for the universities, including crucially the funding of the so-called Natschol awards (direct grants to students providing book allowances, travel expenses from remote areas, and free access to tuition and hostel accommodation).

In a country with only 200,000 adults working as wage earners out of 2 million (the total population is now 4.5 million), and with over 80 per cent of the total population engaged in subsistence agriculture with effective cash incomes of around US$100 p.a., the Natschol allowed students from very poor households to take up places otherwise unaffordable to their families. The author of Australia's HECS, Bruce Chapman, visited Papua New Guinea in 1997, to advise on possible introduction of a modified HECS. This move failed initially, but only for administrative reasons, because the country's tax authority does not operate individual tax accounts (employers deliver bulk payroll taxes on behalf of their labour forces). Even in Australia the administrative costs of HECS are not negligible, at around A$6 million p.a., equal to half the total budget of either of Papua New Guinea's universities in 1999! ¹⁵

Chapman's Report did not assess either the affordability of fees in a country where even graduates in the public service earn less than half average wages in Australia or the mechanics of setting up a loan scheme. The whole exercise made little sense in a country with a severe shortage of graduates where students already faced severe disincentives, like the nil (by 1996) contribution of Natschol awards to poor students' out-of-pocket living costs. But under further pressure from both the World Bank and Australia's aid agency Ausaid, which provided another consultant, the country's latest (fiscal 2000) budget abolished Natschol. It was replaced with a variant of the HECS model - but excluding so far the deferral or loan element. Instead a sliding scale of up-front fees was introduced, amounting for the top 300 (5%) students achieving A grades to K150, 1% of total per student costs of K15,000 (about A$10,500 or US$6,000 as of May 2000), with fees set at K1,050 (7% of unit cost) for up to 48% of entrants, subject to their attaining B grades, and at K3,750 (25%) for the remainder.

Clearly the subsidy element remained large, from 99% to 75%, and the stress on performance means that the new system is not simply a form of taxation like HECS - but cash fees of up to K3,750 as yet unsupported by loans will not be affordable to rural households (80% of all households) where cash incomes of less than K1,000 p.a. are the norm. It is too early to say whether the new scheme will lead to any rise or fall in enrolments, as payment of these fees has been deferred to the second semester in 2000. But the outcome of the past absolute limit on the number of supported students is that a country with a population larger than New Zealand, Singapore, and many other Commonwealth countries has fewer than 20,000 graduates - less than half current enrolments in New Zealand.

GRADUATES, GOVERNANCE, AND GROWTH

The slow growth of university enrolments in Papua New Guinea has contributed to the weaknesses of a government that is manifestly incapable of manning its public service efficiently, including its schools, hospitals, police, defence force, and provincial government system. Primary schools are still staffed with teachers who have only a smattering of secondary schooling, and secondary schools with those who have only teaching diplomas or B.Ed degrees (the teaching service does not employ honours graduates - partly because of low salaries - so theree are no qualified science teachers). Hospitals are staffed with nurses who would not be qualified to be orderlies in countries like Australia. Minimum educational qualifications for the police and defence force have yet to be standardised at year 10.¹⁶

The final outcome is not only the well-recognised general inefficiency of the public service - much decried by the World Bank - but also the dependency of the private sector on expatriates for such basic skills as accountancy and all higher level technicians. Thus a recent survey found that 20 years after its independence, Papua New Guinea's private firms still had 'difficulty attracting [non-expatriate] employees with the required managerial, professional and technical skills' and that 'hiring managerial staff is even more difficult [in 1996 than in an earlier survey in 1992].' ¹⁷

Yet Papua New Guinea is by no means an especially resource-poor country. Its mineral exports run at over US$1.6 billion p.a. and its annual budget amounts to about US$1 billion - but its funding for higher education fell from US$40 million in 1990 to US$20 million in 1999.

WORLD BANK'S TERTIARY CONVERSION

Ironically, given its leading role in holding back tertiary enrolments to less than 5% of age-groups in most of its main clients in Africa and South Asia, the World Bank has recently reappraised its approach to higher education in general, if not yet in Papua New Guinea. The Bank now appears to recognise that unless the world's poorer countries are helped to produce substantial numbers of graduates, including engineers (in all fields, including information technology), business administrators, and accountants (in addition to the possibly excessive number of lawyers that they do produce, arising from the relative cheapness of teaching law degrees) as well as competent professional public administrators, they will never succeed in developing well-governed modern economies.¹⁸

Unfortunately the World Bank's apparent change of mind about the importance of higher education to some extent seems less than whole-hearted, because of its institutional mind-set that because higher education apparently yields lower marginal economic rates of return than basic education, the latter should still have priority.¹⁹ Now whilst it is trivially obvious that one can hardly expect to enter secondary schools without having gone through primary, or enter higher education without completing secondary schooling, it is far from obvious that the government and aid agencies should concentrate their efforts on primary education alone. As noted above, that level of schooling is the cheapest and most affordable to the mass of the population. Indeed in countries like Kenya in the 1970s, rural communities embarrassed the government with the number of schools they built requiring teachers that the government had difficulty supplying, in part no doubt because of the World Bank-imposed low levels of enrolments in universities and teaching colleges. It was naturally beyond the resources of Kenyan villages to build and operate teacher training and other tertiary colleges - the government did expand teaching training and other colleges, but then encountered World Bank Structural Adjustment programmes requiring it to cut back its support for such tertiary education. The World Bank also persuaded the Kenya government to keep annual intakes of students below 10,000 - less than New Zealand's, with its population of only one-seventh of Kenya's. ²⁰

Britain's Department for International Development also appears to have a blind spot in regard to higher education in its enthusiasm for basic education - yet that is the area in least need of the scarce ODA dollar or pound.²¹ Indeed it could be argued that if developing countries cannot organise universal primary education by their own efforts, then they deserve no help in any direction. But if they are helped with their upper secondary and tertiary education, where there is a far greater need for the sorts of things aid agencies can provide, from computers to science teachers, then in all likelihood local populations will compete in their eagerness - with or without government support - to equip their children with the primary schooling they need to enter secondary and higher levels of education. Moreover as Anne Booth has pointed out in her study of education and economic development in Southeast Asia, government policies that restricted access to secondary and tertiary education aggravated inequalities.²²

CONCLUSION

This paper has surveyed the main arguments commonly advanced for justifying user pays fee systems in higher education. All of them are quite plausible in themselves, but none gets over the objection from Occam's razor, that user pays fees are redundant at best - and at worst potentially seriously harmful - when most countries' tax systems already automatically bear down on the higher incomes graduates enjoy relative to non-graduates. It follows that devising clever graduate tax systems like Australia's HECS is so much wasted effort. Even if user pays is relatively harmless in rich developed countries, this paper shows how severely damaging its impact on the supply of skilled manpower can be in developing countries like Papua New Guinea, still struggling to establish an effective administration and extend private sector development beyond the capital city.

ACKNOWLEDGMENTS

The author is grateful for helpful discussions with James Chin, but any remaining errors are to his account.