The Lisbon Strategy - The Role of Education

Table of Contents

1 Introduction

2 The Status Quo of European Higher Education
2.1 The European financing of higher education
2.2 Over-regulation and the role of government
2.3 The lack of social responsiveness

3 What is the Lisbon Strategy?
3.1General Goals of the Lisbon Strategy
3.2 Reforming higher education within the Lisbon framework
3.3 The Bologna Declaration: a step into the right direction

4 Economic Background
4.1Macroeconomics: Social Returns on investment in education
4.1.1 The production of goods
4.1.2 The accumulation of human capital
4.1.3 The impact of human capital on economic growth
4.1.4 Key findings and model results
4.2 Microeconomics: Private Returns on investment in education
4.2.1 Human Capital Theory
4.2.2 Empirical Evidence
4.3 Positive Externalities: Why public and private investment makes sense

5 What Europe can learn from the US
5.1 Funding
5.2 Organization
5.3 Competition
5.4 Meritocracy

6 Policy Implications: A Call for Tuitions in Europe
6.1 Tuition: an absolute necessity
6.2Meritocracy and Competition
6.3 How to finance tuition for higher education

7 Conclusion

8 Appendix
8.1 Figures
8.2Tables

9 Bibliography

Index of Figures

Figure 1: Expenditure on Higher Education

Figure 2: Total Expenditure on Higher Education

Figure 3: Tertiary Attainment Level

Figure 4: Private Returns of Human Capital Investments and additional Returns through Education Subsidies

Figure 5: Positive Externalities and the Optimal Levels of Public and Private Funding

Figure 6: Expenditure per Student in Comparison to GDP per Capita

Figure 7: Income Breakdown of Public US Universities

Figure 8: Average Annual Tuition: Development 1971 - 2002

List of Tables

Table 1: Academic Ranking of World Universities, Jiao Tong University of Shanghai

Table 2: Total Tertiary Education (in % of population)

Table 3: Comparison of funding sources for tertiary education

1 Introduction

More than 5 years have passed since March 2000 when the Lisbon European Council defined its strategic goal for the future decade, namely to “ become the most competitive and dynamic knowledge-based society in the world, capable of sustainable economic growth with more and better jobs and greater cohesion. ” And while this was planned to be achieved through a set of policy instruments, a significant improvement and increased investment into educational systems formed a cornerstone of the “Lisbon strategy”. It is widely acknowledged in theory and empirically proven that investment in human capital promotes economic growth and creates social returns for society as well as private returns to individuals. In order to realise these returns it is necessary, however, to devote significantly more resources to education and training.

So how does the European education system compare to others in the world, which path should it take and how can future success be ensured? How can economic theory justify the investment in human capital? What can the European Union learn from the United States when reforming higher education?

Although the paper will not be able to provide definite answers to these questions, it will undertake an attempt towards pointing out the deficiencies of higher education in Europe and what policy instruments could help overcome these.

2 The Status Quo of European Higher Education

In August 2005 the Jiao Tong University of Shanghai published the latest version of its “Academic Ranking of World Universities” and it did not contain any good news for the Europeans. As Table 1 shows, out of the world’s top 20 universities only two are European, namely Oxford and Cambridge, while 17 come from the US. For Germany the news is even more frustrating: The highest ranking academic institution in Germany is the Technical University of Munich that achieves an overall 52nd place in the survey.

Five years after the ambitious Lisbon goals have been called into existence, the results are disillusioning and the European Union and its member states do have to undertake significantly more in order not to fall further behind the United States while at the same time not being overtaken by the constantly improving Asian countries.

The reasons why Europe’s educational systems are lagging behind in such an obvious way differ from country to country, however, the three core problems are similar all across Europe with different levels of severity: firstly, European universities lack the funds necessary to provide students with a high quality education. This is often further exacerbated through an inefficient use of existing funds. Secondly, the institutions are highly over-regulated and government controlled and do not possess sufficient freedom with regard to choosing their own students, charging tuition, conducting research or maintaining copyrights and patents on successful research. Thirdly, the attainment level of higher education in Europe is insufficient with regard to managing the transition to a knowledge based economy. Accordingly a lack of social responsiveness persists.

2.1 The European financing of higher education

Compared to the US, the EU countries do on average spent far less on higher education¹. Figure 1 shows the overall expenditure of the EU average, selected European countries, the US and Japan per student as a percentage of GDP on higher education. Figure 1 indicates why the US did so well in the Shanghai ranking and why the EU did not. The US spends almost twice as much on higher education than the EU average, both on a per-student level and as a percentage of GDP.

The gap between the US and the EU expenditure on higher education as a percentage of GDP can be attributed to a lack of private funding. Figure 2 illustrates this mismatch between public and private funding. An increase in private funding appears mandatory for European universities in order to level the competitive advantage which US universities currently enjoy.

2.2 Over-regulation and the role of government

The educational systems of almost all membership countries of the European Union are characterized through excessive government regulation. According to the European Commission², over-regulation considerably impedes the modernisation and efficiency of Europe’s universities. National employment rules for academic staff may be a suitable example for hampering efficiency as they restrict curricular reform and the envisaged cohesion. Furthermore the European Commission acknowledges that excessive controls deprive universities of reacting swiftly to an altering environment.

While the costs of over-regulation appear to be difficult to measure on the European level, there are some estimates concerning the costs caused by red tape in EU member countries: In the UK alone higher education related bureaucracy is estimated at costing £250m a year³.

2.3 The lack of social responsiveness

The European attainment level concerning tertiary education is insufficient. Figure 3 illustrates that higher education attainment in Canada is almost twice as big as in the EU. This causes some social classes in Europe to have to compete with the workforce of emerging countries, which offer comparable products or services at a lower price. Therein consists the lack of social responsiveness as society has not managed efficiently the structural change to a knowledge-based economy.

Structural change could be accelerated by increasing the investment in human capital which would result in a higher attainment level. By increasing the investment in higher education social classes of industrialized countries may be able to avoid global price competition in commoditized products by specializing on products in which they dispose of a competitive human capital linked advantage.

3 What is the Lisbon Strategy?

In order to address the striking economic and social challenges the countries of the European Union jointly face, e.g. unemployment, enlargement, globalisation, ageing or structural change, the European Council of Lisbon in 2000 laid out its goals for the decade to come. The strategy attempts to point out a path towards economic growth, targeting the EU

“ to become the most competitive and dynamic knowledge-based society in the world, capable of sustainable economic growth with more and better jobs and greater cohesion. ”

The urgency of such reforms becomes clear when realizing that without reforms Europe would currently lose 1.25% of annual economic growth⁴ only through the impact of an ageing population⁵.

3.1 General Goals of the Lisbon Strategy

The Lisbon strategy takes a stance on six different areas of reform, namely product-, capitaland labour markets as well as social policy, environment⁶ and investment in the knowledge based economy. Of these six only the last shall be of interest for further discussion.

Investment in the knowledge based economy is further specified in three areas where resources should be concentrated:

- Investment in R&D and innovation
- Production and use of information and communication technology
- Investment in education and training.

The following discussion will solely focus on a subtopic of education and training, namely the reforms and policy measure the Lisbon strategy puts forth with special regard to higher education.

It can be observed that in comparison to other reform projects that were accomplished by the EU such as the internal market or the economic and monetary union, the Lisbon strategy has a far broader scope. In that, most critics do also see the major shortcoming of the strategy and the reason for its ineffectiveness thus far.

3.2 Reforming higher education within the Lisbon framework

By 2010, Europe should be the world leader in terms of the quality of its higher education and training systems. Making this happen will mean a fundamental transformation of higher education and training across Europe. The common goal of the Union is to make its universities a “world reference” by 2010.

To ensure their contribution to the Lisbon Strategy, the EU Ministers of Education adopted in 2001 a report on the future objectives of higher education and training systems, agreeing on three shared goals to be achieved by 2010:

- Improving quality and effectiveness of education and training systems in the EU
- Facilitating access of all to education and training systems
- Opening up education and training systems to the wider world

These goals are further specified through objectives as to how they are to be achieved. With specific regard to the institutions of higher education, a 2003 communication of the EU commission⁷ sets out the path towards successful reform. For European universities to become world class, the EU Commission identifies three areas of improvement that will have to be tackled in order to reach the Lisbon goals:

Ensuring that universities have sufficient and sustainable resources The shortcomings of the budgetary situation of EU institutions of higher education have been discussed previously. That this lack of funding is not only a common perception but also a public acknowledgement by authorities is already a first step into the right direction. However, universities will have to do more than just hope for additional government support. Increasing and diversifying universities’ income is a necessity for success. In theory, universities could gain financing out of five different sources: public funds, private donations, income by selling services or marketing research results, endowment and tuitions paid by students. However the generation of endowment income is not realistic at the current state of federal budgets. In Europe universities are almost exclusively financed through public funds. This has to change and institutions will have to undertake more to gain access to other forms of financing while the governments will have to provide a legal framework that allows to efficiently access other sources.

Secondly, available financial resources have to be used more efficiently. Since almost all funds available to European universities stem from public sources, governments should pursue the goal to maximize the social return on investment. De la Fuente (2003) defines the social return of investment as the amount of additional national output that the government can expect to gain from investing a certain amount into education. High drop- out rates, a mismatch between supply and demand of qualifications and a duration of studies that widely differs for comparable degrees across the Union indicate that funds are being employed in an inefficient way.

Lastly, it will become necessary to apply scientific research more effectively. Europeans have not yet found a way to turn innovations that were created in universities into successful businesses.

Consolidating the excellence of European universities

In order to allow European universities to be excellent, it is necessary to create the right framework for achieving excellence. Every university should be able to live up to its full potential and for that, transformations in the system are necessary. Since excellence does not grow overnight, there is a need for long-term planning and financing. This poses exceptional challenges in a system where almost all funding is provided by the government, which is usually elected for a four year term. In order to improve efficiency, successful management structures and practices should be implemented. Running a university is comparable to running an enterprise and therefore outside professionals and performance- based rewards could be a solution.

Furthermore, European institution should work towards developing centers and networks of excellence. Member states and its institutions will have to identify areas of excellence and that is where funds for research should be focused. Only through such a specialization the competitiveness of European universities with regard to its global peers can be attained. Lastly, the recognition of studies and qualification as a key to excellence in human resources will have to be further ensured. Not having such a system impedes the free mobility of labor in the Union. The Bologna agreement already is a milestone on the way.

Broadening the perspective of European universities

Compared to its US peers, the environment offered by EU universities is less attractive for top-level foreign students. Therefore a need exists to broaden the international perspective of the institutions. This not only includes the financial, material and working conditions but just as much regulations on visas and residence permits.

Furthermore, universities can contribute to local and regional development and hence strengthen European cohesion. Technology centres and science parks such as in Cambridge, UK are examples how good ideas can be turned into successful businesses and how the region profits.

As this agenda shows, the goals are ambitious and the path will be long and burdensome. However, with the Bologna declaration a first step was undertaken, which poses the most drastic change in European higher education so far.

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¹ Synonymous for higher education the term tertiary education is used in empirical data sets

² “Mobilising the brain power of Europe”, EuropeanVoice.com, http://www.european-voice.com/eu/info.asp?id=1224

³ “Bureaucracy costing £250m a year”, The Guardian (Oct/12/2005)

⁴ From a current level of about 2-2.25%

⁵ “The economic cost of non-Lisbon”, The European Commission (2005)

⁶ The environmental pillar was added at the Gothenburg summit in 2001

⁷ “The role of the universities in the Europe of knowledge” (2003)