Opinion & Commentary
Stop Subsidising a Failure
John Quiggin is a well- known microeconomic reform sceptic, and in these pages last week questioned whether competition was a practical policy for improving investment in human capital.
In Australia, we have one fully competitive higher education market in postgraduate coursework. Other parts of the higher education system, especially undergraduate education for Australian students, retain a very high level of regulation.
In undergraduate education, apart from non-academic services fees, there is no financial relationship between undergraduate students and their university. The student is charged HECS by the government and the government pays a subsidy to the university.
Universities are further removed from the market by a quota system that sets the number of student places each university can provide. If the university exceeds its quota, it gets about $2,500 for each extra student, way below average cost and financially sensible only at the margins.
A competitive system would allow universities to charge top-up fees, with government loans as necessary, and pay universities according to the number of students enrolled.
How this would improve investment in human capital is most obvious at the level of the individual student. The ban on fee-charging means that he or she cannot, in any but a couple of small private universities, make an additional investment in their own human capital.
'The combination of no fees and quotas must undermine innovation'
It is not possible to pay the university to reduce student-staff ratios from their current average level of around 19 to 1, or to employ better staff, or to improve the library, or anything else that might make the university stronger.
Consider too how the quota system affects students. Some universities have many more applications than places. If the university enrols above quota students it will quickly start to lose money, limiting total enrolments. So the student must go elsewhere or miss out, even though their first-preference university would like to take them.
Unsurprisingly, dissatisfied students drop-out at a high rate, a tremendous waste of human capital.
The combination of no fees and quotas must undermine innovation. Because the universities are dependent on low government subsidies, only cheap innovations are possible, automatically ruling out the most desirable changes.
With the quota set well below actual demand, most universities know they can fill all their places without doing anything particularly impressive, even if they are a second, third, or lower preference. And why innovate to attract more students when the reward is losing money on each extra one over the government quota?
John Quiggin alleges that existing competition has led to academic standards being abandoned. Anecdotal evidence does suggest that poor quality fee-paying students are being passed regardless, but we need to consider the overall incentive system facing universities.
At present, the ban on undergraduate fees makes universities so desperate for cash that standards may well slip. The minority of fee-paying students are used to cross-subsidise the rest, so universities face a choice between potential long-term reputational costs from turning out inferior graduates, or immediate reputational costs in providing seriously inadequate education to local undergraduates.
'Competition is what Australia's universities most desperately need'
Unsurprisingly, they are choosing the long term option, but the choice is a product of a situation competition would end.
John Quiggin also believes that competition is a race fixed in advance, due to the inherited capital assets and alumni base of the so-called sandstone universities.
In undergraduate degrees the race is not fixed, since non-sandstones often do better than sandstones. A national ranking of universities according to the proportion of students in full-time work four months after completion finds three of the lower prestige newer ‘Dawkins’ universities in the top ten, and four sandstones not there. In the top starting salaries ranks two and three go to non-sandstones.
These strengths of newer universities are reflected in their revenue. Even regionally based universities like Central Queensland and Charles Sturt manage to earn a higher than average proportion of their income from fees and charges. While the two universities with the largest absolute such revenues are ‘sandstones’, they are the youngest members of that group. Entrepreneurial management matters much more than inherited capital, alumni or prestige.
Competition is what Australia’s universities most desperately need, but sadly all Professor Quiggin and the education lobby groups can do is call for more of taxpayers’ money to be put into a failing system.
About the Author:
Andrew Norton is a Research Fellow and Director of the Liberalising Learning research programme at The Centre for Independent Studies. He served as a higher education adviser to the Federal Minister for Education, Dr David Kemp, from 1997-99.
