1 Why US Universities Have Higher Quality? Privatization vs. Flexibility Elise S. Brezis BIU and Paris School of Economics June 2010

2 Leading universities: US universities World Rank InstitutionClassification Year of establishment 1Harvard Univ PNP1636 2Stanford Univ PNP1891 3Univ California - Berkeley Pub1868 5Massachusetts Inst Tech (MIT) PNP1861 6California Inst Tech PNP1891 7Columbia Univ PNP1754 8Princeton Univ PNP Univ Chicago PNP Yale Univ PNP Cornell Univ PNP Univ California - Los Angeles Pub Univ California - San Diego Pub1960 Source: SJTU.

3 The purpose of this paper is to analyze the elements that are important for the quality of Higher Education. Are private universities a must for quality? 0r Is Flexibility in the management of university a must? In other words, is the quality of US universities due to being private or having flexibility of management?

4 Quality and Ownership In the past, public universities were flourishing The best universities were known to be the German ones like Heidelberg and Berlin Today the best universities are private. (But not all private are among the best!). The US private universities are the highest in the ranking of universities

5 InstitutionRegional rankingPrivate/Public Harvard1Private Stanford2Private Berkeley3Public MIT4Private Caltech 5Private Columbia6Private Princeton 7Private Chicago 8Private Yale 9Private Cornell10Private Source: SJTU Ownership of US top 10 universities

6 Is there some correlation between Quality and Private ownership?

7 Previous Research on this correlation: Psacharopoulos, 2005 claimed that there is a relationship between the distinction of private vs. public universities and the quality of university. He showed that countries with a high proportion of private institutions have overall higher quality universities. The correlation between top 100 institutions and the share of private resources financing HE is 63%.

8 Nb. Universities in top 100 % Private share of education country 15Austria 12Denmark 414France 78Germany 412Sweden 1130UK 557Japan 248Australia 5167US 441Canada 143Israel

9 I. Why Quality Matters? 1. Historical Perspective In the past, there were universities of homogenous quality. and Universities were not important for economic development. The reasons for the changes in the quality of universities are: the change of the purpose of universities and massification.

10 From the Middle Age on, universities were part of the religious establishment, and their main role was to teach liberal arts, philosophy, and theology. Most university students, whose numbers were in any case few, were preparing for a career in the Church, even after the Reformation. Homogeneity of quality of education (all in Latin). During these centuries, the impact of higher education on the economy was inexistent. Until 19 th century, the effects of university education on innovation are small.

11 Dramatic changes took place in the second part of 20 th century First, the role of universities has changed and they became of utmost importance for economic growth. Second, the quality of education became heterogeneous: The number of universities and colleges in the West rose, and the number of students increased even more. Concurrently with this democratization of higher education, universities became heterogeneous not only in their specialization, but also in their quality. There are top universities,…and the others.

12 This paper analyses whether private ownership is a necessary condition for a university’s achieving quality as suggested by Psacharopoulos My presentation will have 3 parts: I.What is Quality? II. What elements affect Quality? 1. Private Ownership 2. Flexibility 3. Budget III. Empirical Analysis on relationship between quality and Ownership, flexibility, and budgets.

13 I. Quality Universities produce multiple goods and have three main goals. The first goal is R&D. The university is the place where ideas are developed, innovation processes are invented, and basic research takes place. The second: educate the next generation of the labor force. Higher education leads to an increase in human capital, which is one of the main factors of production today The third role is to increase social capital.

14 Therefore, the quality of a given university should be related to the excellence of these two elements: R&D and education. The ideal index for quality of education is related to the increase in human capital, which can be proxied by an increase in wages. So, assuming the same ability, better education might be proxied by the labor market. For R&D, the best proxy is to check its impact on other research.

15 For the past few years, two institutions have published quality indices of universities, attempting to find good proxies for these two elements: education and R&D. In 2004, The Times Higher Education supplements (THE) started producing a ranking of the top 500 universities. Shanghai Jiao Tong University (ARWU), less known at the beginning, has become well known, since it seems to proxy these two elements of quality in a superior way. In this paper, we use the SJTU ranking. The correlation of these two indices is.78

16 II. Ownership When defining the structure of ownership of universities, it should be emphasized that there are not two, but three different types of institutions: Public, Private non-profit (PNP), and private for-profit (PFP). The first group includes all institutions for whose budgets the state is responsible. In most countries, the majority of institutions fall into this category. Of these 500 top universities from among 40 countries, only 12% are private.

17 Leading US universities World Rank InstitutionClassification Year of establishment 1Harvard Univ PNP1636 2Stanford Univ PNP1891 3Univ California - Berkeley Pub1868 5Massachusetts Inst Tech (MIT) PNP1861 6California Inst Tech PNP1891 7Columbia Univ PNP1754 8Princeton Univ PNP Univ Chicago PNP Yale Univ PNP Cornell Univ PNP Univ California - Los Angeles Pub Univ California - San Diego Pub1960 Source: SJTU.

18 United States 41Vanderbilt Univ PNP Pennsylvania State Univ - Univ Park Pub Univ California - Davis Pub Univ California - Irvine Pub Rutgers State Univ - New Brunswick Pub Univ Pittsburgh - Pittsburgh Pub Univ Southern California PNP Univ Florida Pub Univ North Carolina - Chapel Hill Pub Carnegie Mellon Univ PNP Ohio State Univ - Columbus Pub Purdue Univ - West Lafayette Pub Brown Univ PNP Univ Arizona Pub1885 Source: SJTU.

19 United States 107 Univ California - Riverside Pub Tufts Univ PNP Univ Virginia Pub Emory Univ PNP Baylor Coll Med PNP Mayo Clinic Coll Med PNP Univ Hawaii - Manoa Pub Dartmouth Coll PNP Univ California - Santa Cruz Pub Univ Georgia Pub Univ Illinois - Chicago Pub North Carolina State Univ - Raleigh Pub Univ Massachusetts Med Sch Pub1962 Source: SJTU.

20 United States 463 Boston Coll PNP Univ Maine - Orono Pub Univ Idaho Pub Univ Kansas Med Center Pub Med Coll Georgia Pub Lehigh Univ PNP West Virginia Univ Pub Univ Louisville Pub Univ Wisconsin - Milwaukee Pub Coll William & Mary Pub New Mexico State Univ - Las Cruces Pub Howard Univ PNP Old Dominion Univ Pub Montana State Univ - Bozeman Pub1893 Source: SJTU.

21 Leading UK universities World Rank InstitutionClassification Year of establishment 4Univ Cambridge Pub Univ Oxford Pub Imperial Coll London Pub Univ Coll London Pub Univ Manchester Pub Univ Edinburgh Pub Univ Bristol Pub Univ Sheffield Pub Univ Nottingham Pub King's Coll London Pub Univ Birmingham Pub Univ Liverpool Pub1881 Source: SJTU.

22 Leading Japanese universities World Rank InstitutionClassification Year of establishment 20Tokyo Univ Pub Kyoto Univ Pub Osaka Univ Pub Tohoku Univ Pub Nagoya Univ Pub Tokyo Inst Tech Pub Hokkaido Univ Pub Tsukuba Univ Pub Kyushu Univ Pub Kobe Univ Pub Keio Univ PNP Hiroshima Univ Pub1929 Source: SJTU.

23 Leading French universities World Rank InstitutionOwnership Year of establishment 40 Univ Paris 06Pub 1971/ Univ Paris 11Pub Ecole Normale Super ParisPub 1985/ Univ Strasbourg 1Pub Univ Paris 07Pub 1971/ Univ Grenoble 1Pub Univ Paris 05Pub 1971/ Univ Montpellier 2Pub Ecole PolytechniquePub Univ Lyon 1Pub Univ MediterraneePub 1969/1409

24 Leading Israeli universities World Rank InstitutionOwnership Year of establishment 64 Hebrew Univ JerusalemPub Technion Israel Inst TechPub Tel Aviv UnivPub Weizmann Inst SciPub Ben Gurion UnivPub Bar Ilan UnivPub Univ HaifaPub 1963

25 Leading Polish universities World Rank InstitutionOwnership Grade 346 Jagiellonian UniversityPub 11.5/ University of WarsawPub 10.8/100

26 There are countries in which PNPs were almost nonexistent until recently (Germany, for instance), and other countries wherein they have always existed (the US and Japan). The US and Japan has taken a quite different path. In these two countries, PNP institutions were already quite developed by the late 19th century. Moreover, in both countries, the development of PNP and public institutions occurred in parallel. In the US, in 1890, public institutions constituted only 22% of total enrollment. But increased during the 20th century to reach 50% in 1935, 60% in 1940, and 70% today.

27 In Japan, private institution enrollment accounts for nearly 80% of all university enrollment. However, with a few exceptions, the public universities are those ranked high. In Europe, the PNP sector is not developed at all, and only recently have some been established. The case of Germany is typical, wherein from 1980, 60 PNPs have been created. In the UK, only two universities are privately financed.

28 In the developing world, budget is diverted mainly to primary education, so that higher education is left mainly to financing by the private sector. The increase in enrollment in Latin America has been big: The rate of growth between 1960 to 1970 was 260%. In consequence, it has been compensated for by an increase in enrollment in private universities. In 1950, 7% of the enrollment was in private universities; in 1990 it was 40% The third type of institution is the private for-profit (PFP) universities, all of which are quite new. While they are not numerous, it could well be that they will take off in the future.

29 III. Does Private Ownership affect Quality? Empirical Results The correct method to check this relationship is at the level, not of countries, but universities. I check on the 500 top universities, the effects of ownership, flexibility and budget on quality of universities

30 1. Quality and Ownership Does private ownership affect quality? ownership: A dummy for the universities that are private also check seniority

(3)(2)(1)Quality of institutions (7.83) (19.92) (2.82) Constant (1.86) (2.35) (35.77) Private ownership.37 (1.73) Seniority R² 166 (US) 166 (US) 508 (all) Obs Ownership and Seniority on Quality of institutions

32 In conclusion, it appears that the results at the country level, as presented by Psacharopoulos, are also robust at the individual university level. In the next slides, I attempt to isolate which element implied by ownership leads to the relationship between ownership and quality. I focus on two main elements: flexibility and budgets.

33 2. Quality and Flexibility One of the main differences between private and public institutions is the level of intervention by the state. States/governments do sometimes intervene in the universities administration. There are at least four levels on which governments intervene in the public institutions:

34 (1) flexibility about recruitment of scholars, and freedom in deciding on their promotions (2) freedom of admission of students (3) freedom of decisions on salaries (4) freedom regarding tuition fees.

35 In Table 4, I present an Index of Flexibility of public institutions in the various countries of the sample. On each of these four levels of government intervention, I have built an index. At each level, the ranking goes from 1 (no flexibility) to 4 (total flexibility). Then, I build a one-index for flexibility, which is the product of these 4 indices, and which goes from 1 to 256. The intuition underlying this methodology of creating this index, based on product, is that cross-effects among flexibilities are important.

36 (1) flexibility about recruitment of scholars, and freedom in deciding on their promotions (2) freedom of admission of students (3) freedom of decisions on salaries (4) freedom regarding tuition fees. Poland US France UK

(2)(1)Quality of institutions (0.86) (1.32) Private ownership 7.01 (3.3) Flexibility (Sum).24 (3.52) Flexibility (Product).04.03R² 508 Obs. General Flexibility on Quality of institutions

Specific Flexibility and Quality (2.02) Students Admission (2.38) (3) 508 Obs R2R2 Salaries staff (2.46) Scholars Rcruit (3.64)‏ Tuition Fees (1.75)‏ (1.10)‏ Private ownership (4)(2)(1) Dependent variable: (2.32)

39 So, it is not ownership that has an influence on the quality of universities, but rather flexibility of administration. Governments that leave their universities alone to make their own decisions actually give them the possibility of attaining higher quality. In the next slides, I analyze the effect of budgets on quality.

40 3. Quality and Budgets The first question: Are budgets affected by ownership and flexibility?

(2)(1)Budget 2.31 (1.79) 2.31 (1.76) Constant (-0.66) 6.55 (4.06) Private Ownership 10.4 (2.40) Private (dummy for US).03 (5.19).03 (5.11) Flexibility R² 161 Obs Flexibility and ownership on Budgets

42 In conclusion, flexibility is an important factor in obtaining budgets Are budgets per se affecting quality, and what exactly are budgets permitting to finance that seems necessary for quality?

(3)(2)(1) Quality of institutions (6.37) (4.59) (8.61) Constant (-0.06) Private.25 (1.30) Flexibility.001 (1.91).003 (0.86).002 (2.52) Budget /student.02 (2.18).01 (1.39).03 (2.38) Academic staff.01 (2.71).001 (2.15).01 (4.10) Non academic staff.001 (3.27) Professor salary R²

44 Conclusion Higher flexibility (and not private ownership) leads to higher budgets, which lead to quality

45 Higher budgets permit to finance more ‘non-academic’ staff as well as higher salaries - two necessaries elements for quality. Indeed, good universities employ much more non-academic staff and pay higher salaries

46 Conclusion Is Privatization Necessary to achieve Quality of Universities? No, but flexibility is.

47 (I) The US universities have much more flexibility than the EU universities. In order to increase quality, governments should not regulate Higher Education (II) The most important element of flexibility is: Tuition fees. Tuition fees should be fixed by universities in a differential way; not by governments.

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