European Universities Must Get Their Act Together
Published on: Sep 12, 2006

As The Economist (The Brains Business, 10 September 2005) points out, academia in Europe is not ready for the challenges ahead. Realising mass access without sacrificing excellence demands a dynamic and competitive university system. The European challenge is to get the diversity and quality of the US without hurting accessibility. A key problem is that central planning and steering cause a generic lack of variety, monopolistic behaviour, scale increases and grade inflation. The explosive growth in enrollment has led to erosion of academic standards. Reforms of the European university system should tackle these issues. European universities also have much less resources per student than their US counterparts, so it is crucial to raise tuition fees without harming access. 

Higher education in Europe

Enrolment rates have more than doubled during the last thirty years in virtually every country.1 From a lifetime perspective students will not be poor and can borrow more. Costs of higher education (45 thousand euros) are much less than lifetime earnings, hence higher education is an excellent investment. Also, earnings for different studies vary, but tuition fees are often the same. Typically, prices charged to students do not depend on costs. European universities suffer from bureaucracy and lack of autonomy. Almost all parameters are fixed: subsidies per student are fixed, tuition fees cannot be varied, the number of places for each course is often fixed by the ministry of education, and applicants cannot be refused once they have passed their national exams. Therefore, universities find it tough to respond to changes in demand and engage in competition. Much time and energy goes into securing government subsidies for education and research rather than into academic entrepreneurship.
Higher PISA (Programme for International Student Assessment) scores suggest higher educational attainment, lower dropout rates, and shorter study lengths for those who actually graduate and higher wage returns. Lower student/staff ratios are associated with higher educational attainment, lower dropout rates, shorter enrolment duration for graduates and higher wage returns. Targeting government funding at students rather than universities suggest higher attainment, higher dropout rates, slightly shorter study duration for those who graduate and lower wage returns. If students borrow more and receive less in grants, or the share of private expenditures increase in general, this may be associated with higher attainment shorter duration of study for those who graduate, lower dropout rates and bigger wage returns.
Students, the state and sponsors lack the information necessary to judge the quality of higher education. The intrinsic motivation of students and staff, and trust are vital and diminish if too many monetary incentives are introduced. Objectives are typically not profits, but how well they do compared to their peers. Rankings and peer reviews and the competition that result from it, drives universities. Peer effects are also crucial for students as they form values, academic interests and aspirations in the interchange with other students. Universities also need funding from students, alumni, estates and sponsors. However, non-profit enterprises also have a tendency for bureaucratic slack; witness big offices for central administration, ‘prestige projects’, etc. They also tend to under-estimate the costs of its capital services such as buildings and campuses.

Potential merits of the Bologna reforms

The advantages of the Bologna reforms towards introducing system of bachelors and masters in Europe are:

  • Reduces the risk of choosing the wrong study and encourages students to take more demanding studies. A first degree in mathematics or science that lasts three rather than five or six years is a less daunting prospect. Those who like mathematics and science go on afterwards with a specialised degree. By the same token, the Bologna reforms allow students to wait in the presence of uncertainty with regards to their capacities, interests and job market circumstances. 
  • Stimulate students to combine different studies. Much of technological and economic progress in contemporary society occurs in the twilight zone between different disciplines. Moreover, university students who discover that they have more of a professional interest can switch to a professional master course at a college of professional higher education and some of the more academically minded vocational bachelors may switch to university.
  • Stimulate variety. Many European countries offer a higher average quality than the US, but have fewer centres of excellence, less diversity, less flexibility, and less choice between intensive and extensive forms of education.
  • Encourage students to finish their studies more quickly as students will be better matched with universities because the risks of doing a wrong study diminishes, variety increases, and students have the option to return. The Anglo-Saxon system of higher education features almost no dropouts, because students know exactly when to study and when they can work or have fun.
  • Engender competition between a larger number of shorter degree programmes. Currently, however, many universities in Europe are stifling competition as can be witnessed from many mergers and the standardisation of many degrees. If students are unhappy with a particular degree programme, they should vote with their feet and go to another programme.
  • It makes the European system compatible with systems of higher education found in UK, US, Canada, Australia, New Zealand, India, Pakistan and much of Asia and Latin America. This enhanced transparency encourages European universities to compete on a global scale.

The quest for quality
The Times Higher Education ranking of the world’s top 200 universities considers peer review, international faculty, international students, student/staff ratios and faculty citations scores. It is interesting that 41 of the top fifty universities are from countries with an Anglo-Saxon system of education. Continental Europe (excluding Switzerland) only has three universities in the top fifty. European universities provide decent education for all without much diversity in fare offered. Apart from some conservatoires, theatre schools and higher hotel schools, most universities are reluctant to select. The US has considerable experience in aptitude rather than ability tests. Ability or knowledge should not be used for selection because they can be crammed by the fortunate ones with extra training. Unfortunately, there are signals that during the last few years the aptitude tests have become more like ability tests. This threatens to move the US away from a meritocracy towards a system where family ties and background matter. Europe would benefit from more selective entries. The majority of universities in continental Europe admit students solely on the basis of a high school diploma. Hence, many first year students fail and real selection takes place after one year and sometimes even later. This leads to a huge waste of resources.
In much of Europe, the market for lecturers and professors is closed to outsiders. Many scholars with excellent publication records are defeated by local heroes with the right connections. In France, Italy and Germany outsiders and foreigners find it difficult to get a chair, and otherwise they get scared away by stifling bureaucracies. The UK, Scandinavia and the Netherlands have more open recruitment, so benefit from a more competitive environment. Many European universities cannot reward and attract young talent, while older academics stay on even if their productivity has declined substantially. The severe tenure hurdles and the competitive publication race one sees in the US, is less pronounced in Europe.
Peer review gives incentives for high-quality research, but is weak in Europe. Where peer review of research has taken off, it tends to overshoot at the expense of educational quality, especially if professors mark their own exams. Apart from the UK and perhaps Denmark, external examiners are not used to audit contents or grades. But then there is a danger of grade inflation, especially if funding depends on the number of awarded degrees.

How to set subsidies and tuition fees?
Individuals invest more in a particular course of study if interest costs are low, they are not credit constrained, subsidies are high, tuition fees are low, expected graduate wages are high, and academic ability/aptitude for that study is large. Conversely, students are discouraged to take courses that give little esteem and a lot of sweat.  It makes sense for the government to make sufficient borrowing possible, so that students are not credit constrained in financing their education and costs of living.
Education is a ‘customer-input technology’, since students are both consumers and co-producers of education. Institutions generate excess demand for their services by selling below cost in order to control to whom they sell. Selecting and attracting the smartest students generates a positive feedback loop as it raises the quality and reputation of the institute and thus increases further demand from smart students. Having high-quality students improves academic excellence and makes it possible to attract much better employees/professors and funding from sponsors and the state.
Without peer group or reputation effects, degree profit maximizing universities set prices to a mark-up on marginal cost. The mark-up is particularly high for courses with low price elasticity of demand such as pure mathematics or anthropology. These courses may have high marginal cost anyway, and so are extra likely to be expensive in the absence of cross subsidies or special government support. If peer group and reputation effects matter, tuition fees are higher for the less able or less motivated students and lower for the smart students. Hence, universities award scholarships or give discounts to bright students.
The government may support merit studies that are of interest to society as a whole and will not be provided by the market, while generating public benefits (‘educational welfare’). One could think of, say, anthropology, Sanskrit or pure mathematics. The government may also support studies that contribute to citizenship, democratic participation and the transmission of (cultural) knowledge and values or that induce positive R&D externalities and growth. The government may want to reduce the popularity of studies that lead to excessive status or rent seeking and signalling. The government may give a larger weight on individuals from a disadvantaged background with relatively poor parents.
Uniform tuition fees are not optimal if social returns differ between disciplines and students. Subsidies should therefore be optimally targeted to fields of study that have the largest social returns. Furthermore, subsidies should be targeted towards the students that appear to generate most social value. Also, subsidies on studies with a relatively large private return compared to the social return violate optimal rules for education subsidies. Subsidies should be directed towards studies with a large social value, not a large private value.
Most students go to their local university. The optimal tuition fees are higher for such students, because their price elasticity of demand is lower. Also, the government has insufficient information about the preferences of individual students and the supply of courses and may wish to use vouchers rather than subsidies to universities. By giving students personal vouchers, which they can use to pay for their courses, the government encourages students to ‘vote with their feet’. This fosters competition between universities.

Curbing monopolistic practices
In response to scarcer public budgets the scale of universities has increased at the expense of creating public monopolies. Such monopolies reduce quality (‘grade inflation’), ignore demand of students and employers, and increase overhead costs. Universities engage in a race to attract students and thus more state funds, sometimes fuelled by funding based on student numbers, even when this induces grade inflation. Monopolistic price setting drives up tuition fees and lowers quantity and quality of supply of education, especially if the price elasticity of demand is low. Subsidies for a course have to be large if the price elasticity of demand for that particular course is low. Since the price elasticity of demand differs between disciplines, subsidies should be differentiated accordingly.
Both output and input funding have unintended side effects. Output funding to curb monopolistic practices has the unintended disadvantage that it induces grade inflation and reduces incentives to cut costs. Input funding does not induce grade inflation but leaves monopolistic practices in tact and stimulates efficiency. One thus has to strike a tough trade-off between, on the one hand, avoiding grade inflation and inefficiently run universities, and, on the other hand, curbing monopolistic practices. Countries that rely on substantial output funding therefore often have quality safeguarding committees. If there is a lot of uncertainty and efforts of managers correlate little with cost reduction, high-powered incentives become less attractive.
Both private and public universities are better able to compete if subsidies are allocated directly to students through vouchers/grants. Students can spend the vouchers on the institution and courses of their preference. Barriers to enter the market for higher education should be lowered by abolishing historical funding and barring cross-subsidies that hinder fair competition. It helps if an independent authority publishes yearly performance criteria of universities. These criteria should cover dropout rates, average enrolment durations, average exam marks, student evaluations, quality of scientific publications, evaluations of independent scientific committees, etc. A level playing field can open national markets to the international environment, especially if students can get student loans for study abroad and can spend their vouchers abroad. In some countries internal checks and balances have been destroyed by abolishing university democracy. Supervisory boards lack information from the ‘shop floor’ to act as effective countervailing powers. In fact, neither governments, nor students, nor stakeholders, nor potential entrants seem able to discipline administrators in Europe.