Higher Education

1. WITHOUT STATE INTERVENTION, PRIVATE UNIVERSITIES WOULD EXIST AND STUDENTS WOULD PAY FOR THEIR EDUCATION

Obtaining professional or technical training entails important costs: the recipient has less opportunity to earn an income during the period of study; teaching requires the use of scarce resources, such as professors, installations, materials, etc. which have to be paid for; students must engage in intense intellectual activities which often require that they give up time for relaxation. Despite these costs, some of which inevitably befall the student, people often express an interest in receiving this type of education. The most common explanation for this interest is that people perceive that higher education will enable them to obtain a better standard of living. In truth, it is probable that a person with technical or professional training beyond the secondary school level will be more productive and, as a result, will obtain a better job at better pay.

However, people do not always believe that obtaining a higher education is worthwhile. Quite often, there are people who feel that the costs of such an effort will outweigh the benefits, either because: they already have the ability to generate high income; they can engage in stimulating work without obtaining an additional degree; the cost of registration is higher than the expected benefits of the education or than the attractiveness of future employment; the sacrifice in terms of free time is greater than the benefits a student could hope to receive upon graduation. Lastly, it may well be that a potential student finds that his/her probability of completing the course of study is limited and therefore, the opportunity to actually secure higher income or more enjoyable work is not within their reach.

The decision, then, to undertake higher education is evaluated by potential students, some of whom opt to continue their studies and some of whom do not.

When the decision is in favor of higher education -- motivated by a desire for personal benefit -- one can assume that the student is willing to accept the costs of his/her education if this is required in order to carry out the proposed plan of study.

Furthermore, since higher education will most often result in a significant increase in income following graduation, people will not only be willing to support the expenses generated by their education, but will be in a position to do so by charging these costs to their future income.

From this perspective, without the need for State intervention of any kind, potential students can evaluate their decisions and -- should they opt for higher education -- absorb the costs involved. Under these circumstances, there are sufficient incentives for private entrepreneurs to offer higher education to those who are willing and able to pay.

2. NONETHELESS, THERE ARE REASONS FOR STATE INTERVENTION, ALTHOUGH AT A MUCH REDUCED LEVEL

The preceding section describes the medulla of the issue of higher education. However, there are additional aspects which justify State participation in this area, although at levels considerably below the norm.

First, institutions of higher learning -- particularly universities -- because of their activities, have certain inherent advantages in conducting research in scientific and technological fields. Moreover, such facilities need to be in a position to offer students the best training possible. Often, the research conducted at the universities is considered "purely academic", that is, it is not possible to take immediate economic advantage of the results obtained. Thus, the social benefits of research conducted by universities may be greater than the private benefits, and on these grounds, a subsidy can be justified.

Second, there may be some types of professions whose social benefit is greater than the private benefit obtained by students engaging in their study (even when a certain amount of private benefit is generated). In these cases, a State subsidy is also justified.

Third, there are many people interested in engaging in a professional or technical course of study, but who lack the resources to do so and have no access to credit. This lack of access does not necessarily mean that their proposed course of study is non-viable or unprofitable. In essence, what tends to happen in these cases is that, since "human capital" cannot be provided in escrow for loans, viable educational projects do not receive financing. Under these circumstances, it is desirable for the State to intervene so that these viable projects can be implemented and people have the opportunity to attain improved standards of living.

Unfortunately, however, the reasons given in support of a certain level of State involvement in higher education have historically meant that these institutions have been taken over by the State and the concept of an "inalienable justify to free education" has been introduced. This has led to an unfair portion of educational expenses being placed on the taxpayers.

Statism, in addition to the negative effects of excessive taxation, distorts the personal evaluation process of potential students -- no longer must they include this aspect among the costs they are required to bear -- and thus resources are inefficiently distributed. Furthermore, when financing comes from the State, inefficiency in the use of available resources is bound to occur. Logically enough, the effects of this inefficiency are not a financial crisis within the University, but rather an increased burden on the taxpayers who lack agile ways of defending themselves against such impositions.

Moreover, statism and free education in an area as politically exploitable as higher education has in many countries led to strong, public disturbances which successfully press for increased funding for universities, to the detriment of elementary and secondary schooling, which in turn leads to widespread educational undevelopment.

An additional problem arising from statism in higher education has to do with who makes decisions as to the number and type of professionals to train. In effect, when these decisions are made by the market, the types and characteristics of professionals, as well as their numbers, are in accordance with the real needs of the marketplace. The statist option, on the other hand, entrusts such decisions to central planners. This almost inevitably leads to misalignments between the supply and training of professionals and the actual demand for their services.

4. STATE INTERVENTION SHOULD ONLY GO AS FAR AS CAN BE JUSTIFIED. GOING FURTHER IS HARMFUL

The conclusion we can draw from the arguments presented above is that the State should only intervene to the extent that its action will be beneficial. If it exceeds this limit, far from providing additional benefits, its participation will serve as distortion.

5. STATE INTERVENTION CAN TAKE DIFFERENT FORMS; THE MOST EFFICIENT SHOULD BE CHOSEN

The need for the State to intervene in higher education does not mean that universities or other institutions of higher learning should be in the hands of the State. In truth, State intervention can take on a variety of forms. The most important factor is that the allocation of resources by the market be interrupted solely when the market is less than fully functional in achieving the results desired.

Well-conceived State intervention will be more efficient in achieving its goals. Thus, it is likely that the effectiveness of the State in higher education will be maximized when -- instead of diluting its efforts in engaging in activities in which it has no real advantage, such as maintaining its own institutions -- it concentrates on being efficient in areas where the State is irreplaceable, that is, in providing subsidies or creating mechanisms to encourage the market to make the most desirable decisions.

The first justification for State intervention noted earlier was that the social benefits of many "purely academic" research projects are greater than their private benefits.

Under these circumstances, society runs the risk that a project may not be implemented because costs are considered to outweigh eventual benefits, not because it is not profitable, but because an overall evaluation of its benefits renders it futile.

The decisions made in such cases are not always erroneous. In effect, at times the rejected projects really are not worthwhile and therefore their rejection is beneficial for society. Even when all of the potential benefits are not taken into consideration, a project may be evaluated as being worthwhile and be implemented. The problem, then, arises solely when there is a danger of rejecting projects mistakenly.

In these cases, it is a good idea for the State to modify the evaluation of potential research projects conducted by private agents. The most obvious, although not necessarily the best, way of doing this is to empower the State to make this type of decision. In taking this route, it is likely that the State will have considerable difficulty identifying selection criteria and will make mistakes. Just because the social benefits are considered greater than the private benefits does not mean that the project should be implemented without advance evaluation.

If the State takes direct responsibility for the decision-making process on research projects, there is no guarantee that its selections will be better than those of the free market. This is true because the social cost of implementing a non-viable project may be greater than the cost of not implementing a viable one. The frequency with which the State may commit this type of error may well be greater than the rate of similar errors committed by the private sector without the State's participation.

The idea, then, is that the State introduce incentives for the project to be evaluated taking into consideration all of the relevant costs and benefits. The best way to ensure this is for the State to subsidize the project in the exact amount of the benefit differential. The problem resides in how to calculate this amount, particularly since the factors being weighed in include social vs. private benefit, that is, the factors are very often more conceptual than economic.

A practical solution to this problem is to assign subsidies through a competitive process. This approach seeks to intervene on behalf of projects that are more socially than economically worthwhile in a fashion that retains certain rational criteria over decisions on investing in research.

Through this type of mechanism, private agencies apply for a limited number of subsidies, whose amount will depend on the State's perception of the magnitude of the discrepancy between social and private worthiness in the areas of research and investigation.

Under this scenario, the problem of how to assign subsidies among competing projects remains unresolved. To overcome this obstacle, two approaches can be taken: empowering a group of prestigious academicians with good judgement to make the decisions, or trust that applicants willing to provide a larger portion of the costs of the research have the most worthwhile ideas and, therefore, should receive preferential treatment. The first of these two options has the defect that a group of specialists, sooner or later, will move away from their mission of providing supplementary funds and seek to impose their own preferences on the decision-making process. The negative side of the second option is that it tends to favor projects for which the difference between social and private profitability is the lowest.

Nonetheless, whichever approach is taken (a mixture of the two may actually be best), the probable magnitude of social losses involved will probably be lower than if the State simply took responsibility for the decisions. In other words, when different institutions with distinct points of view compete, the depth of the pool for assigning State subsidies will be greater and, therefore, the probability of selecting worthwhile projects will be enhanced.

This mechanism is frequently accused of failing to foster long-term development projects. However, it is important to recall that an institution which does not engage in long-term planning or research projects will most likely have little chance of successfully participating in the competition for funding. Thus, the mechanism of controlling the funds available through competitive subsidies does not hamper the development of lines of research but rather forces institutions to compare these areas with those proposed by other groups, thereby leading to constant institutional enrichment.

A second criticism formulated against this type of mechanism is that academics require peace and quiet in their labors and that the obligation to submit their projects to competition would destroy that peace. Nonetheless, there is no scientific evidence to indicate that scientific productivity is incompatible with competition. There is, however, considerable evidence in other fields of human behavior to indicate just the opposite.

A third criticism is that the State will loose the option of developing scientific development plans by turning decisions over to the private sector. In truth, if the State wishes to control the scientific development of the country according to specific plans (although there is little empiric or theoretical evidence to suggest that this is beneficial to the country) it can easily do so through the competitive funding process by introducing incentives in areas of particular interest to the State.

The second justification for State intervention given at the beginning of this chapter is to provide support for those who wish to follow courses of study which are socially worthwhile but economically unprofitable. Should these situations exist, there are several possible solutions.

The most frequently utilized solution, although clearly not the most efficient, is for the State to create and maintain institutions of higher education which offer these majors or courses of study free of charge or at a cost far below the State's real expense in providing these services.

The primary drawbacks to this option are that it does not provide any criteria on which decisions should be based so that excessive expenditures are not incurred in providing this type of education, nor does it provide incentives for the State agencies charged with training these professionals to use the resources provided with optimum efficiency. Despite these disadvantages, one could justify the presence of such State-run institutions if more efficient alternatives did not exist, but they do.

In truth, there are two alternatives the State may utilize which, although they suffer from the former of the two drawbacks given above, are affected to a lesser extent than traditional models.

The first and most efficient option is for the State to seek to generate a demand for this type of professional. That is, the State may seek to subsidize those fields of activity in which these professionals will work, thereby creating an additional demand for their services.

If professions exist whose private profitability is inferior to their social benefit -- that is, the benefits obtained by those who study these fields are lower than those obtained by society as a whole as a result of the services the professional is trained to provide -- actual demand for such services does not reflect social demand. Under these circumstances, the State should seek to correct the market with the appropriate subsidy so that the income generated by these professionals reflects the value of the services they provide.

The second alternative is for the State to make the course of study personally worthwhile for students by reducing their costs through subsidies to private institutions which provide these types of professional training.

The latter alternative has tremendous advantages over the maintenance of State-run institutions given that once the subsidies have been delivered, the private institutions responsible for handling them have private sector incentives to make good use of the monies provided. A second advantage is that although the system does not provide technical criteria to determine the amounts of such subsidies, at least the endemic trend toward increasing costs common to State-run establishments is halted. Furthermore, it is possible to reasonably manage the difficulties of determining the amount of the subsidies by utilizing competitive funding mechanisms to allocate State resources. The total amounts involved, even when they do not make up the full difference between what is privately profitably and the public good, will at least reflect a global estimate of the magnitude of the discrepancy between these two values.

The second option, we should note, has some advantages which the first and third options lack. By correcting distortions at the source, it is much easier to identify their overall magnitude and seek to resolve the obstacles causing them. This is of particular use given that, in debating the social profitability of different courses of study in abstract terms, we tend to believe that the fields of specialization with low incomes have higher social profitability. This judgment is usually made without giving sufficient consideration to the fact that the income generated by each profession, in most cases, is a reflection of the value assigned to it by society.

Another advantage to this option that it resolves the issue at the root, while the other two options simply postpone the problem or push it into other areas. In essence, although the State may make every effort to make a course of study worthwhile -- by reducing costs for students -- it cannot guarantee increased income upon graduation nor impede the sense of frustration on the professionals' part when they discover that despite their studies, the increase in the standard of living they have come to expect does not materialize.

In summary, the best way to eliminate discrepancies between social and private profitability for certain courses of study is for the State to seek to influence the markets rather than subsidize education. Thus, to be efficient, the State should not intervene in this type of higher education.

Frequently, students who have the ability to successfully study a profession lack the resources to pay for their education at the prices established by the market, that is, their real cost.

This situation is undesirable for two reasons: first, because society is wasting its potential human capital; and second, because there are worthy people who are being denied the opportunity to develop and progress. Therefore, the State tends to maintain its own establishments to offer free education so that these people will have the opportunities to which they aspire.

The problems generated by this solution are multiple: first, there are the problems inherent in all state-run activities, that is, inefficiency in the use of resources as a result of a lack of proper incentives; second, by offering a service free of charge, all interested parties expect these conditions, regardless of their ability to pay. This means that sufficient State resources will not be available to meet demand. Moreover, we should note that under these conditions, the tax burden is such that it serves as a disincentive for investment and production. Third, not everyone who seeks access to this type of education will be able to receive it and there is no guarantee that those who are able to follow the course of study are not able to pay; and lastly, the evaluation of educational projects looses all validity since potential students no longer factor in the cost related to this type of expenditure. As a result, a large quantity of non-viable or undesirable projects will be attempted, and considerable resources will be wasted on them.

One can argue that good, fair selection systems help attenuate a portion of these last two problems. While this is partially true, no selection system is as infallible nor as honest as one would hope and therefore this mechanism provides only a limited solution to the problem.

But perhaps the strongest argument against free, State-financed higher education is that it not only faces important obstacles of a practical nature, but is also unfair and unnecessary. It is unfair because it means paying a subsidy which, like all subsidies, is paid for through the tax contributions of the entire population, including the most needy, to provide a benefit to someone who could perfectly well do without it. Clearly, if a person obtains a profession and takes advantage of the skills acquired, he or she will have access to a better standard of living. Thus, although students may appear to be poor in the short-term, while they are engaging in their studies, they really are not needy if one looks at their perspectives for future income. Thus, just as it is unfair to subsidize people with higher incomes, it is inequitable to subsidize those students who will be relatively well-off in the future. These students do not need subsidies but rather loans so that they can finance their studies given that as professionals, they will be in a position to pay back the cost of the education received. That is why such subsidies are not only unfair, but also unnecessary.

Frequently, the idea that it unacceptable for for-profit institutions to operate in higher education and other social sectors is put forward. Arguments such as "you shouldn't make a profit off education" are utilized to oppose the participation of for-profit entities in these fields.

Nonetheless, economic theory discusses at length the issue of profit as a fundamental incentive to mankind who is guided toward providing the best possible service to others primarily by his own personal interest. At the same time, mankind seeks to take full advantage of the resources available to maximize this personal benefit.

Recently, there has been a growing awareness of the crucial, irreplaceable role positive incentives provide in encouraging men to act constructively in society. Thus, one of the most direct causes of the strident collapse of centrally planned economic systems was precisely the fact that they were based on negative incentives, such as fear of the repressive power of the State, rather than on positive incentives, such as the desire for profit, in order to encourage mankind to provide services to society and do so efficiently.

Therefore, to deny society the possibility of utilizing the desire for profit as a mechanism for inducing people to play a role in building education is to take away a powerful tool for its construction and does nothing more than limit -- on the basis of quasi superstitious fears -- the possibilities of a nation's success in a field which is absolutely key to its current and future development.

Profit, therefore, must be allowed in higher education not as a necessary evil, but rather as an instrument with tremendous potential in helping to achieve national educational objectives.

This does not mean, however, that the State should abandon its subsidiary role in the industry, but rather should focus on effectively performing its role by providing scholarly subsidies when required, subsidizing demand for those professions whose social benefit is greater than their private gain, and giving credit to those students who lack sufficient resources to finance their higher educations themselves.

This proposal, however, should not keep non-profit establishments from engaging in educational activities. In truth, not only profit motivates mankind to provide quality service to the society around him. Therefore, when establishments with other, legitimate motivations do exist, society should give them the warmest of welcomes.

The freedom to create any type of institution is an indispensable requirement for real freedom of education. A society which includes freedom of education among its principles must permit any persons or group which, adhering to the rules of healthy interaction, to form and maintain institutions of higher learning. Otherwise the declaration of principles is nothing more than ink on the page.

a. A failure to monitor the quality of professionals trained in the country means that unqualified people can offer in higher education

Restrictions impeding the formation of private higher education establishments are frequently justified on the grounds that if the State permits just anyone to form this type of institution, the overall quality of graduates will drop. This argument overlooks the monopoly generated by this approach which is diametrically opposed to the formation of quality professionals. In fact, a system monopolized by the State does not guarantee that the quality of professionals will be optimum. Moreover, this argument fails to explain why new institutions should not be created so long as they are subject to systems of accreditation and controls over the educational quality provided. In addition, this position dismisses the fact that countries need to train a vast array of professionals, not just extraordinary ones. Clearly, there will always be differences in the quality of different institutions and among students. This is true even in countries where the entire responsibility for training such professionals lies in the hands of the State. It is good that the system work this way because, since perfection is not possible, it is better to have a large number of professionals of excellent to average quality than to have a only a few because the system is expected to produce only top-rate specialists. Lastly, there is no evidence that the private sector, even though it does not waste its resources, is less successful in training good professionals.

A second frequently-heard argument against the private sector's participation in the field of higher education is that this will lead to a reduction in scientific and technological research. This is based on the fact that such activities are frequently not profitable from a private perspective and therefore private institutions will never be interested in engaging in these ventures. As noted earlier, the State can promote scholarly research much more efficiently through certain private mechanisms than taking direct responsibility for its implementation. This can be achieved without having to incur in the expense of limiting freedom of education nor failing to take advantage of the immense creative and energizing potential of private initiative.

The affirmation is also made that if the private sector is allowed to create institutions of higher learning freely, these institutions, in a desire to maximize profit, will not make room in its classrooms for students with limited resources. As a result, this argument goes, higher eduction will be converted into an elite good and will tend to deepen social differences. This argument is partially accurate to the extent that private entities, in general, will demand that their students pay at least the real cost of their education as a basic premise for providing those services. However, as noted above, this obstacle can be overcome through mechanisms which are much more efficient and beneficial to the students and the country than a simple prohibition against private sector participation in education. Among these options, one of the best is loans to university students.

d. Keeps scientists from having an environment appropriate to the development of science

The argument is frequently made that scholars require a completely tension-less environment in order to engage in science. The supposition is that the private sector could not provide such an environment, given that the profit-seeking variable would force scientists to work under pressure. This argument is difficult to sustain when compared with the results of productive activities of private and state-run efforts in a wide variety of fields.

Lastly, there is resistance to the idea of authorizing the private sector to participate in higher education on the ground that private entrepreneurs would only be willing to offer courses of study that are in demand by the student body. This, the argument holds, runs against the best interests of society. First, we should note that students tend to be interested in courses of study in which they believe they will be able to find ample opportunity to work once they graduate. This only means that they are showing an interest in the fields of specialization the country needs the most. Second, as noted earlier, in those cases where, for one reason or another, professions in the national interest are not as attractive in terms of opportunities for professional achievement, the State should seek to resolve that problem rather than restrict freedom of education.

Until 1980, Chile's system of higher education was composed of a total of 8 universities, of which 2 were State-run and functioned through campuses located around the country. The remaining 6 had originally been private, although the ties with their founding fathers had weakened over time as a result of their almost complete dependence on State financing to remain in operation.

The system was closed -- there were no expedient and sufficiently open mechanisms for creating new universities -- nor were there other, non-university, alternatives to higher education. Outside the system, the private sector maintained a quasi informal market of alternate, non-university programs of study which lacked the benefit of "State recognition".

Moreover, at that time Chile's system of higher education was essentially free of charge. As a result of these factors, it is easy to understand the tremendous pressure on existing universities and their interest in opening up new courses of study in a wide range of academic fields which could, furthermore, represent an increase in the funding they received from the State. The resources provided to Chilean universities consisted of a single, direct contribution which was based on historic contributions and the lobbying power of the different institutions among State officials. During the decade ending in 1974, the 8 existing universities underwent considerable growth in their activities and in the resources allocated to them by the State.

As can be seen in Chart 1, from 1964 through 1974 university registrations expanded from 36,500 to 144,500 people. That is, in 10 years, the number of students attending higher education almost quadrupled while the nation's total population rose by just 25%. This could be considered significant progress were it not that the education was provided free of charge and that supply was limited by political decisions.

Year	Total Registration	Index (Base 1965 = 100)
1965	41.800	100.0
1966	49.900	119.4
1967	55.600	133.0
1968	62.000	148.3
1969	70.600	168.9
1970	77.000	184.2
1971	99.600	238.4
1972	127.200	304.3
1973	140.000	334.9
1974	144.500	345.7
1975	147.000	351.7
1976	134.100	320.8
1977	130.700	312.7
1978	129.500	309.8
1979	127.400	304.8
1980	119.000	284.7

At the same time, the direct contribution from public coffers to the universities grew sharply from 1964-1974 as the State absorbed even greater responsibility for their financing.

From 1971-1973, higher education, which represented just 4.8% of school registrations in Chile (including elementary and secondary school attendance), consumed 39.7% of overall fiscal spending on education.

Such a process naturally led to problems, which were accentuated by in erratic fashion in which growth occurred.

- Lack of orientation and stability in the quantity of resources allocated to research and artistic creation;

- Lackluster administration and poor resource allocation at the institutional level.

In 1975, the country confronted a particularly serious economic situation, which translated into a 13% drop in GNP. The crisis was met with a series of measures, including a strong reduction in public spending which did not exempt educational expenditures.

Higher education, moreover, was resigned to accepting a substantial reduction in fiscal contributions. Given this restrictive situation, Chilean universities adjusted by reducing their overall personnel, significantly diminishing investment, restricting operational costs and obtaining additional revenue through services and increased indebtedness.

Furthermore, registration, which had reached its highest level in 1975 with a total of 147,000 students, began to descend as of 1976 -- when 134,000 students registered -- and stabilizing at over 127,000 students in 1980. That is to say, registrations in higher education in these years suffered a drop of over 13%.

Once the crisis concluded, in 1977, fiscal contributions to the universities increased once again, although five years later, in 1978, such financing had dropped to below their 1974 levels. This situation was reflected in 11.6% reduction in university registration between 1973 and 1978.

In addition, whereas in 1974 the universities received just over 40% of fiscal contributions to education, for the period 1979-1980 that figure fell to approximately 29%.

This drop was the result of a decision by government officials aimed at concentrating funding on the priority areas of elementary and secondary school education. Thus, the State per-pupil subsidy which, in 1974, had been some 20 times higher in advanced education than in elementary schooling had been reduced 10 times by 1980.

It is important to note that the results of a study known as the Map of Extreme Poverty from 1970 indicated that 43% of underprivileged school-aged children did not attend classes.

Moreover, between 1974 and 1980, while the per-pupil subsidy increased at the elementary level by some 110%, the funds provided to university educational institutions increased by just 25%.

This process took place within a framework of strong criticism about the development and management of universities. At the same time, however, studies were released which showed that the explosive and frenzied growth of university establishments in earlier years were not only inefficient in terms of fulfilling their objectives, but also imposed a burden on the community and the public budget which was impossible to sustain.

The result of this stage can be summarized as a reduction of universities on the fiscal budget and the introduction of certain elements of rationality in the management of each institution.

The clear awareness of the problems caused by university expansion, led to the decision to modernize higher education through a set of legal texts which were promulgated as of 1980.

The principal shortcoming of the Chilean university system, its closed and virtually monopolistic nature, was the focal point of the efforts to reform the system. Thus, an effort was made to reinforce broad freedom of education, introducing elements of competition which fostered improvements in academic quality. Furthermore, the need to rationalize the current framework was discussed, given the disorganized and disproportionate growth some institutions of higher learning had attained, reaching gigantic proportions in some cases, which made effective and quality administration impossible.

Of the reform laws passed in the 1980s, the first piece of legislation provided a definition of the concept of a university, the titles and degrees such institutions could grant as well as mechanisms for their formation and dissolution. In addition, the reforms allowed for the creation of new private universities and the option to create private "professional institutes" was also provided for. These institutes were authorized to grant degrees in a variety of areas, including those which up to that time had been under the exclusive domain of the universities. Thus, the path to private participation in higher education was opened.

In addition, a set of regulations was issued aimed at forcing universities adopt policies of institutional restructuring and rationalization and at resolving the complex situation some institutions faced regarding the payment of personnel. Nonetheless, the legislation on university financing was the most innovative and influential of the reforms.

The decrees with the force of law (known by their Spanish acronym, DFL) issued by the government established a new institutionality for universities covering the following areas:

- Norms on the general principles of universities, their purposes, activities and autonomy;

Moreover, priority was placed on promoting scientific and technological development given its decisive role in the economic, social and cultural development of the nation. Toward this end, the National Fund for Science and Technology was created in 1981 to provide financing for specific research projects. Resources allocated to Fund have been increased from year to year in accordance with the availability of monies in the State budget.

In terms of the contributions made by the State to the universities, the new regulations called for public financing in three areas: a direct contribution, set in proportion to the amount received by each institution in 1980; an indirect contribution based on the number of students acquiring high scores on the national university qualifying examinations registering at a given institution; and a so-called "university credit" to be utilized to off-set the cost of tuition for students at each establishment.

The direct contribution for 1981 was set at the 1980 and was slated to be reduced to 90%,75%,60% and finally 50% of that figure over the period 1982-1985. Indirect contributions were established for the 20,000 top scorers on the national entrance exams from among a universe of 30,000 first-year students qualifying for college entry (a total of 120,000 students took the entrance exams that year).

An initial figure of US$ 690 (in 1976 local currency) per pupil was established for 1982, increasing to $1,725 and $2,760 in 1983 and 1984, respectively, to reach a base value of $3,450 per qualifying student as of 1985.

In order to calculate the State's contribution, the 1985 base value was multiplied by an adjustment factor linked to the costs of different courses of study which varied from 2.5 for medicine to 1 for law.

Furthermore, "university credit" was established as of 1981 on the basis of the number of students registered who needed and requested such loans to cover a part or all of their tuition costs.

The maximum credit to be granted each year was set on the basis of the budgetary contribution from 1980. Thus, funds equivalent to 15% of that year's total were made available for university credit in 1982. This funding increased to 23%, 30% and 40% per annum during the period 1983-1985, with allocations after that date equivalent to 50% of the 1980 fiscal contribution to higher education.

This credit was to be refunded to the State by the student through up to 10 annual payments commencing two years after graduation at a real annual interest rate of 1%. This conditions denoted a strong additional State subsidy in this area.

It is important to note that the amounts mentioned above were initially established in an indexed fashion, that is, at an equivalent level of purchasing power.

As noted earlier, the root cause of the deficiencies in the Chilean university system, prior to the reforms implemented as of 1981, stemmed from its closed and virtually monopolistic nature. Thus, the new institutional order was designed primarily to expand the blueprint from higher education to allow for the participation of private initiative and introduce important components of competition into the system. Toward this end, opportunities and incentives were granted to those seeking to establish new universities, as this was perceived as being key to the introduction of competitive mechanisms. Moreover, the university financing system was revamped. The new system called for a framework of general incentives aimed at steering the activities of institutions of higher learning on the basis of academic excellence, competitiveness and maximization of available resources.

The new system also allowed for the creation of non-university continuing-education institutions. These establishments included professional institutes offering 3-4 year courses of professional study which did not grant a university-equivalent degree and technical training centers which, as their name would indicate, were designed to provide technical training in an average of two-year courses of study.

The reduction in the relative weight of direct fiscal contributions sought to achieve several goals:

First, it sought to diminish the potential for financial inefficiency in state-run universities. An institution whose revenue is assured, no matter how well or how poorly it utilized the resources, can indulge in expenditures which are not fully justifiable. Not only are such institutions in a position to splurge, they will inevitable end up doing so; stemming the tide of inefficient expenditures is notoriously difficult. In effect, controlling such spending is so taxing that particularly strong incentives need to be provided to make it possible. The most efficient of these incentives to eliminate funding for such carelessness.

Second, the reduction was aimed at saving fiscal resources whose consumption could not be rationalized in accordance with a judicious definition of the common good. All of the arguments given for providing resources to institutions of higher learning could be dealt with through much more efficient mechanisms than direct support. Moreover, a variety of such mechanisms were instituted through the new legislation. The new procedures, moreover, would facilitate the transfer of funds to such establishments, allow resources to be channelled to other socially needy areas or reduce taxation; a set of objectives that would be beneficial to society as a whole. Among these alternatives, a decision was made to allocate the savings to finance the new mechanisms established in the legislation given that in the end, as noted earlier, this represented an important increase in the financial efforts of the State in this area.

Third, the modifications sought to reduce the possibility of unfair competitive advantages at the State level (as compared to the newly formed institutions derived from the regulatory changes). If State institutions continued to have a guaranteed source of financing, they could engage in dumping practices to thwart efforts by new group to penetrate the educational "market."

The creation of indirect fiscal contributions sought to encourage institutions of higher learning to actively recruit the nation's top students. The idea behind this mechanism was that a student obtaining a high score on the entrance examinations has a greater number of options open to him/her as to where to study. Therefore, the schools chosen by the best students will enjoy enhanced prestige. Given admissions limitations, the students with lower scores will not be able to enroll in such institutions and will have to opt for less prestigious schools should they chose to continue their educations. In other words, the prestige of a given institution is reflected in the quality of student it attracts.

This mechanism, therefore, assumes that the prestige of each institution is in direct proportion to its performance and, in accordance with this supposition, provides financial rewards to those schools with "better reputations;" a concept which in turn is dependent on the number of high test-scorers the institution has enrolled.

The creation of university credit sought to guarantee access to higher education for capable students who lacked sufficient resources to pay for their educations. Unnecessary subsidies, however, were to be avoided. As noted early, thanks to this mechanism, even students with meager resources could obtain loans, rather than State subsidies, to follow their chosen course of study. These loans were to be paid back to the government following graduation.

This mechanism was established in an effort to ensure that the resources provided by the State to stimulate scientific and technological research were effectively utilized for these purposes and not for other less productive activities or to supplant institutional inefficiencies. Moreover, the program sought to ensure that the projects receiving financing were in fact those of greatest interest and benefit to the nation.

In terms of one of the principal objectives of the modernization process -- opening the system up to private initiative -- there was an important void, until 1988, in the university area. Following the creation of three private universities between 1981 and 1983 on the basis of the regulations contained in DFL 1, the process was suspended. The administrative decision to postpone the formation of additional private universities was the result of political indecisiveness over whether such freedom to create institutions should really be granted as well as imperfections and irregularities in the process which had been exposed. There was, moreover, a conspicuous lack of adequate supervisory regulations.

In terms of the financial mechanisms, the indirect contribution and university credit were in theory available to any actor in the system, including students registered in the new private institutions of higher learning. In practice, however, for budgetary reasons these contributions were limited to students in the traditional system.

Nonetheless, after a number of years in operation, the revised framework for financing such institutions through a variety of transfer mechanisms demonstrated that although increased competition had been introduced into the system, other less desirable elements had also been introduced into operations. This generated important distortions, such as:

a) Unsystematic, explosive growth in some fields of university study which resulted in academic deficiencies. For example, Civil Engineer registrations rose from a total of 8,413 students in 1981 to 17,148 in 1985. The fundamental reason for this was that engineering, as a highly sought-after major -- although not one many of the new registrants were likely to complete -- could draw increased resources for the university through the fiscal contributions allocated in proportion to the number of registered students, indirect contributions and student loans.

b) Inefficient behavior at some institutions of higher learning which had failed to adopt measures aimed at coping with budgetary restrictions and improving the utilization of available resources.

These inefficiencies were associated with the level of direct fiscal support. Institutions receiving a high percentage of their revenue from the State enjoyed (in addition to stability) an environment which allowed them to prolong deficient operating formulas and lacked incentives to rationalize expenditures.

c) In general, the costs set for tuition responded to the availability of fiscal credit rather than following the spirit of the legislation passed in 1981 which called for there to be two basic factors taken into account in setting such rates: the cost of implementing a course of study and the subsidy to be provided to certain programs of particular social importance or need.

d) The presence of significant financial surpluses from 1981-1983 translated into investment in financial assets in the capital markets rather than strengthening the mechanisms which would have allowed the development of other more stable sources of independent income, such as the sale of services and consulting which, moreover, are more in line with the objectives of the universities as institutions. Similarly, some institutions allocated important sums to infrastructure and equipment which was not directly related to the quality of teaching or academic excellence.

Once implemented, new legislation produced interesting results. First, 3 universities, 21 professional institutes and 181 technical training centers -- primarily oriented toward business administration and elementary school education -- were instituted by the private sector.

Second, universities were restructured. The headquarter of the two State entities, the University of Chile and the State Technical University remained in Santiago, while outlying campuses were merged. Thus so-called "derived" regional universities were created in an effort to encourage decentralization and better satisfy local needs.

The universities were also restructured on the internal level, leading to increased, although still insufficient, rationalization in central coordinating bodies and administrative systems.

In financial terms, the first difficulty arose in early 1982. In March of that year, faced with the effects of the economic crisis that were beginning to felt, Chile's economic authorities were forced to reduce fiscal contributions to higher education globally by 4%. Later, the indexation of contributions corresponding to the second quarter was eliminated, resulting in an additional 5% cut to overall State contributions to the system.

As a result, the contribution by the State during this, the first year that the new legislation on university financing was to become fully operational, dropped by some 9%.

Furthermore, the importance of the indirect per-pupil contribution led universities -- especially those born of the restructuring -- to begin to open up new fields of study and increase the admissions quota in areas which had been virtually frozen since 1979. This was particularly true for the majors garnering the highest weighted "factors." Subsequently such differentiations were eliminated (the factor for all majors was set at 1) and a system of quintiles was established whereby the scores on the aptitude examination were weighted (in descending order) by 12,9,6,3 and 1 to establish a student's overall placement.

Moreover, since the new legislation did not establish clear norms for the granting of university credit, institutions began to compete to provide such loans under the most open terms possible.

Overall, the universities' interpretation of the new financial legislation began to cause some undesirable side effects.

In addition, regulations were issued which restricted access to fiscal credit in accordance with the social objectives on which it had originally been based and academic performance requirements were introduced.

In the development of the academic aspects of the system financed by the State (teaching, research and outreach), problems remained in the disorderly growth of courses of study and professorships (such as pedagogy and civil engineering), the lack of orientation and instability in the resources allocated to research and the high drop out and failure rates. As a result, scare resources were wasted as can be seen in the following chart (Chart 2):

In terms of administration, the problems of deficiencies in the administration of resources at the institutional level continued. This situation was characterized by investment decisions which were not always in accord with the needs and priorities of academic activity.

Nonetheless, the limitation on resources affecting Chilean universities as well as many of the criticisms formulated about the management of higher education in 1975 remained. On this matter, it is important to note that although the global resources allocated to the system underwent significant reduction, there was no perceivable drop in academic quality, providing staunch proof of the inefficiencies of the previous system. Some of those inefficiencies, however, persisted and still needed to be corrected.

The structure of financing, for its part, resulted more in distortions generated by the interpretation of the framework of incentives put forth in the legislation of 1981 than in those produced by the economic crisis per se. These distortions were as follows:

- The most important imbalances were in the distribution of direct fiscal credit and the disorderly installation of State universities which did not meet minimum requirements for such institutions. This resulted in competition aimed not at improving academic excellence, but rather the acquisition of a larger volume State resources. In the private sector, these two elements should dovetail nicely. When the resources are provided by the State, it is another matter entirely.

- The majority of the "derived" (provincial) universities were forced to depend on fiscal credit as their primary source of funding because of their limited access to direct and indirect fiscal contributions.

- Furthermore, there was no linkage between resource distribution mechanisms and research as a fundamental element in university activities. This meant that private institutions were to a large extent deprived of the possibility of developing areas of research that would have helped consolidate their contribution to higher eduction and their status as universities. This occurred because the distribution of direct fiscal credit was based on historic considerations and current registration; indirect fiscal support, moreover, was related to teaching through a portion of the best scores on Chile's university entrance examinations; FONDECYT, the only mechanism linked to research was not of the same significance in terms of resources available for transfer as the other mechanisms.

- Competition to obtain increased fiscal resources was the primary cause of the proliferation of majors and admissions even when minimal conditions in equipment and human resources required by some courses of study, such as Civil Engineering, could not be met.

- Furthermore, courses of study with low teaching costs, such as pedagogy, also saw their ranks soar given that the increased number of students made it possible for the school to obtain additional resources.

- This led to extraordinarily complex situations for some universities which expanded their level of activity beyond their real possibilities by increasing institutional indebtedness to finance the expansion.

- Tuition failed to bear any relationship to the approximate cost of a given course of study but rather were adjusted in accordance with estimates on the availability of fiscal credit. As a result, in 1986, 54.7% of undergraduate tuition was obtained from fiscal coffers. Naturally, requests for credit spiraled and their distribution within universities was not based on students' real needs and socioeconomic conditions.

Lastly, one of the conclusions we can draw from this analysis is that the distortions and inefficiencies to a large extent were the result of a lack of an owner who could effectively orient behavior; this was also true for initially private institutions linked to the Catholic Church and other foundations which received fiscal contributions. These institutions gradually became more and more dependent on fiscal funding and distanced themselves from their founding fathers.

The corrective measures adopted, following a profound analysis of the impact of the legislative reforms of 1980-81, dealt with modifications to the system's general framework of incentives as follows:

- In 1988, fiscal university credit was transferred to the institutions of higher learning to form the University Credit Funds which belonged to the universities and professional institutes themselves. These institutions then administered the monies in accordance with their own criteria and were authorized to invest surpluses obtained through a higher-than- expected repayment rate in development.

- As of 1989, 95% of direct fiscal contributions were distributed in accordance with the historic criteria utilized in the past. The remaining 5% was distributed among institutions of higher education in accordance with five new criteria, including the number of research papers in internationally renowned magazines published by university personnel, the proportion of professors with Masters degrees and Doctorates as compared to the rest of the teaching staff and the proportion of full time professors over the number of part-time instructors.

- As of 1989, indirect fiscal contributions were opened up to all of the institutions of higher learning recognized by the State rather than just the traditional institutions and their "derived" campuses has had been the rule in the past. Thus, universities, professional institutes and technical formation centers created as a result of the legislation passed in the 1980s were able to access a source of State financing in accordance with their ability to attract students placing in the top 30,000 on the system's entrance exams.

- The Fund for Science and Technology (FONDECYT) expanded from a total of 400 million pesos in 1986 to 3 billion in 1989. This increase came at the expense of direct fiscal contributions and permitted a significant increase in the financing of research projects.

- Lastly, and perhaps most importantly, the option to create new private universities was reopened, as per the legislation enacted in the early 1980s. As noted earlier, this option had been closed through administrative measures following the creation of a few such institutions early in the decade.

1. CREATION OF PRIVATE INSTITUTIONS: NUMBER OF INSTITUTIONS AND NUMBER OF STUDENTS

By 1990, the results of the new thrust toward private higher education were clear: 60 universities, 80 professional institutes and 156 technical formation centers. These figures are all the more impressive if we compare them with the statistics from 1989 which show a total of 34 universities, 41 professional institutes and 133 technical training centers.

That is to say that as a result of the liberalization of the restriction on the entry of new universities, 26 such institutions, 39 professional institutes and 23 technical training centers were formed.

It is important to note that of these establishments, just 20 universities -- a third of the total in operation today -- and two professional institutes receive direct fiscal support. The remaining institutions -- some of which receive indirect fiscal support -- are essentially self-financing through tuition payments by students. Other institutions prefer to do without State contributions in an effort to maintain their efficiency and autonomy.

The number of institutions in the private system located throughout Chile's 12 regions in 1984 and 1990, including regional campuses of some institutions, is as follows (Chart 3):

	1984	1990	1984	1990	1984	1990
Iª	8	13	-	3	-	1
IIª	10	10	-	3	-	-
IIIª	2	3	-	2	-	-
IVª	8	10	-	6	-	-
Vª	26	33	4	14	-	6
RM	90	79	18	45	3	27
VIª	6	12	-	2	-	2
VIIª	9	7	-	3	-	-
VIIIª	15	13	2	8	-	3
IXª	8	14	-	4	-	2
Xª	8	12	1	5	-	-
XIª	2	-	-	-	-	-
XIIª	4	3	-	-	-	-
Total	196	209	25	95	3	41

Source : 1984, La Educación Superior en Chile, riesgos y oportunidades en los '80, Mª José Lemaitre, Iván Lavados. 1990, Directorio de Instituciones Privadas de Educación Superior en Chile.

Moreover, registration in the higher educational system rose from a total of 116,962 students in 1980 to 248,354 in 1990; an increase of 112.3%. Of this total, 130,767 students were registered in institutions in the private system which did not receive fiscal support (52.7% of these students were following non-university courses of study).

In terms of the development of intermediate education, it is important to keep in mind that the number registrations in alternative post-secondary school education -- technical training centers offering short, two-year, programs of study -- leapt from zero, in 1980, to 77,724 in 1990. This figure represents 31.3% of the total number of students registered in the higher education system, all of whom are enrolled at private educational establishments.

	1980	1981	1984	1989	1990
Sub System
w/Fiscal Support
Universities	116,962	101,620	105,573	105,583	111,115
Prof. institutes	-	14,155	18,740	5,467	6,472
Tech. training centers	-	-	-	-	-
Sub total	116,962	115,775	124,313	111,050	117,587
Sub System
w/o Fiscal Support
Universities	-	-	3,686	13,773	19,509
Prof. institutes	-	441	11,033	28,290	33,534
Tech. training centers	-	12,368	45,402	76,695	77,724
Sub total	-	12,809	60,121	118,758	130,767
Total System
Universities	116,062	101,620	109,259	119,356	130,624
Prof. institutes	-	14,596	29,773	33,757	40,006
Tech. training centers	-	12,368	45,402	76,695	77,724
Total	116,962	128,584	184,434	229,808	248,354

Source : 1980, 1981 y 1984, La Educación Superior en Chile, riesgos y oportunidades en los '80, Mª José Lemaitre, Iván Lavados. 1989, Memoria 1973-1990 Ministerio de Educación. 1990, listados División Educación Superior, Ministerio de Educación.

The privatization of higher education is of tremendous importance, both in order to achieve an increased contribution by this industry to the development of the country and to guarantee the corporeality of mankind's most fundamental liberties.

In Chile, important progress has been made in this field, but important hurtles which pose limitations to the nation's system of higher education remain.

The first of these hurtles is that the State continues to provide substantial subsidies for education in a poorly structured fashion.

Thus, direct fiscal support continues to be provided to universities. Recently, moreover, this type financing has tended to increase as a portion of overall fiscal funding granted to such institutions. As we have noted in this chapter, this type of financing is the least desirable given that it not only provides an incentive for inefficiency in the use of resources allocated to higher education, but also conceals misuse.

Furthermore, the State continues to provide indirect fiscal support. This mechanism, although far superior to that of direct contribution, is not a desirable option over the long term either. It is true that this mechanism stimulates universities to excel by providing a subsidy to the institutions which are most capable of attracting top students and therefore garner the greatest prestige. However, one still needs to justify why these institutions should receive subsidies. In truth, the potential justifications for such financing are not all that different from those applicable to higher education as a whole, that is, encouraging academic investigation, guaranteeing access to students with limited resources and ensuring a supply of majors whose social consequence is greater than the personal gains of those who engage in that particular field of study. The most efficient mechanisms for achieving these objectives were discussed in this chapter and have nothing to do with indirect fiscal support.

Over the long term, then, the system should move toward the elimination of these types of contributions and focus on more appropriate mechanisms, such as: enhanced, better-funded research programs; increased resources for university credit and the extension of this option to professional institutes and technical training centers; and corrections to discrepancies between social and private profitability when they exist.

Lastly, another area where progress remains to be made is in the establishment of a system in which freedom of education is a reality. Toward this end, institutions should be allowed to be formed without the obligation of being subjected to systems of accreditation or examination by existing institutions. By functioning in this fashion, the current system grants existing establishments a monopoly and produces no specific benefit. Instead, the State should created a merely informative classification system on the quality of education being provided by academic entities so that students and their parents can orient their selection process and facilitate full freedom in the creation of institutions of higher learning.

Major	Percentage
Law	26
Agronomy	71
Architecture	53
Civil Engineering	72
Forestry Engineering	77
Business	61
Medicine	29