China - Higher education reform

Report No. 15573-CHA China Higher Education Refornm June227, 1996 RL11raI .11an 'u()Ci.i DevelOpritienl UJperi)itin Divislol ( hina a nJ Depamo i tnit ICst Asia rd1 I'acific Regionla ()Iti ce Document of the World Bank  CURRENCY EQUIVALENTS (1994) Currency Unit: Yuan (Y) $1.00 = Y 8.62 FISCAL YEAR January I - December 31 WEIGIITS AND MEASURES Metric System ACRONYMS AND ABBREVIATIONS USED ADC - Academic Degrees Committee ADCSC - Academic Degrees Committee of the State Council CD - Curriculum Division CP - Communist Party GDP - Gross Domestic Product GNP - Gross National Product GOC - Government of China HEI - Higher Education Institution HEMC - Higher Education Management Center MIS - Management Information System MOF - Ministry of Finance NAEA - National Academy of Education Administration PEdC - Provincial Education Commission SEdC - State Education Commission SO - Special Office SPC - State Planning Commission  CONTENTS Acknowledgments ..........................................................v Executive Summary ........................................................ vii 1. The Reform Agenda .........................................................1 A. Introduction .........................................................1 B. Higher Education And Economic Reform .........................................................2 C. System Indicators ..........................................................5 D. World Bank Assistance ......................................................... 20 E. The Nature And Structure Of The Report ........................................................ 21 2. Relationships Between Universities And The State . ................................................ 24 A. Context ......................................................... 24 B. Issues ........................................................ 26 C. Recommendations And Action Plan ........................................................ 28 3. Changes In University Management .......................................................... 37 A. The Context ........................................................ 37 B. Management Issues ........................................................ 38 C. Recommendations And Action Plan ......................................................... 43 4. Financing Higher Education: Diversification Of Resources . . 48 A. The Current Context Of Higher Education Finance ........................................ 48 B. Reforms In Higher Education Finance And Their Consequences ................... 50 C. The Changing Pattern Of Higher Education Finance: Institutional Perspective And Implications ......................................................... 57 D. Policy Options For Funding Higher Education. 1995-2020 ............................ 61 5. Quality Improvement In Instructional Programs ................................................... 76 A. The Context: Changes Of The Reformn Decade .............................................. 76 B. The Issues ........................................................ 81 C. Recommendations And Action Plan ........................................................ 87 6. Achieving Reform Goals: Strategic Priorities ....................................................... 102 ANNEXES Annex 1: Chinese Higher Education: Historical Background ....................................... 109 Annex 2: Suggested Topics For The Higher Education Law And University Statutes ......................................................... 112  - ii - Annex 3: Returns To Higher Education: Tools For Assessment And International Comparison ............................................................. 116 Annex 4: Scientific Research And Technological Development .................................... 125 Annex 5: Number Of Institutions, Enrollment, And Students-To-Teacher Ratios In Regular Higher Educational Institutions, 1994 ............................................... 130 Annex 6: Teachers, Staff, And Workers In Regular Higher Education Institutions, 1994 ............................................................. 131 Annex 7a: Adult Postsecondary Education Institutions, 1994 ........................................ 132 Annex 7b: Academic Postsecondary Qualifications Of Full-Time Teachers In Adult Post Secondary Education Institutions, 1994 ..................................... 133 Annex 8: Research And Development Personnel By Field Of Study, 1994 ................... 134 Annex 9: An International Bibliometric-Based Assessment Of Research Activity In Chinese Higher Education And Research Institutions .................. 135 Annex 10: Utilization Of Buildings In Regular Higher Education Institutions, 1994 ............................................................. 136 Annex I 1: Institutions Of Higher Education By Province And Municipality, 1994 ............................................................. 137 Annex 12: Provincial And Municipal Population, GDP, GDP Per Capita, And Higher Education Teachers And Staff, 1994 ........................................ 138 Annex 13a: Public Finance In China, 1978-1994 ........................................................... 139 Annex I3b: Indicators Of Levels Of Public Expenditure On Education, 1976-1994 .............................................................. 140 Annex 14: Composition Of Revenue And Expenditure Of Selected Institutions Of Higher Education, 1993 ............................................................. 141 Annex 15: Expenditures In Selected Institutions, 1980 And 1993 ................................. 142 Annex 16: Average Annual Growth Rates Of Different Components In Expenditure In Selected Institutions, 1980-93 ............................................. 143 Annex 17: Per Student Spending In 14 Selected Institutions In 1993 ............................ 144 Annex 18: Student Financial Aid And Tuition Revenue, 1980-93 ................................. 145 Annex 19: Student Family Background, 1980-93 .......................................................... 146 Annex 20: Explanation Of Projection ............................................................. 148 Annex 21a: Population Projection. 1990-2020 .............................................................. 151 Annex 21b: Projection Of The 18-22 Age Group ........................................................... 152 Annex 22: Projected Population, GDP, GDP Per Capita And Total Government Expenditures, 1995-2020 ............................................................. 153 Annex 23: Enrollment Projection, 1994-2020 .............................................................. 154 Annex 24: Projected Student-To-Staff Ratios By Different Enrollment Growth Rates, 1994-2020 ............................................................. 155 Annex 25: Projected Personnel Costs, 1994-2020 .......................................................... 156 Annex 26: Projected Public Expenditure On Higher Education And Enrollment If Public Spending Per Student Remains At The 1994 Level, 1994-2020 .... 157 Annex 27: Projected University-Generated Revenue, 1994-2020 .................................. 158 Annex 28a: Projected Total Public And Private Resources At Different Enrollment And GDP Growth Rates, 1994-2020 ....................................... 159  - 111 - Annex 28b: Public And Private Resources As A Percentage Of Total Resources At Various Growth Rates Of GDP And Enrollment, 1994-2020 .................... 160 Annex 29: History And Future Perspectives Of Television Universities ....................... 161 Annex 30a: Existing Student Loan Programs ............................................................ 163 Annex 30b: Check-list Of Policy Options For Deferred Cost Recovery ........................ 165 Annex 30c: Hidden Subsidies And Government Losses On Selected Student Loan Programs ............................................................ 167 Bibliography And References ............................................................ 170 BOXES IN TEXT Box 3.1: Delegating the Difficult Decisions ............................................................ 42 TABLES IN TEXT Table 1.1: Enrollment in Regular Higher Education Institutions, 1994 .............................4 Table 1.2: Gross Enrollment Ratios in and Public Expenditure on Higher Education in Selected Countries ..............................................................7 Table 1.3: Percentage of Graduates Enrolled in the Next Level of Education ...................8 Table 1.4: Educational Attainment of Population Aged 25 and Over in Selected Countries .............................................................9 Table 1.5: Percentage Distribution of Higher Education Students in Selected Countries ............................................................. 12 Table 1.6: Student-to-Teacher and Student-to-Total Staff Ratios .................................... 13 Table 1.7: Academic Qualifications of Full-Time Teachers in Regular Higher Education Institutions, 1994 ............................................................ 14 Table 1.8: Age Structure of Full-Time Teachers in Regular Higher Education Institutions, 1994 ............................................................ 15 Table 1.9A: Research Output as Measured by Cited Papers in the Institute for Scientific Information Research Front Database .......................................... 17 Table 1.9B: Research Papers Cited in the Institute for Scientific Information Research Front Database per Researcher, 1990 ............................................ 17 Table 1.10: Female Participation in All Levels of Education . .......................................... 18 Table 2.1: Performance Indicators at the National and Institutional Levels ..................... 32 Table 3.1: Ways of Achieving Economy and Efficiency .................................................. 46 Table 4.1: Average Annual Growth Rates in Real Terms, 1978-94 ................................. 49 Table 4.2: Funding Souces for Higher education and spending per student, 1978-1994 ............................................................ 51 Table 4.3: Cross-Regional Comparison of Public Subsidies per Student as a Percentage of GNP Per Capita by Level of Education, 1980-94 ........................................ 51 Table 4.4: Government Allocation of Funds per Student to Provincial Universities and Colleges in Selected Provinces, 1992 ....................................................... 52 Table 4.5: Percentage Distribution of Funding from Different Sources ........................... 53 Table 4.6: Financial Aid to Students, 1992 .56  - iv - Table 4.7: Average Annual Wage of Staff and Workers by Level of Education, 1994 ............................................................ 58 Table 4.8: Projected GDP per Capita, Percentage of Relevant Age Group Enrolled in Higher Education, and Tuition Fees and Spending per Student, 1995-2020 ............................................................ 62 Table 4.9: Per Student Cost in Adult Postsecondary Education ....................................... 74 Table 5.1: Trends of Changing Faculty Structure by Rank .............................................. 78 Table 5.2: Trends of Faculty Qualification Structure ....................................................... 80 Table 5.3: Faculty by Gender and Rank of Qualification ................................................. 83 Table 5.4: Faculty by Gender and Rank ............................................................ 84 FIGURES IN TEXT Figure 1.1: Enrollment in China by Level of Education, 1952-94 ................................... 22 Figure 1.2: Enrollment in Regular Higher Education Institutions, 1952-94 ..................... 23 Figure 2.1: Examples of Buffer Bodies ............................................................. 28 Figure 2.2: Action Plan: Relationships Between Universities and the State ................... 36 Figure 3.1: Action Plan on Management ............................................................ 47 Figure 4.1: Differential Economic Burden on Rural and Urban Households ................... 68 Figure 4.2: Tuition Fees as a Proportion of Recurrent Expenditures in Public Higher Education Institutions ............................................................. 73 Figure 4.3: Action Plan: Financing Higher Education: Diversification of Resources .... 75 Figure 5.1: Action Plan for National System of Accreditation ......................................... 91 Figure 5.2: Action Plan for Curriculum Development ..................................................... 93 Figure 5.3: Action Plan for Faculty Development ............................................................ 99  v - ACKNOWLEDGMENTS This report is based on work done by a team of World Bank staff and consultants and draws freely from specially commissioned papers, which are available in the project files. The team comprised Hena Mukherjee (Task Manager), Chung Yue Ping, John Fielden, Ruth Hayhoe, He Jin, Marjorie Lenn, Min Weifang and Kin Bing Wu. Zhang Yanhong managed the institutional data, Cao Xiaonan assisted with the updating of supporting research, and Ibrahim Dione assisted with data entry. Insightful comments from peer reviewers Thomas 0. Eisemon, Sandra Erb, Josephine Douek-Hykin, and William Saint were appreciated. The study could not have been completed without the close cooperation of the Finance Department of the State Education Commission, Beijing, the Academic Degrees Committee of the State Council, Education Commissions at provincial and municipal leve!s of Anhui, Guangdong, Sichuan, and Shanghai, and the higher education institutions the team was privileged to visit. Their support is gratefully acknowledged. Thanks are also due to senior government officials and the Chinese academic community for their comments and contributions at the Report Dissemination Seminar held in Beijing in April 1995. The seminar was jointly organized by the Finance Department of the State Education Commission and the World Bank. The study was carried out under the supervision of Vinay K. Bhargava and completed under the general direction of Joseph Goldberg. The Director is Nicholas C. Hope, and the Lead Economist is Richard S. Newfarmer.   - vII - EXECUTIVE SUMMARY The Macro Context 1. The economy of China is one of the fastest growing in the world, with an annual average Gross Domestic Product (GDP) growth rate of 9.8 percent in real terms between 1978 and 1994. Universities play two key roles in sustaining this growth rate and in facilitating socially and environmentally responsible development. First, they prepare citizens to fill high-level scientific, technical, professional and managerial positions in the public and private sectors. Second, in their capacities as repositories, generators, and communicators of knowledge, they underpin internal technical advances, particularly in transforming research and development results for industrial productivity, and provide access to and adaptation of ideas from elsewhere in the world. 2. These tasks of educating the leadership of, and generating knowledge for, China's development effort present major challenges. Destroyed by the Cultural Revolution (1966-76), China's higher education system was rebuilt only in the late 1970s as one element of a strategy to modernize the country. The 1978-94 period saw remarkable proliferation of public regular higher education institutions from 598 to 1,080, and of enrollment from 0.86 million to 2.8 million full-time students in undergraduate and short- cycle courses, at an annual growth rate of 7.7 percent. Graduate enrollment rose from zero in 1978 to 0.13 million by 1994. While this achievement was impressive, the proportion of the appropriate age cohort in regular higher education institutions was only 2.4 percent in 1994, barely above that in 1960. When enrollment in all adult tertiary institutions is considered, it amounts to just over 4 percent of gross enrollment in higher education. This ratio is low. not only in comparison with other fast-growing East Asian countries (for example. 10 percent in Indonesia. 19 percent in Thailand. 20 percent in Hong Kong, 39 percent in Taiwan (China), and 51 percent in Republic of Korea), but also with India, which had a per capita GNP of $300 in 1993. lower than China's $490, and yet had an enrollment rate of 8 percent in higher education. 3. According to the Ninth Five-Year Plan (1995-2000), the Government's target for GDP in 2000 is to quadruple that in 1980, and that for GDP in 2010 is to double that in 2000. This entails an average annual growth rate of 8 percent between 1995 and 2000, and over 7 percent between 2000 and 2010. Given the momentum of China's historical growth rate, it is realistic to expect the GDP to continue to grow at an annual average of 7-9 percent in real terms over the next 25 years. If the population growth rates are held down, its GDP per capita would be $600-$700 by 2000; $1,100-$1,600 by 2010; and $2,100-$3,500 by 2020, according to this study's projection. In other words, in five years' time, China would be on its way to becoming a lower-middle-income country, and in 25 years' time, it would be poised to join the league of upper-middle-income countries.  - viii - To sustain these economic growth rates. the demand for wvell-educated personnel is likely to be high. 4. The increasing integration of the world economy and the global acceleration of technological change (mostly in the form of computer and labor saving technologies) would make the reliance on labor-intensive production of low-skilled products a nonviable option for future development. The Chinese government invested heavily in universities and research laboratories prior to 1980. Significant technological achievements have been made by the sector, but transformation into increased productivity has been limited. In 1991, only 6.2 percent of domestic technology trade originated in universities and colleges (World Bank, 1995g). As world trade expands, China will face increasingly competitive pressure from lower-wage economies (such as Viet Nam and Bangladesh). For China to speed up its development and to raise her living standards in the 21st century, it is imperative to master the manufacturing of medium- skilled products and to move into the production of high-technology goods and services. Incentive mechanisms, improved training for faculty, and increased mobility of researchers are required in order to transform research and development results into increased productivity. 5. According to the UNESCO Statistical Yearbook (1995), only about 2 percent of the Chinese population over the age of 25 have had postsecondary education, compared to 11 percent in Hong Kong, 14 percent in Republic of Korea, 21 percent in Japan, 14 percent in the former USSR, and 45 percent in the United States. The US National Science Foundation estimated that in 1990, only 5.6 scientists and engineers engaged in research and development per 10,000 persons in the work force in China, compared to 30 in Singapore, 38 in Taiwan (China), 37 in Republic of Korea, 75 in Japan, and 75 in the United States. Emerging evidence of growing economic returns to higher education and increased wage inequality in Hong Kong, Taiwan (China), Malaysia, Indonesia, and Chile indicates that fast-growing economies can face skill scarcity if the supply of well- educated people is unab!e to keep pace with the demand. Given China's small stock of highly educated people, skill scarcity would reduce China's attractiveness to foreign investment, particularly in the medium-to-high technology areas. limit the options for industrial upgrading, undernine the institutional capacity in all sectors, and exacerbate income inequality in a more liberalized labor market. The challenge of the future is to consolidate the gains in the past and to expand the capacity of universities to meet the development needs of society. 6. Since 1978, the Chinese Government has placed priority within the education sector upon rapid expansion and improvement of higher education to help reduce the serious human resource constraints on the country's economic and social development. In 1985, the Government adopted the document Decision on Education Reform that, inter alia, aimed at providing the mix of skills of a rapidly changing society; to improve efficiency, quality and equity; and to release resources required to develop and enhance education at lower levels. More recently, in order to speed up transformation nationwide from a planned economy to a market economy, the Guidelines of China's Educational  - Ix - Reform and Development (GOC, February 1993) records changes at two levels: chiefly, govermmental policy and institutional practice. The major strategic approach is that of decentralization in institutional management and administration while maintaining managerial oversigblt at the macro level. Devolution of power and responsibilities to institutions has brought new challenges to the higher education sector. The purpose of this report is to review China's higher education reform efforts over the last 10 years in relation to goals delineated in the 1985 document, with the objective of providing advice for continuation of reforms over the next 25 years. The Higher Education System 7. In 1994. the Chinese higher education system comprised 1,080 regular public universities and colleges which were under the jurisdiction of and obtain their funding from one of three administrative authorities: (a) State Education Commission (SEdC) in the central government, (b) central ministries, and (c) provinces and municipalities. About 11 percent of students enrolled in 36 national key universities funded by SEdC, 34 percent were in 325 ministry-funded institutions, while 57 percent of them were in 704 provincial and municipal universities. Of the total student body in these public institutions, 52 percent enrolled in degree-earning undergraduate studies, 44 percent in short-cycle, nondegree programs, and 4 percent in postgraduate studies. These institutions employed 1.04 million staff, of whom 38 percent had teaching responsibilities, 44 percent were administrative and support staff and workers, and 18 percent were employed in organizations affiliated with universities (such as factories, enterprises, and research institutes). In 1994, of the total staff, only 2.2 percent held a doctorate degree, 20 percent a master's degree, 49 percent a bachelor's degree, and 30 percent short-cycle diplomas. How to expand the capacity of these regular. public institutions, in quantitative and qualitative terms, is the focus of this study. 8. There are, in addition. 1,172 public adult education institutions of postsecondary levels, including radio and television universities, schools for workers, peasants, and cadres. pedagogical colleges, independent correspondence colleges, and correspondence or evening courses run by regular higher education institutions. These institutions enrolled 2.35 million students on a part-time basis in 1994, and employed 0.21 million full-time staff (of which 45 percent were teachers) and 0.03 million part-time teachers. About 90 percent of enrollees were in short-cycle programs, and only 10 percent in regular undergraduate studies. These adult education institutions are not the focus of this study. Nonetheless, some of the recommendations for improving cost-effectiveness, quality and equity of the higher education system take these adult institutions into consideration. 9. Furthermore. over 800 private postsecondary institutions have been in operation (enrolling about I to 5 percent students in addition to those in the regular public institutions). However, only 16 of these institutions have been accredited by the government. Since no official data have been collected systematically on them, these  private institutions are beyond the scope of this study, but the recommendations take their potential contribution into account. 10. Since 1981 eight Bank projects totaling $910.4 million have been undertaken in science and engineering, economics and finance, agriculture, medicine and education in support of the government's aim to increase the quantity and quality of high-level skilled manpower. The overall impact of the higher education projects has been enrollment expansion, improved quality of instruction, strengthened research capacity, improved management and curricular reform. Beginning with the prestigious key universities, assistance was spread to provincial normal (teacher training) universities, universities under line ministries-agriculture and forestry, public health-and short-cycle vocational universities. A significant tier that has not been included in any of the projects is a range of nonspecialized universities under provincial jurisdictions. The Bank's first sector report (1986) looked at key issues in management and financing of higher education, which became significant components in subsequent projects. Important lessons were learned from these projects with respect to faculty and curriculum development, as well as managing and developing university-based research. Challenges Confronting Institutions 11. Regular higher education institutions in China were established with the aim of meeting the skill requirements of a centrally planned economy and funded according to State planning. The fundamental challenge of current economic and educational reform is to orient institutions both to a more open labor market as well as to a more open society. The operating environment in the recent past and the next two decades might be characterized in the following way: from functioning within a command economy to a socialist market economv; from a system of job assignments to a system of greater choice in job selection; from the practice of lifelong employment in one institution to increasing mobility of the labor force responsive to changing market demand and skill requirements; from a system that derives all directives for policy and action from the center to a more managerially and financially decentralized model. characterized by increasing autonomy; from a situation that isolates the subsector to one that sees higher education as fundamentally linked with government, business, and the local community, national and international institutions: and overall, from an input and supply-driven model to an output and demand-driven one. effecting wide-ranging changes in management, faculty, students, and programs of study. 12. The key issues confronting institutions are: (a) lack of clarity regarding respective roles and powers of SEdC, central ministries, and provincial and municipal governments; (b) inadequate or inappropriate management and administrative structures and processes; (c) inefficiency in the use of scarce resources for qualitative improvement and quantitative expansion; (d) an existing system of resource allocation that is not linked to improving operational efficiency and institutional quality; (e) difficulties relating to a balance between market-oriented programs of study and basic disciplines; and (f) uneven  - xi - distribution of managerial, financial, academic, and technical capabilities and capacities among regions, provinces, institutions. 13. In the context of this operating environment and challenges, the report's recommendations are organized around four core themes crucial to reform goals: (a) the changing roie of government in relation to higher education institutions; (b) the implications of reforms for institutional management; (c) the diversification of structure and sources of financial support and its utilization; and (d) quality improvement in higher education with particular emphasis on staffing and curricular issues. Identification of core themes and subthemes of the report were guided by SEdC's verification of the issues posed by the reform goals to the system as a whole and to institutions in particular: and to their prioritization of problem areas to be examined. Recommendations 14. Education is a key element of China's strategic initiative to reach international competitive standards in economic and social terms by the 21st century. In order to achieve this goal, this report recommends that the following overarching principles be observed and reinforced in the implementation of reforms: (a) the role of the State be clearly that of policy and standard-setting, monitoring and regulating; (b) the State provides an "enabling environment" in which institutions can have more financial and managerial autonomy; and (c) the State provides leadership for increasing institutional capability to handle such autonomy by creating a national body to provide advice to individual universities and provinces or municipalities. 15. This report finds an uneven picture of the impact of reforms on the higher education scene. Except for those institutions that are well-funded by the government. have a well- developed tradition of scholarship and research, and are located in or close to areas of socioeconomic change, the majority of higher education institutions do not have the managerial, financial, academic and technical expertise to contribute to economic stabilization and long-term growth nor to the development of an open and civic society. These disparities may in themselves become the seeds of destabilization. To meet the developmental needs of the higher education system and to address the ubiquitous issue of disparities within the system, this report recommends that: (a) the role of the State be defined unambiguously vis-a-vis universities within the framework of the new Higher Education Law, which should provide definitions of the respective roles, responsibilities and powers of the national, provincial and municipal authorities and the universities themselves;  - xii - (b) effective funding and policy-making bodies be established with defined functions within post-reformn structures; the principle of autonomy to be strengthened in the devolution of new managerial, administrative and academic responsibilities and powers to institutions; (c) universities be empowered through training and exposure, nationally and intemationally, to prepare and implement their own strategies for development and to strengthen their managerial capacity. A National Higher Education Management Center should be established to assist individual institutions, provinces and municipalities; (d) a sound information base be established by designating an agency to be responsible for collection, processing and publishing data that emphasize indicators of performance and achievement: (e) nongovernmental or private institutions be encouraged and accreditation procedures and support facilities be expedited to maintain national standards; (f) critical assistance be provided to provincial institutions in poor areas that are resource-starved and have little access to professional and technological support; (g) funding methodologies for both recurrent and capital funding be reviewed so as to reward efficiency and encourage expansion at below cost; (h) policies and programs be developed that encourage universities to generate further income from the provision of short-term training, professionally managed enterprises and donations or endowments from all sources; (i) policies of cost sharing through tuition fees be continued and student loan schemes (initiated by financial capital from government sources) along with other financial assistance programs be put in place to protect poor, minority and female students; (j) funding policies for research and training be refined in order to rectify the balance among institutions, among discipline areas while observing gender and ethnic priorities; (k) financial and nonfinancial incentives be established and clearly spelled out in order to move institutional practices such as better research and publication outputs toward qualitative goals; (1) accreditation procedures and structures be extended and accelerated, accompanied by training using both local and international expertise, spearheaded at provincial level by the establishment of "quality centers"  - xiii - whose sole task would be to institutionalize accreditation procedures, working with national and provincial bodies; and (m) "centers of excellence" be established serving provinces or regions, building on institutional excellence in specified cognate areas. Their function would be to provide and coordinate degree-level and nondegree training for ongoing professional development of faculty; and stimulating and coordinating research and publication activities. 16. The report suggests five approaches that may assist the government in its gradualist and selective path of reform in the subsector. First, there should be wide participation in the planning of change to win support and to provide legitimacy. Second, the outcomes of participatory planning should become visible as concrete, realizable targets for action. The development of appropriate monitoring indicators should be included in the exercise. Third, the government needs to orchestrate efficient information flows without which planning becomes a futile exercise. Fourth, while national standards are set by the center, specific provincial and institutional targets will vary according to capacity and capability. National standard setting does not imply uniformity. Finally, reform targets should be based on carefully focused reward and incentive mechanisms that will induce institutions to move toward local and national goals. Relationships Between Universities and the State 17. Context. Since the early l 980s the government has been gradually moving away from a centralist model in which it controlled the detailed operations of higher education institutions. This was originally applied by central control of five key functions: provision of core funding, setting student enrollments for each institution, approving senior staff appointments, authorizing all new academic programs and managing the student assignment process. As the numbers of institutions and students grew, it became increasingly difficult for State bodies to exercise this control in a way that was compatible with the needs of the rapidly growing socialist market economy. As a result, the government began consultations on the legal framework that will designate universities as independent legal entities and establish the mechanism on which the university's managerial autonomy will rest. The legal framework will allow universities to set their own strategic goals, define their own academic focuses ("specialities") in order to respond to local and provincial needs, and control their resources. 18. Although the State will still continue to provide core funding, it recognizes that it can no longer provide all the funds itself. As a result, it has set up the China Education and Scientific Trust Investment Corporation, which acts as a commercial banker specializing in the education sector. It provides short-term loans to institutions, secured on their assets, for their buildings and equipment. It has been unclear, however, whether poorer institutions will have the necessary collateral to access such financing. Some initial steps have been taken to encourage the development of nongovernment institutions of higher education (or "minban"). The minban universities are using staff from nearby  - xiv - State-financed universities, and although it is clear that, in the early stages, there are significant economies of scale and relatively few risks of poor-quality teaching, the advantages could disappear as the nongovemment sector grows, requiring quality-control procedures to be set up by government. National accreditation activities which could expedite these procedures are moving slowly. 19. Issues. This gradualist approach to introducing change is pragmatic and careful, but involves a judgment by a central authority as to whether a level of management is thought "ready" to acquire new responsibilities. As a result, there is sometimes resentment by some universities at the slowness with which freedoms are given or power delegated. Another predictable consequence of the pragmatic, selective introduction of new freedoms is that the system is very varied; different decisions about provinces by SEdC and about universities' capabilities by provinces are resulting in a sometimes confused, uneven picture. 20. A direct consequence of the change in the national funding flows appears to be an increase in the influence of the provincial governments in higher education compared to SEdC. It is still a fluid situation that also varies according to the wealth of the province and the importance it places on higher education. Moreover, economic pressures are threatening to distort the balance of courses offered. Universities are finding that it is increasingly hard to maintain some core academic disciplines when students do not enroll. The number applying for the basic sciences and humanities subjects are far below what is healthy for comprehensive universities. 21. China is in the middle of moving from a "state-control model" to a "state- supervising model" (in current terms "macrocontrol" to "macromanagement") as regards the relationship between universities and government. There are difficult questions to answer about the respective roles and powers of SEdC, central ministries and provincial/ municipal governments. What split of powers and control will still allow the State to fulfill its "macromanagement" function and yet also unleash the latent energy and enthusiasm within institutions? 22. Recommendations. A program of action has been suggested as a possible response to the above issues. In order to achieve the program's objectives, the capacity of the center needs to be greatly enhanced. The operative principles underlying the proposed program are: (a) that the role of the State should be to monitor and regulate, rather than exercise detailed control; (b) that the State should provide an "enabling environment" in which universities can plan their own destiny within State-set policy frameworks or efficiency targets; and (c) that universities should be encouraged to develop individual strategic plans showing how they aim to serve their specific province or community. Impact of Changes on University Management 23. Context. Universities are presently operating in a policy environment that implies that the management role of university presidents should be strengthened.  - xv - However, there is continuing evidence that presidents are still subject to the direction of the Party Secretary although the president does appear to maintain academic autonomy. Moreover, many universities have established Boards of Trustees in order to develop links with society and local enterprises. The roles of these Boards vary tremendously. Some Boards provide contacts with a wide range of commercial enterprises and their funds, some stress involvement of provincial or municipal government officials in university activities while others are actively involved in the actual internal management of the institutions. University organizations' structures are changing but most of these new structures seem to be very flat with a relatively large number of people reporting directly to the president. 24. Issues. As Boards of Trustees and Councils become a more integral part of the university, there will be a need to define precisely the respective roles of SEdC, the Council/Board of Trustees and the President. Many presidents are also experiencing a conflict between their roles as manager/fund-raiser and academic leader. The senior academic staff have not been trained to take on management tasks and they have had difficulty reconciling the two disparate functions. 25. The management of university enterprises is assuming growing importance as financial pressures increase and enterprises are seen as one of the principal sources of additional finance. This raises two management issues: (a) whether they can continue to serve dual academic and financial objectives given that there is a basic conflict between using a company as a research test bed and teaching forum and using it to generate profits; and (b) whether it is right that teachers who are appointed on essentially academic criteria should be expected to manage industrial holding companies in an increasingly competitive environment. 26. One main task of presidents is to improve efficiency within their universities. However, presidents feel constrained in their freedom to make major changes in the staff structure of their universities. They do not have the power to dismiss unproductive or ineffectual teachers and, as long as society expects them to provide a total package of care for their employees, regardless of the level of contribution to the university, the universities will not become fully efficient. 27. Presidents are also unable to obtain adequate information support. The present management information systems (MIS) are unable to meet the needs and demands for appropriate information. Therefore, there is a massive task of training ahead in all aspects of designing and implementing integrated management information systems. 28. Recommendations: Government Actions. A professionally enhanced center can assist in strengthening the internal management of institutions by the following government actions: (a) including guidance about the role and composition of the university Governing Body or Council in its legal framework; (b) clarifying the position of universities with regard to their tax free status; (c) modifying its encouragement of the expansion of university enterprises so as to make clear the various options for managing  - xvi - or holding investments in them; (d) encouraging them to prepare strategic plans which are linked to the annual funding process: and (e) encouraging universities to collaborate in the costs of developing computerized management systems. 29. Recommendations: Universities. On their part universities need to: (a) develop strategic plans of action that assess their strategic options in the context of their history, academic strengths and potential local and regional markets; (b) develop plans for improving management efficiency as an important element of strategic plans; (c) request university councils to review current practices of managing enterprises; and (d) formulate a strategy for computerizing the university's basic administrative systems. Financing Higher Education: Diversification of Resources 30. Public Finance. Since China embarked on economic reform in 1978, the Gross Domestic Product (GDP) grew by an impressive 9.8 percent per year in real terms, from Y 1,006 billion to Y 4,501 billion in 1994 (in constant 1994 prices). However, the growth of government revenue fell far behind that of GDP, increasing at an annual average of only 2.6 percent over the period. This resulted from decentralization and from permitting production units to retain much of their earnings without simultaneously putting in place a national tax administration until 1994. The revenue-to-GDP ratio declined from 34 percent in 1978 to 13 percent in 1994. Government expenditure, however, increased at 3.3 percent per year, higher than revenue, resulting in budget deficit in all but one year. Between 1987 and 1993, the public sector deficit hovered around 11-12 percent of GDP and was a key factor underlying inflationary pressures in the economy. In 1994, the public sector deficit declined to 9.9 percent. 31. Public expenditure on education increased from Y 21 to 98 billion (in constant 1994 prices), by an annual average of 10 percent between 1978 and 1994, far exceeding the respective growth rates of the total government revenue and expenditure. As the overall public spending shrank over the years. public expenditure on education as a percentage of total government expenditure rose from 6.2 percent in 1978 to 17 percent in 1994. Public expenditure on education as a percentage of GDP rose from 2.1 percent in 1978 to the height of 3.1 percent in 1989, and then fell back to 2.2 percent in 1994. This level of public spending on education is low in comparison with least-developed countries' average of 2.8 percent, developing countries' average of 4.1 percent, and developed countries' average of 5.3 percent. 32. Total public allocation to higher education grew from Y 4.2 to 18.6 billion (in constant 1994 prices), by an annual average of 9.7 percent between 1978 and 1994. Public spending on higher education increased from 20 percent of total public expenditure on education in 1978 to the peak of 29 percent in 1984, then declined to around 17 percent between 1989 and 1992, and climbed back to 19 percent in 1994. Since under 2 percent of the age cohort were enrolled in higher education in much of the 1980s, the high share of public spending devoted to them reflected the effort to rebuild the higher education system.  - xvii - 33. At the same time, given the very low enrollment ratio in China, public spending on higher education was high by international comparison. For example, Indonesia, Malaysia, Thailand, Taiwan (China), Republic of Korea, and Japan. which had a much higher enrollment ratio in higher education, spent only 11 to 17 percent of their respective total public education expenditure on higher education. and mobilized the rest of the resources from private resources; the rest of their public expenditure was spent on lower levels of education. In 1980, China spent 27 percent of its public education expenditure on the primary level, 34 percent on the secondary level, 0.5 percent on preprimary education, and 18 percent on others. By 1993, the share of primary education went up to 34 percent and that of secondary education to 38 percent, while preprimary and other types of education claimed 1.3 and 9 percent, respectively. Since the lower levels of education are where the poor have access to, whereas middle- and upper-class students tend to be overrepresented in universities, allocating more public resources to lower levels of education is more equitable. In China, in 1990. public spending per-student in higher education was 193 percent of GDP per capita, that in secondary education was 15 percent, and that in primary education was 5 percent. In 1994. this was 175 percent. While improvement has been made, this percentage is still considerably higher than the 1990 average of 98 percent in East Asian countries. The relatively low per-student spending at the tertiary level in East Asia was made possible by the relatively large enrollment in higher education and efficient use of resources, resulting in reduced unit cost. 34. The public allocation per student in real terms peaked in 1984, and then went on a decline with year-on-year fluctuation. The increasing share of university-generated income and student fees made up for the shortfall. In 1994, the total allocation per student amounted to Y 8,168 of which Y 6,645 were public allocation and Y 1,515 were allocated from university-generated resources. In other words, in spite of rapid enrollment expansion, the total public and institutional allocation per student maintained the average unit allocation at a relatively stable level for higher education. 35. Issues. The central government has delegated financial responsibilities to provincial governments for higher education and line ministries in financing higher education. However, the financial capacity varies from province to province. Regional disparities in funding of higher education have serious implications for the ability of poorer provinces to attract and retain capable faculty members and to provide quality education. Even within a province, disparity is evident in the resources available for provincial universities and national universities. 36. In conjunction with financial decentralization, the nonfungible line-item budget was replaced with a block grant allocation from the State to the university. In addition, the incremental approach to allocating recurrent funds was replaced with a formula approach, with the major allocation parameter being the number of full-time equivalent students enrolled. Although this has improved the transparency in resource allocation, it does not provide incentives to improve efficiency or quality. This is due in large part to the fact that the national norms for allocating public funds are extremely generous.  - xviii - 37. The reforms have also given higher education institutions more autonomy to generate their own revenues. In 1992, public allocation accounted for 82 percent of total revenue in public higher education institutions, income generated by universities themselves for the rest. The main independent sources of income (1992 figures) are from: (a) university enterprises that provide approximately 3.7 percent of higher education revenue. However, not all institutions have the relevant management expertise and not all investments produce positive returns; (b) commissioned training for enterprises that constitutes the second largest (2.3 percent) independent share of revenue. Commissioned training has potential to generate further income; but the potential for rural universities may be limited; (c) income from other educational services was 1.1 percent; (d) research and consultancy that accounts for approximately 1.3 percent. This also has limited potential for provincial colleges and teacher colleges, where the research budget is very small and research and consultancy is limited; (e) income from logistic services (dining halls, etc.) was 0.7 percent; (f) income from other funded activities was 3.7 percent; (g) donations that contribute 0.8 percent of income. Once again, small provincial universities in the interior are rarely the recipients of donations, which heightens the disparity between national universities and the others; and (h) student tuition fees contribute 4.6 percent. The total amounts to 18.2 percent of universities' funding for 1992. 38. The former student stipends system, which distributed funds equally to all students, was changed into a new system of merit scholarship and loans for needy students in 1988. Currently, these scholarships cover between 50 and 80 percent of students. The sums awarded are very small, ranging from Y 60 to 300 per year, which was equivalent to 1.2 to 6.1 percent of state allocation per student in 1992, and was hardly adequate support. 39. The report's analysis of the reforms for diversifying sources of funding and changing patterns of expenditure has found that part of the financial difficulties experienced by institutions stems from disparities in their natural endowment and location, part is due to the funding mechanism that does not provide incentives for efficiency improvement. and part stems from the welfare burden that the socialist system requires institutions to bear. Since most provincial universities are much more disadvantaged than national universities (and yet enroll over 50 percent of students), their financial plight has serious implications for the higher education system as a whole. Changing the funding mechanisms will improve efficiency and reduce some disparity in natural endowment, but systemic change is required to reduce the welfare burden. 40. Recommendations. To enable higher education institutions to expand enrollment under conditions of public resource constraints, three policies need to be pursued simultaneously. First, the operating efficiency of the system needs to be improved by: (a) containing staff growth; (b) encouraging the growth of existing public institutions in size through expansion or merger, and the expansion of private universities; (c) devising funding mechanisms that encourage efficiency and reward cost-effective provision; (d) reviewing the norms and space formulae for allocating capital funding; (e) allowing for  - xix - flexible duration of study as long as course requirements are fulfilled: and (f) making better use of educational technology to reduce cost and assure minimum quality. Second, institutions can enhance their capacity for resource generation by: (a) conducting short-term training for industries, governrmental agencies, and communities using new technology in management/administration, (b) increasing income from research, particularly research- and development-related, and consulting activities; (c) ensuring that university enterprises are managed professionally; and (d) effectively mobilizing donations from enterprises. Chinese citizens and overseas Chinese. Third. cost-recovery policies should be continued and monitored, complemented by strong provision of a financial assistance system. Quality Improvement in Instructional Programs 41. Context. Striking changes have taken place during the 1980s in China's higher education curriculum with adjustments in enrollment that reflect both personal needs and rising social demand. relaxation of central control over content, movement toward more broad-based structures of knowledge and experimentation with course organization and delivery methods. Moreover, university based research has been recognized as a necessary foundation for curriculum development in new fields, good graduate study and teacher preparation in all subject areas. These changes have put considerable demands on the faculty in Chinese universities. The demands are different by field, region and level of institution. However, the most important differences exist between faculty based on their geographical location, in the center of economic growth or at the periphery, and at the national, provincial or local level of institution. 42. There have been solid achievements in faculty development since 1980. During the 1980s the promotion processes changed from being based on age and seniority to evaluation of teaching quality and research. Significant investment has been made in training, both domestic and overseas. China recognizes the long-term benefits contributed by overseas research and study experience to updating and revitalizing the higher education curriculum; and to research and publication advances in many specialist areas. Current policies to improve the quality of teachers are aimed at raising the formal qualifications of faculty under 40 to graduate level and new promotion requirements are based on these qualifications. Considerable efforts have also been made to attract and retain young teachers within the system. 43. China also began a step toward quality assurance in 1985. Common to all quality assurance practices are: (a) the development of standards; (b) the application of those standards to a program or institution by third parties for the purposes of assessment and enhancement; and (c) the subsequent improvement of the education entity. However, accrediting activities in Chinese higher education are still very modest. 44. Issues. In the curricular change process over the decade, universities and their faculty have had increasing freedom to shape their own programs. As institutions take on greater managerial, professional and academic responsibilities, they are called upon to  - xx - make decisions for which they have little training and experience. An appropriate balance needs to be found between (a) consideration of maintaining academic standards and the constant upgrading of the knowledge content; (b) concerns about the macroregulation of emphasis on various fields in relation to national needs for personnel; and (c) concerns about providing a foundation of knowledge and nurturing a professional attitude, which fosters abilities for an ongoing self-development process that goes beyond immediate market demands. 45. Despite the fact that absolute levels of research have increased, more appropriate balance is required (a) between institutes; (b) between discipline areas; (c) between basic and applied research, and for such research findings to feed into curriculum, faculty development, and industrial innovations. Increasing higher education and national research and development investments has become an important element in economic growth strategies. Recent studies indicate that the social rate of return from investments in new industrial technology in developed countries seems to be high. Technological change in many industries and increased output of society have been based on recent academic research. 46. The key to curricular change is the people who make it happen-the teachers. While changes have taken place in the character and definition of instructional programs, making them more flexible, broad-based and overtly market-oriented in terms of content/ knowledge, there has been less change in teaching methods and fundamental pedagogical approaches, which opens up questions of effective change. There is great variation across provinces and institutions within provinces according to available human, financial and material resources. Priority policies for institutions, particularly those in the interior provinces, would include the creation and implementation of favorable working conditions; insisting on high academic qualifications; investing in inservice graduate study; and implementation of national policies on better living conditions. 47. Recommendations. While priorities among the recommendations would depend on each institution's unique needs and will be expressed in its strategic plan, the recommendations in this section focus on four key aspects in the quality improvement strategy: curriculum, teaching and research, quality assurance, and educational inputs and facilities. In order to maintain systemic and institutional quality in government and nongovernment institutions, a nationwide system of accreditation should be supported, building on achievements made in this area and strengthening existing training providers. It will entail the setting up of a National Steering Committee and Secretariat; identification, training and organization of accreditation bodies; and establishment of staff development and support mechanisms in the form of "quality assurance centers" and "centers of excellence."  - 1 - 1. THE REFORM AGENDA A. INTRODUCTION 1.1 Since 1978, the Chinese Government has placed priority within the education sector upon rapid expansion and improvement of higher education to help reduce the serious human resource constraints on the country's economic and social development. In 1985, the Government adopted the document Decision on Education Reform that, inter alia, aimed at providing the mix of skills of a rapidly changing society; to improve efficiency, quality and equity; and to release resources required to develop and enhance education at lower levels. 1.2 In order to speed up transformation nationwide from a planned economy to a market economy, the State Council and the Communist Party jointly issued the Guidelines for Development and the Reform of China's Education System in February 1993 to outline the strategy for further reform of the Chinese higher education system. The document identified higher education as being linked to China's competitive position in the world: "Whoever receives education that is oriented toward the 21st century will gain the strategic initiative in international competition during the 21st century." The document called for reforms to (a) provide the required specialists for China's modernization and establishment of a socialist market economy; (b) improve the social status, work and living conditions of teachers; and (c) build up 100 key universities and establish several key courses of study. To attain these goals, among the reform measures introduced are decentralization with educational institutions gaining more autonomy; restructuring the system of college enrollment and job placement for graduates. diversifying channels of funding; and improving the quality of the subsector. 1.3 Within this context of reform, and the sectoral priorities of efficiency and quality, this report examines implementation of reform goals in terms of four core themes: (a) changing role of government in relation to higher education institutions; (b) implications of reforms for institutional management; (c) diversification of structure and sources of financial support and its utilization; and (d) quality improvement in higher education with particular emphasis on staffing and curricular issues. Identification of core themes and subthemes of the report were guided by the State Education Commission's (SEdC's) identification of the challenges posed by the reform goals to the system as a whole, and to institutions in particular, and by the Commission's prioritization of problem areas to be examined. This chapter reviews the implementation of reforms to date, and assesses progress by examining a number of system indicators.  -2 - B. HIGHER EDUCATION AND ECONOMIC REFORM 1.4 Background. China's present higher education system was put in place in the early 1950s with the goal of training high-level personnel according to perceived manpower needs of the central plan. Between 1949 and 1959, highe~r education expanded sixfold in order to meet the skill requirements for industrialization. modernized agriculture, and political mobilization. In 1969, during the Cultural Revolution (1966-76), enrollment was reduced to below the 1949 level, examinations were abolished, and admission and graduation were based on political criteria. In short. teaching and research came to a halt. After the fall of the radicals in 1976, economic reform was initiated in 1978. The thrust of the reform devolved decision-making authority to lower levels of government, replaced the collective system with individual responsibility in agriculture, allowed the provinces and state-owned enterprises to retain much of their earnings for their own development, recognized the role of private enterprises in economic development, opened China to foreign investment, and encouraged foreign trade. These policies resulted in rapid growth of the Gross Domestic Product (GDP) at an annual average of 9.8 percent between 1978 and 1994 in real terms, making the Chinese economy one of the fastest growing in the world. 1.5 Higher education was rebuilt as a key element to modernize the country. The national university entrance examination was reinstituted in 1979 to establish a merit- based system, and enrollment was expanded. Faculty members were supported to upgrade their skills and academic qualifications through domestic or overseas training. In 1991, 17 out of 36 presidents of national key universities had overseas study experience (Cao, 1996). Overseas training in general increased from 860 students going abroad in 1978 to 19,000 in 1994 (China Statistics Bureau, 1995), with the difference in that after 1985 overseas study was for short-term stints. But the long-term benefits continue as evidenced by the contribution of academic links and exchanges to curriculum revitalization. research, and publication. These reforms gradually rehabilitated the higher education system. The turbulent history of Chinese higher education development is reflected in the enrollment trends shown in Figure 1 .1 at the end of this chapter. Annex I provides brief historical information on the subsector. 1.6 The First Wave of Higher Education Reform. In order to speed up the transformation from a planned economy to a socialist market economy, the Government adopted the document Decision on Education Reform (GOC, 1985), which aimed at reforming the higher education system in order to provide the mix of skills to meet the developmental needs of the changing society. The reform emphasized the implementation of a three-level management system at the central, provincial, and major municipal levels. It gave universities new powers, particularly with regard to the content and methods of teaching, as well as freedom to admit students outside the state plan if they are financed by enterprises or by themselves, and to develop new programs, including postgraduate ones, and even new local institutions at the short-cycle level and in adult education.  1.7 Another major change was focus on quality and the integration of teaching with research. Prior to 1985, the main function of the higher education was teaching, with a separate system for research established under the Chinese Academy of Sciences and various national line ministries (see Annex 4 for a brief account of research and development in science and technology in China). A large number of research institutes developed, with research topics and funding assigned by the state plan, which had very little connection with the higher education system, except for the fact that research staff were drawn from its graduates. A few institutes undertook programs in graduate education. In the 1985 reform, universities were given new functions as centers of teaching and research. With quality improvement as a goal of teaching, one of the most important changes in higher education over the last decade has been the development of a research function, which made it possible for universities to conduct basic and applied research. The intention was to revitalize both curricular content and teaching, taking advantage of the impact of research results. 1.8 The Higher Education System. Between 1978 and 1994, higher education provision in China grew from 598 to 1,080 regular public universities and colleges.' These regular institutions are the focus of this study. Enrollment in undergraduate studies and short-cycle courses in these regular institutions increased from 0.86 to 2.8 million, and that in postgraduate studies moved from zero to 0.13 million. Over this period, staff also increased from 0.5 to 1.04 million persons. These public institutions obtain their principal funding from three sources: (a) SEdC; (b) central ministries; and (c) provinces and municipalities. About 11 percent of students were enrolled in 36 national key universities funded by SEdC, 34 percent were in 325 ministry-funded institutions, while 57 percent of them were in 704 provincial and municipal universities (Table 1.1). Of the total, state-sponsored students constituted 71 percent, enterprise-financed students, 17 percent, and self-financed students, 11 percent. The policy of charging tuition fees was adopted after 1989, and has resulted in each student having to pay for his own education, although the fee level of the state-sponsored students was much lower than those of the other two categories. In 1994, the fee levels for students financed by the state, enterprises or themselves were unified, and fees were raised across the board. (See Chapter 4 for discussion on cost-recovery.) 1.9 In addition, there exists an adult postsecondary education system which comprised 1,172 public institutions in 1994, including radio and television universities, schools for workers, peasants, and cadres, pedagogical colleges, independent correspondence colleges, and evening or correspondence courses run by regular higher education institutions. These institutions enrolled 2.35 million students on a part-time basis in 1994, and employed 0.21 million full-time staff (of whom 45 percent were The figures of institutions, staff, and enrollment in regular higher education institutions and adult tertiary education institutions are drawn from China Statistical Yearbook 1995, and Educational Statistics Yearbook of China 1994, pp. 18-21, 24. The sources and page numbers of most of the figures cited in the text are reported in the tables and annexes. Most of the percentages are calculated by mission members, and are rounded to facilitate readability.  teachers) with an additional 0.03 million part-time teachers (Annexes 7A and 7B). The adult higher education institutions admit enterprise-sponsored students as well as self- financed students. These adult education institutions are not the focus of this study, but some of the recommendations take them into consideration. TABLE 1.1: ENROLLMENT IN REGULAR HIGHER EDUCATION INSTITUTIONS, 1994 Total Insti- Undergraduate Short-cvcle Total undergraduate Total tutions enrollment enrollment enrollmcnt enrollment enrollment (000 persons) (i00 persons) (f000 persons) (%) (%) Under the Jurisdiction of: SEdC 36 223 47 269 15 11 Ccntral ministries 331 629 328 956 41 34 Provincial or municipal authorities 713 666 907 1.573 44 57 Total 1.080 1.518 1,282 2,799 100 100 Enrollment Arrangement: Enrolled according to State Plan 1.370 623 1.993 90 71 Enrolled by contract with enterprises 71 412 482 5 17 Self-financed students 74 245 319 5 11 Inservice teacher training courses I 2 i 0 0 Total 1,517 1,282 2,799 100 100 Source: SEdC, Educational Statistics Yearbook of China, 1994, pp. 20-2 1. 1.10 Nongovernment or private institutions have proliferated, with more than 800 institutions approved by various levels of government (representing I to 5 percent of additional enrollment according to SEdC), of which only 16 have been approved by SEdC to issue diplomas or certificates recognized by the government. Because official information is not available on these institutions, they are beyond the scope of this study but the recommendations do take private providers into account. 1.11 Deepening of the Reform. The Guidelines for Clina s Educational Rejorm and Development (GOC. 1993) records changes at two levels, chiefly (a) government policy; and (b) institutional practice. The major strategic approach is that of decentralization in institutional management and administration while maintaining managerial and supervisory oversight at the macro level. Continuing the theme of decentralization, efforts to devolve more responsibility for financial provision marks a sea-change in the higher education system: this is evidenced by current efforts to diversify the funding basis of institutions in expectation of declining shares in government allocations. The goal was to recover 20 percent of the cost through charging tuition fees by 1997. 1.12 A policy that is at the heart of the relationship between economic reform goals and higher education is the two-way job selection policy. In 1956, a unified national job assignment system was established, which was managed jointly by the State Planning Commission, the sectoral or line ministries, and the then ministry of higher education, to ensure that each graduate was trained to fill a position as a state cadre. The high degree of predictability in personnel planning was linked to an economic situation where the priorities were to build an economy based on heavy industry. Students enrolled free of charge and were provided with stipends; after graduation, they were obliged to accept job  - 5 - assignments from the state in whatever the position and wherever the location. Since 1978, the move from such a planned system to a market system that needs to function within a competitive, global economic environment signaled that a supply-driven approach had to give way to more demand-driven practices. With the success of economic reforms, there are pressing needs for professional personnel with skill profiles different from those the system was designed to serve. The emphasis has moved from traditional industries and governmental services to new industries serving a rapidly growing internal consumer market reaching out to international markets, paralleled by a burgeoning service sector. With the introduction of the two-way selection system, employment decisions are reached through consultation among employers/hiring units, students, and universities, implying an element of choice and competition. Nonetheless, the labor market has not been fully liberalized. When state-sponsored students cannot find employment after graduation, the state still has the responsibility to provide jobs, mostly in the government service or in state-owned enterprises. 1.13 Having come such a long way, where does Chinese higher education stand now? Has the higher education expanded too fast or not fast enough? How is quality identified and maintained? Have scarce resources been used efficiently? How do women and students of workers and peasants fare under the new system? Are development efforts regionally balanced? To answer these questions, measures of progress are required, working with commonly-used indicators of quantity, quality, efficiency, and equity, and comparing with benchmarks achieved in other countries in order to identify the areas that require improvement. Available data from Asia Pacific Economic Cooperation (APEC) countries (which include East and Southeast Asian countries, Australia, New Zealand, the United States, Canada. Mexico and Chile), as well as major Western European countries and a few large countries (such as India, Russia, and Brazil) are included for comparison purposes. The sources of these data are cited in the tables and the annexes. C. SYSTEM INDICATORS 1.14 Over- or Undersupply? This is a key policy question in countries all over the world. In China. the speed of enrollment expansion has led to concern about its impact on quality and financing. This concern has given rise to suggestions by policymakers to limit the number of degrees granted, irrespective of enrollment. However, an examination of a number of indicators found that the stock of well-educated persons is still very low in China, and supply may not have met demand yet. 1.15 While China has achieved substantial growth in higher education enrollment, the proportion of the 1 8-to-22 age cohort in regular, public higher education institutions was only 2.4 percent in 1994, barely above that in 1960. Even when enrollment in adult education institutions is taken into account, which add another 2 percent, this gross ratio is still low, not only in comparison with other fast-growing East Asian countries [for example, 10 percent in Indonesia, 19 percent in Thailand, 20 percent in Hong Kong, 39 percent in Taiwan (China), and 51 percent in Republic of Korea], but also with India,  - 6 - which had a per capita GNP of $300 in 1993, lower than China's $490, and yet enrollment rate of 8 percent in higher education (Table 1.2).  - 7 - TABLE 1.2: GROSs ENROLLMENT RATIOS IN AND PUBLIC EXPENDITURE ON HIGHER EDUCATION IN SELECTED COUNTRIES GNP per capita Annuai Gross Public spending Total public growth enrollment ratio on on higher education spending on 1993 1980-93 highereducation (%ofall levels) education as Countrv dollars (%) 1980 1993 1980 1993 %ofGNP, 1992 China Regular System 490 8.2 1 2 25 19 2.1 Adult System - - - 2 - - - Asia India 300 3.0 4 8+ 13 14I 3.7 Indonesia 740 4.2 4 10+++ 22 15 2.2 Philippines 850 -0.6 28 26 22 15+ 2.3 Thaiiand 2,110 6.4 13 19-++ 13 16++ 4.0 Malaysia 3,140 3.5 4 7+ 12 15 5.5 Republic of Korea 7,660 8.2 16 511 9 7--- 4.2 Taiwan (China) 10,215 7.8 18 39- - 17+ 5.5 Hong Kong 18.060 5.4 5 20-+ 25 30++ 2.9 Singapore 19.850 6.1 8 19+ 17 31+ 4.4 Japan 31.490 3.4 29 32 11 23 4.7 Oceania New Zealand 12.600 0.7 27 58 28 371 + - Australia 17,500 1.6 25 42 23 29 4.5 Latin America Brazil 2.930 0.3 12 12 19 26 4.6 Chile 3,170 3.6 13 27 24 21 2.8 Mexico 3.610 -0.5 14 14 12 14 6.0 Argentina 7.200 -0.5 22 41 23 18 4.7 North America Canada 19.970 1.4 41 71+ 27 29- 7.6 United States 24.740 1.7 56 72+ 39 24+ 5.7 Western Europe Britain 18,060 2.3 19 37 22 21 4.1 France 22.490 1.6 35 40 13 14 5.1 Germany 23.560 2.1 26 36 15 24+ 3.7 Former USSR 2.340 -1.0 22 45 14 12+ 8.2 kev:+ = Data of 1990: ++ = Data ot 1991:+++ = Data ot 1992: + = Data of 1994. Notes: (I) Gross enrollment ratio is calculated by dividing the number of pupils enrolled in all postsecondary institutions by the population in the university-going age roup. Countries differ in the age group they adopt: the cohort aged 20-24 is commonly used, but OIECD indicators use several age cohorts such as 18-21. 22-25. and 26-29. Ihe very high enrollment ratios in Canada and the United States are attributable to a large number of learners over age 24 enrolling in higher education: in fact, the net enrollment ratio of the 18-21 age group in 1992 was 27 percent of Canada and 42 percent for the United States. See OECD, Education At a Glance. p. 153-155. 23 The percentages are rounded. 3 Germany refers to West Germany before 1990. Sources: World Bank, IYorld Development Report 1995, Washington, D.C.. pp. 162-3 and 216-7 for GNP and GNP growth rates; UNESCO, Statistical Yearbook 1995. pp. 3.35-3.75 for enrollment data and pp. 4.4-4.18, 4.49- 4.50 for public expenditure data in most countries, and UNESCO, IYorld Education Report 1993, pp. 144- 145 and pp. 156-157 for supplementary information; United States National Science Foundation, Human Resources for Science and Technology: The Asian Region, NSF93-303, 1993, Washington, D.C., p. 62 for enrollment ratios in Singapore; OECD, Education At a Glance: OECD Indicators, Paris, 1995, pp. 73, 98 & 153 for public expenditure data: World Bank, University Research for Graduate Education Project, Staff Appraisal Report 12841-IND, 1994, p. 2 for Indonesian spending on higher education; Taiwan Statistical Data Book 1993. Taipei, p. I for economic information on Taiwan (China); and Education Statistics of the Republic of China. 1993, p. 33 for enrollment ratio, and p. 40 for public expenditure on higher education in Taiwan (China), Chung & Wong (Eds.) The Economics and Financing of Hong Kong Education. 1992, p. 259 for estimates of public spending on education as percent of GDP in Hong Kong in 1991.  - 8 - 1.16 The Chinese education system is extremely selective, which is reflected by the sharply reduced entrant rates at higher levels of education. In 1993/94, while net enrollment of the school-age population in primary schools reached 98 percent, 86 percent of primary school graduates entered junior middle schools, 46 percent of junior middle school graduates made it to senior middle schools (including regular senior secondary, specialized secondary, and vocational secondary schools), and only 4.5 percent of senior middle school graduates were admitted to regular higher education institutions (see Table 1.3 for sources). By contrast, in Taiwan (China) and Republic of Korea, 88 and 94 percent of graduates from junior secondary schools enrolled in various types of senior secondary schools, and 60 and 57 percent of graduates from senior secondary schools were admitted to higher education, respectively (Table 1.3). TABLE 1.3: PERCENTAGE OF GRADUATES ENROLLED IN THE NEXT LEVEL OF EDUCATION China Taiwan (China) Republic of Korea 1993/94 1991/92 1990/91 % of School-age Children in Primary 98.4 99.6 99.9 Schools % of Primary School Graduates Entering 86.6 99.5 99.5 Junior Middle Schools % of Junior Middle Graduates Entering 46.4 88.3 94.0 Senior Middle Schools % of Senior Middle School Graduates 4.5 60.0 57.0 Entering Regular Higher Education Sources: China Statistical Yearbook 1995, Tables 18-6 and 18-7, p. 588, Table 18-21 on p. 595, and Table 18-25, p. 598; Education Statistics oJ the Republic of China. 1993. pp. 28 and 29; Educational Indicators in Korea, 1991, p. 51. 1.17 Repetition and dropout rates throughout the grades are unavailable in China. If dropout rates in the pre-university levels are assumed to be zero, based on the above- mentioned entrant rates, only 1.8 percent of a given cohort eventually would make it to universities. The only advantage of such a selective system is that after many rounds of screening at lower levels, dropouts from regular universities are rare. In 1994, for example, out of 2.8 million enrollees, only 5,635 students quitted their programs, 4,249 were suspended, and 594 were expelled (Educational Statistical Yearbook 1994, p. 29).  - 9 - 1.18 In China, only 2 percent of the population aged 25 and over have had postsecondary education (See Table 1.4 for sources). This compares poorly with the higher education attainment of the population in Hong Kong (11 percent), Republic of Korea (14 percent), Japan (21 percent), and the United States (45 percent) (Table 1.4). The US National Science Foundation estimated that in 1990, only 5.6 scientists and engineers engaged in research and development per 10,000 persons in the work force in China, compared to 30 in Singapore, 38 in Taiwan (China), 37 in Republic of Korea, 75 in Japan, and 75 in the United States (Table 1.9b).2 With such a small stock of well- educated people, China's major comparative advantage in the world market is the abundance of low-cost labor. TABLE 1.4: EDUCATIONAL ATTAINMENT OF POPULATION AGED 25 AND OVER IN SELECTED COUNTRIES % of Population Aged 25 and Over Who have No Primary Secondarv Tertiary Schooling Education Education Education China (1990) 29 34 34 2 Female - - - - Asia Hong Kong (1991) 16 30 43 11 Female 23 29 43 8 Republic of Korea (1990) 11 22 54 14 Female 16 26 50 7 Japan (1990) 0 34 45 21 Female 0 36 47 17 Former USSR (1989) 8 15 63 14 Female 11 16 60 13 North America Canada(1991) 1 16 62 21 Female 1 16 54 20 United States (1990) 1 9 44 45 Female - - Latin America Mexico (1990) 19 58 23 9 Female 21 49 23 7 Argentina (1991) 6 57 25 12 Female 6 58 26 12 Source: UNESCO, Statistical Yearbook 1995, pp. 1-30-1-5 1. 2 US National Science Foundation, Human Resources for Science and Technology: The Asian Region, Surveys of Science Resources Series, Special Report NSF 93-303, Washington, D. C., 1993, p. 123.  - 10- 1.19 However, the increasing integration of world economy and the global acceleration of technological change (mostly in the form of computer and labor saving technologies) would reduce the viability of relying on labor intensive production as an option for future development. As world trade expands, China will face increasing competitive pressure from lower-wage economies (such as Viet Nam and Bangladesh). For China to raise living standards of the people in the 21st century, it is imperative to master the manufacturing of medium-skilled products and to move into the production of high- technology goods. 1.20 Currently, the economy of China is one of the fast-growing ones in the world. According to the Ninth Five-Year Plan (1995-2000), the Government's target for GDP in 2000 is to quadruple that in 1980, and that for GDP in 2010 is to double that in 2000.3 This entails an average annual growth rate of 8 percent between 1995 and 2000, and over 7 percent between 2000 and 2010. Given the momentum of China's historical growth rate, it is realistic to expect the GDP to continue to grow at an annual average of 7-9 percent in real terms over the next 25 years. To sustain these growth rates, the demand for highly educated people is likely to be high. 1.21 Emerging evidence of growing economic returns to higher education and increasing wage inequality in Hong Kong, Taiwan (China), Malaysia. Indonesia, and Chile indicate that fast-growing economies can face skill scarcity if the supply of well- educated people is unable to keep pace with the demand (see Annex 3 for details). At present in China, however, wage data cannot be relied upon to provide good indication of the changing skill requirements in the economy. This is because wages in the large public sector are still set administratively, instead of being driven by the forces of supply and demand. Nonetheless, given China's very small stock of human capital. skill scarcity can be expected if the economy continues to grow at the historical rates. At present, the ease and speed with which graduates find jobs and the brain drain of capable people from the interior to the coastal provinces provide some indication of the potential magnitude of skill scarcity in the future. Skill scarcity would reduce China's attractiveness to foreign investment in the medium-to-high technology areas, limit the options for industrial upgrading, undermine the institutional capacity in all sectors, and exacerbate income inequality when the labor market becomes fully liberalized in the future. 1.22 To find out whether enrollment has expanded too fast and whether there is an oversupply of graduates requires tracing the employment patterns and wages of graduates by field of study. While wages of the public sector are not driven by the forces of supply and demand, those in the formal private sector tend to be more responsive. Policy decisions should be guided by monitoring the changing wage differentials between university and senior secondary school graduates in the formal private sector over time in 3 The source is Premier Li Peng's "Explanation on the Suggestions about Formulating the National Economic and Social Development Goal for the Ninth Five-Year Plan and the Long-term Targets for 2010" (dated September25, 1995, and published in thePeople'sDaily, October6. 1995).  - 11 - the short run, and in the entire economy after the labor market becomes liberalized. A rising wage gap would indicate rising demand for skills and, hence, would justify further expansion as long as there is private demand for education. The implementation of cost- recovery has provided a mechanism to gauge the strength of private demand which has been manifested in the rapid increase of self-financed students and adult education enrollment. The issue of how to finance expansion will be discussed in full in Chapter 4. 1.23 What levels of quality have been achieved, and have resources been used efficiently? The quality of education is ultimately embodied in the skills of graduates and their ability to learn continuously and to adjust to changing needs of the time. At pre-university levels, tests are often used to assess cognitive skills. In the tertiary level, national professional examinations (such as in law, accountancy, and medicine) can provide indicators of professional competency. But in arts and science, national exit exarninations are rare; more often, institutions administer their own examinations without any comparability in the instrument used across institutions. Hence, there is no national indicator of academic achievement at the tertiary level. Proxy indicators, however, are used to gauge the quality of education provided in the higher education system. These include enrollment by type of programs. the percentage of staff engaging in teaching, time of faculty members spent on research, the academic qualification and age distribution of faculty members, and research output as measured by the number of publications. The picture provided by these quality indicators of Chinese higher education is mixed. 1.24 In regular universities and colleges. only 52 percent of students were in undergraduate studies leading to the bachelor's degree, 44 percent in short-cycle, nondegree courses. and 4 percent in graduate studies in 1994 (see Table 1.5 for sources). In adult education institutions, 90 percent of enrollment was in short-cycle courses. In total, only 33 percent of students in tertiary education in China were in regular programs of undergraduate studies. This pattern of higher education enrollment by program type compares unfavorably with many countries where the majority of students enroll in degree programs (Table 1.5). Such a high percentage of students enrolled in short-cycle programs raises the question of the skill level of the graduates. 1.25 In terms of the percentage of staff involved in teaching and research, there is room for improvement. Although regular universities and colleges had a staff of 1.04 million persons in 1994, only 38 percent of them have teaching responsibilities, 44 percent were administrative and support staff and workers, and 18 percent were employed in organizations affiliated with universities (such as factories, enterprises, and research institutes) (see Table 1.6 and Annex 6 for sources). Of these full-time teachers, 52 percent engaged in research for over 10 percent of their time, and only 7 percent did so more than 90 percent of their time (Annex 7B). By contrast, in Taiwan, faculty members with teaching responsibilities accounted for 75 percent of total staff and in the Republic of Korea, they accounted for 66 percent of total staff (Table 1.6).  - 12 - TABLE 1.5: PERCENTAGE DISTRIBUTION OF HIGHER EDUCATION STUDENTS IN SELECTED COUNTRIES Undergraduate Studies Postgraduate Short-cycle Programs All post- Total No. Programs or Leading to graduate of Country Junior College First Degree Programs Students (%) (%) (%) ('000 Persons) China (1994) Regular System 44 52 4 2,798 Adult System 90 10 - 2,351 Total 65 33 2 5,149 Asia India (1990) - - - 4,425 Indonesia(1992) 56 44 - 178 Thailand (1991) 41 56 3 209 Malaysia (1990) 41 50 9 20 Republic of Korea (1990) 34 58 8 342 Taiwan (China) (1992) 53 42 5 653 Hong Kong (1992) 46 40 4 20 Singapore (1990) - - - 51 Japan (1991) 33 62 5 697 Latin America Mexico(1993) - 92 8 152 Chile(1993) 7 76 18 15 Brazil (1993) - 100 - 240 Oceania New Zealand (1992) 20 59 23 17 Australia(1993) 6 68 26 132 North America Canada(1993) 74 22 4 671 United States (1990) 24 54 22 2.024 Western Europe Britain (1991) 37 45 19 400 France (1992) 58 31 12 389 Former W. Germany (1990) 32 59 7 256 Russia (1992) 56 41 3 1,038 Note: The percentages are rounded. Source: Educational Statistics Yearbook of China 1994, pp. 18, and 97: UNESCO Statistical Yearbook 1995, pp. 3.342-3.390; Educational Statistics of the Republic of China, 1993, pp. 111-113; and USNSF, Human Resources for Science and Technology: The Asian Region, 1993, p. 61, for statistics on India and Singapore.  - 13 - TABLE 1.6: STUDENT-TO-TEACHER AND STUDENT-To-TOTAL STAFF RATIOS Full-time teachers Student-to-full- Student-to- as % of total staff time teacher ratio total staff ratio China (1994) Regular Higher Education 38 7:1 2.7:1 Adult Education 45 25:1 11:1 Comparative Data North American & European Universities - 1-5-20: 1 7:1 Taiwan (China) (I 992) 75 21:1 16:1 Republic of Korea (1994) 66 33:1 21:1 Source: China Statistical Yearbook 1995 for construction of the ratios in China, Korea Educational Indicators, 1994 pp. 164- 166, 210-211, 212-213 for construction of the ratios in the Republic of Korea; Educational Statistics of the Republic of China, 1993 pp. 104-107, 144-155 for construction of the ratios in Taiwan; Personal Communication with Commonwealth Higher Education Management Services, Association of Commonwealth Universities, London, UK for ratios in North America and European Universities. 1.26 A related issue is efficiency. With enrollment expanding faster than staff increase between 1978 and 1994, the student-to-teaching-staff ratio in regular higher education institutions rose from 4.3: 1 to 7: 1, while that of student-to-total-staff ratio increased from 1.7:1 to 2.7:1. While efficiency gains have been made over the past 16 years, these ratios are still low by domestic or international comparison, as indicated in Table 1.6. This strongly suggests that the Chinese regular higher education institutions could triple or quadruple their ratios to make more efficient use of scarce resources. 1.27 The support for staff development since 1978 has enabled an increasing number of faculty members with full-time teaching responsibilities to earn postgraduate degrees. This support has grown stronger by the year, as demonstrated by the increase from 860 students who were sent abroad to study by the State in 1978 to 19,000 in 1994.4 In spite of these efforts, given the size of China, there is still a long way to go. Of the 390,000 full-time teachers in the regular higher education system in 1994, only 2 percent of academic staff held the doctorate degree, 20 percent the master's degree, 49 percent the bachelor's degree. and 30 percent short-cycle courses and some undergraduate training (Table 1.7). While more professors (5 percent) and associate professors (4 percent) obtained the doctorate degree, a much larger percentage of them (54 percent) than lecturers, assistants, and instructors had not even obtained the bachelor's degree, although a large number of them (53 percent of professors and 54 percent of assistant professors) had completed undergraduate courses without obtaining the credentials. The fact that so 4 China Statistical Yearbook 1995, Table 18-8, p. 589.  - 14- many high-level academic staff had to upgrade themselves from a basic level is indicative of the quality issue in the Chinese higher education system. By contrast, in Korean and Taiwan (China) universities, 44 and 46 percent of the faculty members had the doctorate degrees (Table 1.7). These indicators suggest that faculty development should command priority in the effort to improve quality. TABLE 1.7: ACADEMIC QUALIFICATIONS OF FULL-TIME TEACHERS IN REGULAR HIGHER EDUCATION INSTITUTIONS, 1994 Doctorate Master's Bachelor's Total (no. degrees (%) degrees (%) degrees (%) Others (%) of persons) China (1994) 2.2 19.5 48.6 29.7 396,389 Of which females 0.7 14.9 58.2 26.3 127,060 Professors 5.4 8.5 32.5 53.6 28,281 Associate Professors 3.6 12.4 29.5 53.9 102,114 Lecturers 1.8 28.0 48.1 22.2 168,683 Assistants 0.4 15.7 74.5 9.4 76,573 Instructors 1.3 14.7 72.5 11.4 20,738 Comparative Data Taiwan (China) (1992) Universities 46.0 26.4 26.2 1.3 12,636 Colleges 28.5 35.8 32.0 3.5 5,155 Junior Colleges 3.7 56.2 31.9 0.0 13,639 Republic of Korea 44.3 37.6 15.5 2.6 44,231 (1994) Universities 64.4 24.1 17.2 0.1 - Junior Colleges 20.5 59.6 3.7 16.1 /a Bachelor's degrees include those who held it and those who had completed postgraduate studies without obtaining postgraduate degrees. /b The "Others" category includes those who they had completed undergraduate courses without obtaining the bachelor's degree, and those who had completed or attended short-cycie courses. Sources: Educational Statistics Yearbook of China 1994, pp. 28-29; Educational Indicators in Korea, 1994 pp. 246-247; pp. 250-25 1; Educational Statistics of the Republic of China, 1993, p. 104. 1.28 The age distribution of faculty members also affects quality. In 1993, the largest groups (30 percent) were those in their 20s and 30s, respectively, while those in the SOs accounted for 24 percent of the total; however, those in the 40s were the smallest group, constituting only 14 percent of faculty members (see Table 1.8 for sources). By contrast, in Taiwan (China), faculty members in their 30s and 40s were the backbone of the university, each accounting for 30 percent or more of the total; the Republic of Korea exhibited a similar age distribution (Table 1.8). This pattern in China reflects the long- term effects of the Cultural Revolution (1966-76). First, those between the ages of 40 and 50 in the 1990s were born in the 1940s and 1950s, and came of age at the time of the Cultural Revolution. Their opportunities for higher education were severely curtailed,  - 15- resulting in a much smaller share of the cohort becoming faculty members in higher education than any other age group. This age distribution reflects a quality issue because young staff do not have the necessary experience to provide the leadership, while older teachers do not have the necessary academic training to guide university development. The fact that over 90 percent of professors were over 50 and yet 50 percent of professors had not even obtained the bachelor degree is indicative of an adverse impact on quality by basing promotion on seniority, rather than on academic qualifications (Tables 1.7 and 1.8). TABLE 1.8: AGE STRUCTURE OF FULL-TIME TEACHERS IN REGULAR HIGHER EDUCATION INSTITUTIONS, 1994 30&< 31-40 41-50 51-60 61+ Total (%) (%) (%) (%) (%) Teachers China (1994) 30.1 30.3 13.5 23.7 2.4 396,389 Of which female 39.2 30.6 12.5 16.7 0.9 127,060 Professors 0.1 2.5 6.2 63.0 28.2 28,281 Associate Professors 0.7 13.7 22.8 61.2 1.5 102,114 Lecturers 22.4 53.6 16.2 7.8 0.1 168,683 Assistants 81.0 17.8 1.1 0.2 0.0 76,573 Instructors 90.9 6.9 1.3 0.8 0.1 20,738 Comparative Data Taiwan (China): (1992) Universities 15.4 33.9 30.6 13.4 6.8 12,636 Colleges 14.8 41.4 29.6 11.0 3.2 5,155 Junior Colleges 22.5 46.5 20.8 7.2 3.0 13,696 Republic of Korea (1994) 20.0 31.0 29.0 15.0 5.0 ?? Note: In the case of Taiwan (China) and the Republic of Korea, the age grouping was under 30, 30-39, 40-49, 50-59, and 60 and over. Sources: Educational Statistics Yearbook of China 1994, pp. 28-29; Educational Indicators in Korea, 1991, pp. 25 8-259; Educational Statistics of the Republic of Chinaz, 1993, pp. 104-107. 1.29 An international bibliometric-based assessment of research activity in Chinese higher education and research institutions, however, shows promising signs. Between 1988 and 1990, Chinese publications in international journals grew by 40 percent. This growth rate exceeded all other countries, including the United States and Japan, except Taiwan (China) and the Republic of Korea (see Table 1.9 for sources). The scope of research activities also expanded from covering only 21 percent of all fields to 26 percent (Table 1.9). Strengths were shown in physics, materials science, mathematics, and computer science, reflecting the emphasis on science and engineering in higher education5 (see Annex 8 for sources). The research output from key universities such as 5 "Science in China: A Great Leap Forward" in Science, Vol. 270, November 1995.  - 16- Peking University (484), University of Science and Technology (420), and Fudan University (395) indicate that one of the goals of the 1985 higher education reform efforts, to restore the research function of universities, has been accomplished (Annex 8). The science policy of the government in fostering research and development is explained in Annex 4. 1.30 That research has shown so much progress despite the low academic qualifications of the total complement of faculty members demonstrates that China's existing policy of emphasizing key schools and centers of excellence at the tertiary levels succeeds in preparing a very small cadre of world class academic elites. The success, however, is not broad based, and the volume is small. For example, of 345,000 papers of the world cited in the Institute for Scientific Information Research Front Database, only 3,842 were Chinese, compared with 160,000 American, and some 5,800 Indian. Moreover, the output per researcher is also low by international comparison. In 1990, the number of cited papers per researcher in the bibliometric database was 0.01 in China, compared with 0.06 in India, 0.05 in Taiwan (China), 0.06 in Japan, and 0.17 in the United States (Table 1.9A). The case of India is particularly noteworthy because it has a population size closely matching China's, its GNP per capita is lower than China's, its higher education enrollment rate is higher than China's. and its researchers' papers were cited six times more than China's in the bibliometric database (Table 1.2 and 1.9A). Although not all good articles are submitted to international journals and the English language is likely to be a high barrier, international bibliometric data still serve as a useful indicator of Chinese research having attained international standards. Thus, increasing publications in international refereed journals could provide the calibration needed to further improve quality (Table 1.9B). 1.31 In summary, most of the indicators for quality signal that there is room for improvement. The issue of the academic qualifications of faculty members is the most fundamental of all. When such a low percentage of them have had postgraduate training, the basis for expansion and improvement is weak. The policy options for providing high quality education will be discussed in Chapter 5. 1.32 Equal opportunity for women, and students of worker and peasant background? Since the founding of the People's Republic in 1949, the Government has officially promoted gender equity and the interest of workers and peasants. To what extent have these groups enjoyed equal opportunity in higher education in an increasingly market-oriented economy? Indicators on the participation rates of these groups provide clues.  - 17 - TABLE 1.9A: RESEARCH OUTPUT AS MEASURED BY CITED PAPERS IN THE INSTITUTE FOR SCIENTIFIC INFORMATION RESEARCH FRONT DATABASE Scope of Scope of Citing papers, Citing papers, Growth rates research. research. 1988 1990 per year. 1988 1990 Countrv 1988(%) 1990 (%) (no. of papers) (no. of papers) 1988-90 (%) rank rank China 21 26 2.746 3,842 40 18 17 World 100 100 345.080 375,346 9 Top 7 countries United States 98 98 147,335 160,384 9 1 1 Britain 82 83 31,969 34.218 7 2 2 Japan 68 69 25.417 28.641 13 3 3 (West) Germanv 73 37 22.170 24.743 12 4 4 France 68 70 19,076 20.820 9 5 5 Canada 73 74 18,208 20,017 10 6 6 USSR 47 46 13,686 13.609 -1 7 7 Asia India 34 36 5.489 5,873 7 12 13 Taiwan (China) 12 17 1,085 1,720 59 30 28 Republic of 9 12 650 1,015 56 35 33 Korea Latin America Brazil 16 21 1.499 1.942 30 27 25 Argentina 13 15 1.146 1,313 15 29 30 Mexico 10 12 721 884 23 34 34 Chile 8 8 581 686 9 38 36 Source: Coward. Roberts, "Bibliometric Indicators of Research Activity and Infrastructure," World Bank, 1994, Table 2, pp. 18-22. TABLE 1.9B: RESEARCH PAPERS CITED IN THE INSTITUTE FOR SCIENTIFIC INFORMATION RESEARCH FRONT DATABASE PER RESEARCHER, 1990 Scientists & engineers Scientists & engineers in R&D per 10.000 in No. of papers per Country in R&D ('000) the work force researcher China (1990) 391 5.6 0.01 Top Seven Countries United States(1989) 949 75 0.17 Britain (1992) 255 - 0.13 Japan (1990) 477 75 0.06 West Germranv (1989) 176 - 0.14 France (1991) 129 - 0.16 Canada(1991) 65 - 0.31 USSR (1991) 878 - 0.02 Asia India (1990) 106 3.3 0.06 Taiwan (China) (1991) 32 38 0.05 Republic of Korea 69 37 0.02 ( 1990) Latin America Brazil (1985) 53 - 0.04 Argentina (1988) 11 - 0.12 Mexico (1984) 17 - 0.05 Chile(1988) 5 - 0.15 Sources: US National Science Foundation, Human Resources for Science & Technology: The Asian Region, 1990, p. 122; UNESCO Statistical Yearbook 1995, pp. 5-25-5-29.  - 18- 1.33 Encouraging signs are shown in the increasing rate of female participation in higher education from 23 percent of total students in 1980 to 35 percent in 1994 (Table 1.10). This increase can be explained by the fact that female student enrollment as a percentage of total enrollment in lower levels of education has increased. For example, female students accounted for almost half of the enrollment in primary and secondary education, resulting in a "pipeline effect" by which more female students entered universities. Nonetheless, given the high rates of female participation at the lower levels, the same rate is not found in higher education. In this sense, opportunities for higher education are not equal for women, largely due to social factors that government policy should mitigate. TABLE 1.10: FEMALE PARTICIPATION IN ALL LEVELS OF EDUCATION 1980 1994 A. Percentage of Female Students to Total Students Higher Education Institutions 23 35 Specialized Secondary Schools 32 48 Regular Secondary Schools 40 44 Vocational Middle Schools 33 48 Primary Schools 45 47 B. Percentage of Female Teachers to Total Teachers Higher Education Institutions 26 32 Specialized Secondary Schools 26 41 Regular Secondary Schools 25 35 Vocational Middle Schools 13 36 Primary Schools 37 46 iVote: The percentages were rounded. Source: China Statistical Yearbook 1995, Table 18-24. p. 597. 1.34 Female teachers as a percentage of total faculty members also increased from 26 percent to 32 percent over the same period (Table 1.10). To the extent that this share mirrored the share of female graduates from higher education, there is no evidence of discrimination against the employment of women in higher education. Moreover, that female teachers aged 30 or under accounted for 42 percent of total female teachers in 1993 showed that more women were hired in higher education in recent years than in the past. However, the disadvantages suffered by women are reflected in their academic qualifications. Only 0.7 percent women held the doctorate degree, and 15 percent the master's degree, significantly below the national average of 2.2 and 20 percent, respectively. But more women (58 percent) had the bachelor's degree than the average of 49 percent, and fewer of them (26 percent) had below bachelor's degree (Table 1.7). Unfortunately, breakdown of qualification and rank by gender is not available to reveal  - 19- the pattern of promotion. Nonetheless, the emerging question is that since women had better undergraduate qualifications than men, why did a smaller share of them have postgraduate education? Do woman faculty members enjoy equal support for staff development? If women with better basic qualifications than men are not given more opportunity for skill upgrading, what is the implication for the quality of education an institution provides? This issue will be discussed in depth in Chapter 5. 1.35 Institutional data from nine universities provide information on student social background in 1993 (Annex 10). On the whole, there was a sizable share of students from families of peasants (20-75 percent) and workers (20-40 percent), and the trend appeared to have increased participation for them between 1980 and 1993. However, the distribution of students from different family backgrounds differed across institutions. Students from families of intellectuals (6 to 22 percent) and government cadres (5-23 percent) have very high participation rates relative to their small share in the population. It was only in an agricultural college that the share of students from peasant background reached 75 percent, which closely mirrored the overall share of the rural population in the country. Students from peasant and worker background also had a much stronger presence than students from families of intellectual, managers, and government cadres in education and medical colleges. In other words, they tended to be tracked into fields that provided very important social services, but were not lucrative. The distribution of student background by field of study has important implications for the policy of cost recovery, which will be discussed in Chapter 4. 1.36 Regionally balanced development? In 1957-58, with the Great Leap Forward, new comprehensive and normal institutions as well as various specialized institutions were established at the provincial level, designed to serve provincial needs. Unlike national universities. provincial institutions recruit students from within the province, at a somewhat lower level of marks in the national entrance examinations. Graduates are usually assigned to the provincial or prefectural level. As disparities in economic growth increase between the thriving coastal zones and the provinces, especially those in the interior, the contribution of the provincial universities to initiate and sustain growth at the regional level assumes great importance. They have a solid performance record in the past; they train most of the highly qualified manpower needed by the provinces in support of their economies; and they produce health and other professionals beyond what the national institutions can provide. They undertake research and make available technical services in areas important for local development. Their programs perform great social services, despite the fact they are funded on a per-student basis at a lower level than that provided to the national universities. Of special concern have been the low educational qualifications of many of their faculty, the lack of modern scientific and computing equipment, and deficiencies in their foreign-language library holdings. The decentralization of finance and planning has widened the gap between poor and more prosperous provinces. In 1994, there were 43.3 college students per 10,000 in China. For Beijing, the figure was 136, while geographically remote and economically backward Guizhou province had only 9. Strategies are required in order to make distribution of  - 20 - resources and educational opportunities more equitable and directed to poor provinces. (Annexes 11 and 12). 1.37 In summarv, the above survey has found promises as well as challenges in Chinese higher education. To consolidate the gains in the past and expand the capacity of universities. quantitatively and qualitatively, to meet the developmental needs of the future requires attending to several areas: (a) the relationship between the state and the universities; (b) financing; and (c) policies that foster improvement of quality, which the following chapters address. D. WORLD BANK ASSISTANCE 1.38 World Bank Investment in Chinese Higher Education. In 1980 the Chinese government approached the World Bank proposing an assistance plan to strengthen Chinese higher education. The goal of the Government of China was to build up the high-level technical and managerial manpower required for national development. SEdC and the World Bank. working together. identified two manpower shortage problems: the low level of overall university enrollment and the imbalance of enrollment structure. In addition, SEdC reported that the university system was further constrained by the limited size of the university graduate programs that trained most of the country's researchers, university researchers and specialized personnel. In order to eliminate these problems by the 21st century, the Govermnent of China and the World Bank began designing a series of projects to assist the government in their efforts. 1.39 Since 1981 Bank assistance in higher education supported China's economic priorities of alleviating manpower shortages in strategic areas most affected by the Cultural Revolution. Eight Bank projects totaling $910.4 million have been undertaken in higher education. These projects have dealt with science and engineering, economics and finance, agriculture. medicine and education in support of the government's aim to increase the quantity and quality of high-level skilled manpower. The overall impact of the higher education projects has been enrollment expansion, improved quality of instruction, strengthened research capacity, improved management and curricular reform. A complementary series of projects directed interventions to 183 institutions across almost the entire subsector. Beginning with the prestigious key universities, assistance was spread to provincial normal (teacher training) universities, universities under line ministries-agriculture and forestry, public health-and short-cycle vocational universities. A significant tier that has not been included in any of the projects is a range of nonspecialized universities under provincial jurisdictions. 1.40 Lessons from World Bank Projects and Previous Sector Work. The first sector report relating to Chinese higher education looked at key issues in management and finance of higher education and options for addressing them over 15 years. As a result, management and efficiency became significant components of each of the early Bank-supported university projects. Although much progress was achieved in improving management and efficiency through inputs such as training and equipment, there is room  - 21 - for improvement. Evaluation of projects indicates that one of the most effective ways to improve both efficiency and academic quality is through sharing of scarce resources and cross-fertilization of ideas within and between universities and between universities and other organizations, including industry. In addition, if further improvements were to be achieved, universities would have to be given greater freedom to manage their financial and academic affairs under broad policies and directives established by the appropriate governing body. 1.41 Important lessons were learned with respect to faculty and curriculum development. Because of the skewed age distribution of staff, with about 40 percent due for retirement by the turn of the century, it became imperative for universities to seek effective ways to upgrade and promote sufficient numbers of young scholars while maintaining the quality of the higher education system. The rapidity with which institutions are mounting popular "market-oriented" programs indicates clearly the renewed urgency for training and retaining qualified staff. Among the chief conclusions relating to continued improvement were those of upgrading faculty qualifications and the establishment of an effective promotion system, both of which still need to be addressed. 1.42 Previous projects also addressed issues of fragmentation of teaching programs as evidenced by a proliferation of narrow specializations for almost all disciplines. There has been some progress in broadening curricula. Equally important was the conclusion that, in order to build curriculum revitalization into the system, long-term plans for cross- institutional curriculum reform and teaching materials development were necessary. In the quest for instructional quality, this report provides an opportunity for these long-term recommendations to be revisited. E. THE NATURE AND STRUCTURE OF THE REPORT 1.43 The Report summarizes the main findings of the two fact-finding missions. Chapters 2 to 5 review and analyze the three areas of investigation. incorporating diagnoses and suggested strategies for action in each of them. The content of this report and the extent of practical detail respond directly to guidance and requests from senior officials, policymakers and practitioners. The emphasis throughout is not so much on what needs to be done, as Chinese agencies and scholars have given this exhaustive scrutiny: rather the conclusions of this review stress how goals are to be achieved. To this end, Chapter 6-Achieving Reform Goals: Strategic Priorities-narrows down the range of strategies suggested in the earlier parts of the review to three major thrusts in the belief that incremental changes rather than a sweeping systemic overhaul is a pragmatic approach, beginning with those most pressing and responsive to the country's reform goals. Action Plan matrices are attached to the appropriate thematic sections and are seen as a launching pad for concrete discussion among the major stakeholders rather than a set of blueprints for action.  Figure 1.1: Enrollment in China by Level of Education, 1952-94 (10,000) 16000 - 14000 / _ 12000 - , i! ~~/ 10000 / - / - Higher 8000 . - - Secondary - -Primary 6000 - / V -- 4000 / 2000 i 0 1952 1957 1962 1970 1975 1978 1980 1985 1990 1994  Figure 1.2: Enrollment in Regular Higher Education Institutions, 1952-94 (10,000) 300 7 250 200 / ;M 150./:: l -4 200 150 0~~~~~~~~~~~~~~~~~~~~~~~ 1952 1957 1962 1970 1975 1978 1980 1985 1990 1994 (A L- Higher Education i4  - 24 - 2. RELATIONSHIPS BETWEEN UNIVERSITIES AND THE STATE A. CONTEXT 2.1 The State has recently developed a very different interpretation of its role vis-a-vis the universities. The principles behind this new approach were summarized in a recent publication of the Communist Party (CP) Central Committee and the State Council.' Paragraph 18 calls for deepening reform of the higher educational system "by gradually setting up a system under which the government exercises overall management while schools [universities] are run independently and geared to the needs of society." The document suggests the areas where their managerial autonomy should be expanded as being "enrolling students, adjusting specialities, appointing and removing cadres, spending funds, evaluating job titles, distributing wages and conducting international cooperation and exchanges." It also proposes a gradual devolution of the state's overall management function from the center to autonomous regional and municipal authorities and suggests that. subject to various conditions, they should have the power to set enrollment levels and decide on new academic specialities. Paragraph 19 outlines other changes in the enrollment system, declares a move to a system in which all students pay fees, supported by scholarships where necessary, and an employment system where "the majority of graduates should choose a job by themselves." 2.2 Changes have already been introduced to the direct relationship that SEdC has with universities and consultations are under way within SEdC on the mechanics of designating universities as independent legal entities. This is the legal rock on which their managerial autonomy will rest, as it could allow them to set their own strategic goals, define their own specializations and control their resources accordingly. In August 1992 SEdC made a formal directive which reduced central controls in 16 areas. The principal relaxations concerned the management of universities and the devolution to university presidents of new responsibilities. For example, universities were free to appoint or remove teaching staff below the level of vice president, they gained the right to choose academic specializations within the broad academic areas approved by SEdC, they could expand fee-paying and contract student numbers within a cap of 25 percent of their total enrollment, both capital and recurrent budgets were given as "global budgets," allowing spending flexibility within the total, they gained the freedom to approve travel and study overseas and they were free to pay bonuses, or rewards for good performance Program for China's Educational Reform and Development. Text issued by Xinhua News Agency. Beijing. February 26, 1993.  - 25 - to individual academic staff. These freedoms have since been acted upon energetically as Part 3 shows. 2.3 As a result of these changes, the current position in the five functions described in paragraph 2.1 is as follows: (a) core funding is still provided by SEdC, a sponsoring ministry, province or municipality (or a combination of them), but universities have been strongly encouraged to widen the range of their sources of income; (b) the State sets student number targets for those students funded by State funds and usually attempts to set a limit on the numbers of self-financing or sponsored students; however, all students are expected to pay a fee of some kind and the fee level is increasing; (c) central control is usually only exercised over the appointments of the president, although some provinces still monitor the appointment of deans/heads of departments in some institutions; (d) major new programs still require the approval of the funding body; and (e) job assignment has virtually disappeared except for some specialist disciplines and has been replaced by "two-way selection" in which employers and graduates choose each other. 2.4 The State has changed its role as regards the provision of capital funding since it can no longer provide all the funds itself. It has set up the China Education and Scientific Trust Investment Corporation, which acts as commercial banker specializing in the education sector. With initial fumds from the Ministry of Finance (MOF), the State Planning Commission (SPC), SEdC and the China Trust and Investment Corporation, it provides short-term loans to institutions, secured on their assets, for their buildings and equipment. Institutions are encouraged to search elsewhere for capital finance; for example, a private university persuaded its sponsoring municipality to guarantee its loan from a bank, a provincial university on the basis of the president's guarantee obtained a large capital loan from a bank, and several universities visited by the mission persuaded overseas Chinese alumni to finance new academic buildings or libraries. 2.5 The government has recently taken steps to encourage the development of nongovernment institutions of higher education (or "minban"). To date, 15 institutions have been vetted and appraised prior to their formal approval by SEdC. Equally keen to encourage private investment in higher education, provinces have approved 800 institutions. Part 4 discusses the economic and financial implications of these policies. The institutions visited by the mission used teaching staff from nearby state-financed universities, and it is clear that, in these early stages, there are significant economies of scale and relatively little risk of poor-quality teaching. As the nongovernment sector  - 26 - grows in scale, these advantages could disappear. requiring quality control procedures to be set up by government. 2.6 In keeping with the overall. gradual approach to implementing change, several experiments are under way, such as giving the provincial Bureaus of Higher Education a greater say in the management of SEdC's key universities in their provinces, local salary supplements to staff or the enactment of Higher Education Administrative Decrees by provinces (Guangdong is a notable example). One province had also introduced a special 1 percent tax on goods and services, the proceeds of which were directed to higher education. Two institutions. Shanghai International Studies University and Southeast China University, were authorized to enroll all their students on a self-financing basis. In Hefei two colleges of a university were operating with the bulk of their funding supplied by enterprises, an electronics company and a manufacturer of sporting goods. B. ISSUES 2.7 This gradualist approach to introducing change is pragmatic and careful. but involves a judgment by a central authority as to whether a level of management (whether it be a province or a university) is thought "ready" to acquire new responsibilities. Inevitably, therefore, there is sometimes resentment by some universities at the slowness with which freedoms are given or powers delegated. Both the SEdC and the provinces are sometimes resented by those they administer. There is perceived to be a gap between the rhetoric of policy and the actual pace of implementing change. The mission found many examples of university presidents who expressed a predictable wish for a more rapid acquisition of new powers. In particular. they were unhappy at the control on enrollment targets, especially where self-financing students were concerned, (one case was found where this control was no longer exercised) and at the State setting limits to fee levels in locations where it was known that enterprises and individuals could pay more. More autonomy in the decision to start new academic programs was also desired, again particularly in those cases where there was strong, local. unmet demand. 2.8 Another predictable consequence of the pragmatic. selective introduction of the new freedoms is that the system is very varied; different decisions about provinces by SEdC and about universities' capabilities by provinces are resulting in a diverse, uneven picture that is hard to summarize. Provinces are developing distinctive management styles and processes. This is not necessarily a weakness, but it makes it difficult to get an overall view of what is happening or to establish the standard national information collection and reporting systems, which will be required. 2.9 As a direct consequence of the changes in national funding flows there appears to be an increase in the influence of the provincial governments in higher education compared to SEdC. It is still a fluid situation that also varies according to the wealth of the province or the importance it places on higher education. Some of the poorer provinces such as Yunnan and Guizhou look after their universities well despite their low income. Guangdong spoke of its plans for an age-participation ratio in higher education  - 27 - of 40 percent by the year 2010 and was preparing a plan to that effect. The province already coordinated the higher education provision within the province, including that offered by SEdC's key universities. In Sichuan some universities that were funded by SEdC and central ministries told the mission that they wanted closer relationships with the province; the reasons were largely self-interest. in that they hoped to get funding from the province and wanted to know about provincial manpower needs and economic plans so that they could develop appropriate strategies. Provinces had developed innovative ideas: Guangdong awards an annual prize of Y 80,000 to the best university teacher, Anhui insists that each of its universities spends at least 5 percent of its recurrent grant on the purchase of library books and journals, Sichuan encourages university libraries to collaborate in purchasing decisions, given the shortage of funds. 2.10 The pressures of the socialist market economy are threatening to distort the balance of courses offered. Universities are finding that it is increasingly hard to maintain some core academic disciplines when students do not enroll for them. The numbers applying for the basic sciences and humanities subjects were far below what is healthy for a "comprehensive university." Presidents were feeling isolated and threatened on this issue as they usually lack any broadly based Advisory Council or Academic Board/ Senate to offer them moral support in upholding the concept of a university. One provincial bureau claimed to have a policy of protecting some subjects, but also said that it would not interfere to stop a university from closing a key discipline (such as chemistry). 2.11 China is in the middle of the move from "a state-control model" to a "state- supervising model"2 as regards the relationship between its universities and government. In this exercise there are difficult questions to answer about the respective roles and powers of SEdC, central ministries and provincial/municipal governments. What split of powers and controls will still allow the state to fulfill its "macromanagement" function and yet will also unleash the latent energy and enthusiasm within institutions? What kind of regulatory approach should be adopted? Should it be based on "command and control," on funding incentives to perform, or on feedback from complaining customers?3 How should this macromanagement role be exercised; is it practical to split the strategic policy function from that of funding and operational management of the system? 2.12 The terms "macrocontrol" and "macromanagement" are widely used inside China to describe the role of government vis-a-vis the universities. They still have to be fully defined, as have the control and information mechanisms by which they are exercised. 2 van Vucht, Frans A. "Autonomy and Accountability in Government/University Relationships." Paper prepared for the World Bank seminar. Kuala Lumpur, Malaysia. June 1991. 3 David E M Sappington (1994). "Principles of Regulatory Policy Design." Background Paper for World Development Report. World Bank.  - 28 - FIGURE 2.1: EXAMPLES OF BUFFER BODIES In India a University Grants Commission (UGC) was established by the Govemment in 1956 with a main responsibility of regulating academic standards. Grants are given by the central government to universities through its agency to support and develop academic programs and the infrastructure of the universities. The Commission has 12 members and a secretariat of 760 staff, with five regional offices throughout the country to service and monitor its grants more effectively. In order to undertake its academic roles effectively it has created a large number of expert committees. These promote the development of new programs, assess proposals for change and monitor and evaluate ongoing academic activities. The Ministry for Human Resource Development retains responsibility for planning and policy but is advised on policy matters by a Central Advisory Board on Education, on which the Chairman of the UGC sits. The United Kingdom changes its structure for the management of higher education in 1992 and each of the four countries now has a Funding Council whose main function is to advise the Minister of Education on the funding needs of higher education institutions and to distribute available funds. The Higher Education Funding Council for England is the largest one and distributes recurrent and capital funds for teaching and research to 144 institutions. The Council has 15 members including representatives of industry and the professions. Full responsibility for policy and planning higher education remains with the Ministry of Education. Source: Association of Commonwealth Universities, London, U.K. C. RECOMMENDATIONS AND ACTION PLAN 2.13 A program of actions is suggested as a possible response to these issues. Figure 2.1 on page 36 illustrates the objectives that the program seeks to achieve, together with the means and possible indicators for assessing the results. The basic principles behind the proposed program are: (a) that the State should move quicker toward adopting a monitoring, regulatory role and abandoning detailed control; (b) that the State should be providing an "enabling environment" in which universities can plan their own destiny (but this still expects the State to set policy frameworks or efficiency targets within which institutions should plan); and (c) that universities should be encouraged to develop individual strategic plans showing how they aim to serve their specific province or community. 2.14 These principles are embodied in the Action Plan that suggests some possible initiatives for the government to consider. Each of the main action areas proposed in the plan is now discussed in turn. Legislation 2.15 Once the Higher Education Law is promulgated, there will need to be four levels of legislation or control: the Law that sets out general principles; national, provincial or  - 29 - municipal regulations that would offer policy guidance, Higher Education Institutions' (HEIs') own Statutes, which are drafted by their Board, approved by the State and which set out the internal powers and responsibilities of the Board, the Council and the President; and, finally, IlEIs' internal regulations, which are detailed rules approved by the University Council covering courses. fees, discipline. etc. Annex 2 describes the topics that are normally covered in such national Laws and in university Statutes. The Roles of SEdC, Ministries and Provinces 2.16 Once the State's role has been defined, there still remains the question of how it is exercised at the center and as between the center and the provinces. One model that might be appropriate is to confirm the role of SEdC as that of the supreme policy-making and planning body for higher education and to split this from the detailed fund allocation and management functions. In its policy role SEdC would advise the State Council on all matters relating to post secondary education. It would be freed from the minutiae of day to day management of universities, but would be empowered to establish agencies or bodies to ensure that quality standards were maintained, that management information and statistics were provided, that resources were allocated equitably in line with its policy. Most of the more detailed macromanagement functions could be carried out by new grants committees or funding councils. These would act as buffer bodies between the universities and SEdC, in line with practice in many countries of the world (see Box 2.1). Their main advantage is that suitable representatives of society, industry or higher education would sit on their Boards and have an influence on the detailed management of universities so that it reflected their needs. One such committee or council could be established to oversee SEdC's 36 key universities (or its successor 100 universities planned for the early 21st century and another to coordinate the funding for the 325 ministry-run universities. Similar committees already existed in the provinces visited by the mission and these might be redesignated, if they are thought competent to take on wider powers. Gradually, all provinces would have such funding councils, but, until this time arrived, either SEdC or a national grants committee would undertake the role. SEdC's overall role would include the allocation of funds to the various funding councils. 2.17 A central policy role for SEdC would include decisions on the designation of sponsors for universities. The Shanghai Higher Education Bureau has already been given responsibility for coordinating the activities of all the universities in the municipality regardless of their source of funding. There are clearly strong feelings on both sides about any suggestions that in the long run provincial governments should have responsibility for all the universities in their province, even those currently funded by SEdC. One of the issues which any transfer of responsibility would raise is whether the 36 SEdC institutions would retain a national entry system, taking students from all over China. In many countries Ministries of Education do set entry targets for students from particular regions or minority groupings. This could be adapted to ensure that provincial bureaus retained open entry in former SEdC-management universities, if all on time come under provincial jurisdictions. Indeed, perhaps the top 100 could have national entry.  - 30 - Providing an Enabling Environment 2.18 One function of a regulatory government role is to help universities to manage themselves professionally. The mission was told clearly by several presidents that they wanted less control but more guidance. There are four ways in which the State can help: (a) SEdC or other sponsoring bodies should ask universities to prepare strategic plans and should encourage them to develop distinctive and, if necessary diverse, solutions to providing higher education. Strategic plans will incorporate existing institutional plans which have been SEdC requirements from the mid- 1 980s. (b) Universities must be given the information to help them to manage. Thus, not only will their internal information systems need to be strengthened considerably, but they will expect to have a national reporting and information system providing comparative information on the performance of all universities. (c) Universities will need help in acquiring the necessary management skills and the development of extensive programs of training for the particular categories of staff involved in managing universities. This will require clarifying the role expected of university managers and administrators. (d) Universities will wish to have access to advice and information on best management practice within universities in China and in other countries. The four recommendations are now described further. Strategic Plans 2.19 Many governments have found that the best way to obtain results from their universities is to set them broad policy goals and to allow them to respond to them in their own way. In the United Kingdom, for example. when it was decided to make a dramatic increase in the age participation rate, universities were not given higher enrollment targets, but were simply offered financial incentives and invited to submit their own ideas for expansion. One way for government to ensure that this relative freedom of action is soundly based is for universities to be asked to think through their objectives and develop long-term strategic plans to achieve them. The results are often surprising to government as they unleash creative ideas and help universities to embark on initiatives or innovative solutions that government on its own would never have imagined. 2.20 Before universities invest time and effort in such plans they will need to know why they are doing it and how their planning will fit in with national policy. It is therefore essential that the sponsoring body prepares a framework document. This will cover areas such as: national objectives for higher education in the next five years,  - 31 - specific priorities in disciplines or subject areas for teaching and research, particular issues to be taken into account in planning (these might for example cover subjects such as minority students. gender balance, recruitment from poorer provinces) and guidelines on relationships with "minbans.' In giving such guidance it is important that any constraints are clearly stated; if. Ior example, the tunding scenario is that allocations per student will fall by x percenit. this should be declared. National Mianagement Information 2.21 An iniportant role of' the government is to develop information and reporting systemis co\cringl the performance of' provincial univcrsity systems and of individual institutions. Peri'ormance indicators. though based on the same data as management infomration. are evaluative measures related to institutional or sector goals. They can be used at program/disciplinary level, institutional level, or systems level. At present, annual statistics are reported providing fairly comprehensive information for planning and management purposes. Much fuller and updated information on statf students, courses and finance should be publicly available. to help both strategic planning by the government and the management of individual institutions. The coverage of any reporting system must embrace all activities of universities whether they are funded by government or not. A four-stage approach to developing the system is suggested: (a) research is commissioned on the most suitable performance indicators that might help the government. Funding Councils. and institutions (see Table 2.1) assess whether institutions have achieved the policy goals set for them; (b) a wvorking group of university presidents and vice-presidents is asked to recommend what comparative information about other universities' outcomes and costs they would find valuable. They are also asked to comment on the practical feasibility of producing information resulting from the research in (a); (c) a survey is undertaken of the routine management information that central government ministries or provincial bodies need to have about higher education institutions and the degree of aggregation/detail desired; and (d) on the basis of the three preceding studies, the government defines an annual reporting system for all universities and establishes a suitable organization or agency to be responsible for collection, processing and publication. There should be a special emphasis on ratios, unit costs and other indicators of performance or achievement. Some examples of such measures or indicators collected in other countries are given in Table 2.1. One prerequisite for such an exercise, which must not be overlooked and which will need prompt attention, is the development of standard, national definitions of an undergraduate student, a staff member, a postgraduate and of agreed categories of expenditure.  - 32 - TABLE 2.1: PERFORMANCE INDICATORS AT THE NATIONAL AND INSTITUTIONAL LEVELS Although indicators should always relate directly to the policy objectives that governments set tor their higher educational systems and institutions, many of these are sufficiently similar throughout the world for a generalizable set to be relevant in most countries. All data should be disaggregated by gender and by minority nationalities. It is important to distinguish between national and institutional indicators; the latter which relate to the internal management of an institution may be of little interest to government. A selection of possible national indicators. some of which reflect Chinese concems, is shown below: Students: absolute numbers of full time and part-timers in each institution * students by family income * numbers of postgraduates * full-time equivalent (fte) student numbers * percentage of applicants admitted by program of study * percentage of students who are female and from minorities * percentage of students funded through the State plan * lowest entry score for which State students are accepted * percentage of students in a year who drop out or fail * percentage of entering cohorts who achieve good final degrees * numbers of adults or others attending continuing education courses * percentage of students who were found jobs through assignment Staff: * full-time equivalent teacher numbers * percentage of teachers with higher degrees * percentage of teachers aged 45 and under * qualifications of tcaching staff by age group * average number of days formal staff development/training per teacher * numbers of research publications. by category * number of international conferences attended * ratio of teacher numbers to nonteacher numbers Resources: * ratio of fte students to open-access computer terminals * expenditure per hte student on books and journals * square meters teaching space per fte student * ratio of fte students to fte teachers * ratio of fte students to total numbers of all staff * number of book titles and periodicals in library Finance: * education expenditure per fte student percentage of total recurrent expenditure on maintenance of premises and on administration * percentage of expenditure on scholarships * percentage of expenditure on health. education, housing. * percentage of income from non-State sources * university's unrestricted reserves as a percentage of annual expenditure * percentage of expenditure on bank interest or loan repayments.  - 33 - Training University Managers 2.22 Before management training can be planned and developed, SEdC needs to have a vision of how it expects universities to be managed. There are various models throughout the world: (a) The top management of the university is entrusted to respected senior academic staff who have given up their academic career permanently and have become full-time managers (the American model). (b) The top managers are academic staff who have been temporarily persuaded to become full-time or part-time managers, but who have no intention of doing it for longer than a short-term contract (the current Chinese model). (c) Senior management is carried out by a mixture of full-time permanent staff from either academic. nonacademic or professional backgrounds and part-time senior academic staff with limited policy roles for a short period (the British model). In all these models there has to be a cadre of permanent, professional administrative and support staff working for the top managers. The more temporary the senior management, the more essential it is to have high-caliber administrators. 2.23 The situation in China is that of model (b) above without any formal acknowledgment of the need for permanent professional administrators. All the presidents and vice presidents interviewed were keen to emphasize their prime loyalty to their academic careers. As regards administrative staff, there were the beginnings of professional disciplines emerging, but this was not universal and there were frequent examples of young teachers being allocated to fill administrative positions for a short period. It was not clear whether this allocation implied that they were inadequate academically. If China stays with model (b) (which seems to be culturally the most acceptable option), the status and role of administrative staff will need to be enhanced. Administration must not become a posting for failed teachers and it should be recognized as a family of professional disciplines that each deserve investment in training. 2.24 Management training for university staff at national level is currently provided by the National Academy of Education Administration (NAEA) in Beijing and by four affiliated colleges in other provinces. NAEA deals principally with training for education administrators below the postsecondary level; its training for university staff has been very limited, with only three core courses aimed at higher education. NAEA has offered only six- and three-month courses for presidents and vice presidents and a few short courses for other categories of manager. Some provinces have been taking the initiative in developing courses of their own and in encouraging universities to provide some management training internally. In view of the size of the training requirement nationally SEdC will need to consider a more significant, structured approach. NAEA would seem  - 34 - to be the obvious focus for this. but it might require further investment in increasing the range of its specialist skills and capacity. The next steps could involve the following: (a) funding training needs analyses of the various categories of university staff: presidents and vice presidents. deans, heads of departments, senior administrative staff (by specialization), technical staff and middle managers in the administration; (b) development of a training strategy including resolution of issues such as the desirability of developing a qualifications framework for university management training, whether any training should be mandatory for any categories of staff, the options for delivery including distance learning, the scope for producing open learning materials for certain categories of trainee, the need for focus or centralization of training provision, whether by specialization or by geography, and a pricing/funding policy defining the scope of the state's financial support for continuing training provision; (c) deciding whether selected institutions, such as NAEA, should be preferred as key providers or developers of training material on university management; and (d) networking with international agencies and universities overseas in order to draw on their experience and existing training materials4 and to develop the opportunities for staff exchanges or secondments. It would be unfortunate if China were not able to tap the training material that is being developed for university management training elsewhere in the world. Advice on University Management 2.25 Universitv presidents frequently expressed the need for more advice on how to manage. How can this be provided? It is clearly not a task that either SEdC or provincial bureaus are competent to perform. However, in view of the scale of change facing universities, their limited access to management skills at present, the number of small universities and the wide range of provincial management practices, there are good arguments for government helping to develop some national initiatives. What is needed is no less than the development of a new profession in a very short space of time. One option would be for SEdC to subsidize an independent Higher Education Management Center (HEMC), which would provide help and advice to individual universities and provinces or municipalities. Possible roles for such a Center might be to: 4 For example, the International Center for Distance Learning at the British Open University operates a database of 26,000 courses worldwide. These include several on university management at diploma or certificate level, which could be adapted. Further details of such courses offered throughout the British Commonwealth are outlined in a publication by the Association of Commonwealth Universities.  - 35 - (a) undertake research into best management practice in Chinese universities-and relevant experience elsewhere-and disseminate the results to all; (b) work very closely with existing groups of university administrators to help them to develop their professionalism and assist in the formation of other similar groupings for those managing physical property, the human resource/personnel functions, student admissions etc. Such work would include sponsorship of meetings, development of best practice and publications relating to the specialist area of university management; (c) organize collective discussions and conferences on key management issues as they arise; (d) provide practical consultancy advice to specific university managers on their problems using a network of experienced practitioners; (e) publish guidelines and handbooks on good management and help to develop comparative measures of managerial performance; and (f) advise the providers of management training on the training needs of university staff and collaborate with them to develop and offer short courses. SEdC could invite bids from universities to host such a center and then provide it with "core funding" for a short period. During this time it would be expected to build up an income-generation capability from selling its courses, advice or software. If such a Center is established, it is important that its staff are not simply teachers with research interests, but are able managers with practical experience of university management. 2.26 These four steps by government will help individual institutions to build up their managerial capacity. The published national infornation will form the basis for critical self-examination as well as providing targets or comparative benchmarks. The staff development programs will allow individual Presidents to develop their key staff as effective managers and the national HEMC can become a valuable sounding board for innovative, managerial ideas. Chapter 3, which follows, describes the management challenges that have to be faced.  - 36 - FIGURE 2.2: ACTION PLAN: RELATIONSHIPS BETWEEN UNIVERSITIES AND THE STATE OBJECTIVE MEANS INDICATOR ACTION Define the role of the Enact a Higher Education Law setting Passage of the Act State Council state vis-a-vis the uni- out general principles. Confirm versity content and authorities of: Publication of SEdC * State regulations model statutes * University statutes * University regulations Establish effective Review roles of SEdC, ministries and policy-making and provinces in setting higher education funding bodies for policy and funding individual higher education. institutions. Define who performs each role in a Confirmation of State Council future structure. new policy and funding arrange- ments Providing enabling Instruct universities to prepare strate- Publication of SEdC and environment for gic plans and issue comprehensive guidelines other spon- universities to develop policy guidelines. soring bodies own strategies and strengthen their mana- gerial capacity. Development of a national reporting Publication of SEdC system of key management informa- standard informa- tion (and indicators of performance) in tion reports consultation with President and their staff. Agreement on management staffing Completion of SEdC and model for universities and develop- national training sponsoring ment of a training strategy together strategy for uni- bodies wNith designation of training providers. versity managers Creation of a Higher Education Man- Publications. SEdC agement Center to research best prac- tice, publish guidance and sponsor training workshops.  -37 - 3. CHANGES IN UNIVERSITY MANAGEMENT A. THE CONTEXT 3.1 As Part 2 has shown, one of SEdC's recent policy objectives has been to strengthen the management role of the university president. Although much formal documentation presented to the mission showed the president as still being subject to the direction of the Party Secretary, there was no evidence that this clashed with the president's academic autonomy. What is less clear are the respective roles and powers of University Councils as regards the provincial bureau or SEdC. There is also a potential area of confusion in those cases where universities have established Boards of Trustees as well as a goveming council. 3.2 Many universities have established Boards of Trustees in order to establish and develop links with society and local enterprises. However, the role of such boards was not always the same; most institutions used it to provide contacts with a wide range of commercial enterprises and their funds, some stressed the involvement of local provincial or municipal government officials, while Chongqing University actively involved its board in its intemal management, expecting it to review the University's development plans. 3.3 University organization structures were changing. Many of those presented to the mission appeared to be very flat with relatively large numbers of people shown as reporting directly to the president. After its recent merger (Chengdu Scientific and Technological University and Sichuan University) Sichuan United University has no less than six vice presidents. In discussions with senior officials, a typical senior organization structure in universities emerged along the following lines: President -Vice President, Research -Vice President, Education or Dean of Studies -Vice President, Personnel -Vice President, Finance and Administration (and Enterprises) In two universities, a post of secretary general was shown at the same seniority level as that of vice president. The incumbents were senior, trusted academic staff who acted as the president's chief administrative officer. Other administrative job titles commonly found were: Director of Personnel, Director of Finance, Director of Academic Affairs, Director of Foreign Affairs (or Intemational Relations), Director of General Affairs and Services and Director of Science Research. In almost all cases these posts were filled by former teachers who had become administrators. In some institutions there were specialist offices for functions such as: Student Assignment, Campus Accommodation, the University Hospital,  - 38 - University Printing House and management of university enterprises. The typical organigram was similar to that in the United States with senior academic staff acting as vice presidents and managing heads of administrative functions. B. MANAGEMENT ISSUES Respective Roles of President, Council and Board of Trustees 3.4 In a few of the universities visited there was a University Council or Governing Body, but it had varying roles; in one case it was described as advising the president, while in another it was clearly directing him, as in the American or British model of governance. There was no consensus on the role or composition of a university council. This uncertainty will not be resolved until legislation is passed along the lines suggested in Chapter 2, defining precisely what the respective roles of SEdC, the council and the president are. The role of Boards of Trustees will need to be confirmed in the light of the formal powers given to councils and they might be expected to focus on fund raising and industrial liaison rather than management. 3.5 One emerging problem is that of the conflict between the president as manager/ fund raiser and as academic leader. Many times the mission heard of the concerns of senior academic staff that they were not trained to take on management tasks and that they had difficulty reconciling the two disparate functions. Chinese university leaders are not alone in this dilemma, which is virtually a worldwide phenomenon in higher education; China does, however, lack an adequate infrastructure of either skills training or experienced technical support. If the recommendations in paragraph 2.25 are followed, the task of the short-term academically inclined president would be made immeasurably easier. The Management of University Enterprises 3.6 The management of enterprises is assuming growing importance as financial pressures increase and the enterprises are seen as one of the principal sources of additional finance. Part 4 describes the income that has been generated from such sources to date and assumes that it will continue to increase. Responsibility for managing university enterprises appeared to be given usually to the vice president in charge of finance, but there were indications in some institutions that this was becoming too large a job. All the universities visited had a number of enterprises employing their own workers; in one case 60 such companies were named, in another there were 400 employees in one enterprise alone; yet another had sales outlets in cities throughout China and several were run as joint ventures either with foreign investors or with former alumni in Hong Kong and Singapore. Fangzheng Corporation, owned by the University of Peking, was reported to have a turnover in excess of Y 1 billion and a profit of more than 200 million. 3.7 The increasing role that these enterprises play in Chinese universities (and the reliance on them as providers of alternative income) raises two management issues:  - 39 - (a) whether they can continue to serve dual academic and financial objectives. There is a basic conflict between using a company as a research/consultancy test bed and teaching forum and using it to generate profits. For example, the investment criteria for each objective are different; in one model, equipment purchases may be used to illustrate new technologies to students, while in the other equipment is purchased on purely payback or profit- making criteria. Although most university leaders claimed that this was not yet a problem, financial pressures will make it increasingly difficult to serve purely academic objectives. Some university enterprises are already seeking to charge fees for the time they give to students. The strategic question must be faced and universities should look closely at their portfolio of company enterprises and decide which are purely commercial and should be managed as such and which have academic objectives. In the latter case, clear guidelines on investment criteria and the use of staff time need to be set. It may also be necessary to accept that such companies operate at a loss. (b) whether it is right that teachers who are appointed on essentially academic criteria should be expected to manage industrial holding companies in an increasingly competitive environment. One university has lost several million Yuan from one enterprise and now treats them warily. As China's market economy grows in sophistication, it is quite possible that those academic enterprises that have thrived until now will not prosper in the face of tougher. professional competition. One well-known key university said that it did not wish to manage enterprises any more, but would prefer to be an investor receiving profits from organizations run by professional managers. This should be the route for all universities in future. It would be risky and expensive to allocate teachers to posts managing enterprises unless they were particularly well qualified in the right technical skills. 3.8 Universities are clearly keen to get as close as they can to external enterprises, not only as sources of finance and work experience for students, but also as employers of their graduates. There was little evidence among universities visited of the close long- term relationships that exist in some universities which foster clubs or groups of their local enterprises and then jointly solve their technical problems by consultancy as well as providing training and short courses for all levels of staff. This scenario however is changing rapidly, particularly in areas of economic growth. In due course, China will need to develop the profession of Industrial Liaison Officer within universities in order both to professionalize the services offered by teachers and to ensure that universities get the maximum income possible from its inventions and intellectual property. As Chinese universities enter the world of commercial research, they can draw on international experience of managing the technology transfer process. Council for Industrv and Higher Education and Department of Trade and Industry (1989). Collaboration Between Universities and Industry. Six handbooks. HMSO. London.  - 40 - The Management of Teaching Staff 3.9 Improving the quality of personnel and their performance has understandably been given top priority by presidents as their most important management issue. They now have the powers to make desired changes. Among the innovations being introduced were: (a) "Eliminating traditional ideas of giving promotion according to one's experience and age...and increasing the proportion of young and middle aged teachers in high positions." Some universities had radically changed their age profiles: at Southwest Normal University 67 percent of staff were under 45 and at Southwest Agricultural University 57 percent were under 35. (b) Attempting to recover suitably qualified academic staff from overseas or other provinces by offering specially attractive packages of accommodation and pay. There is active recruiting by some presidents of inland universities in an attempt to reverse the economic pull toward the prosperous coastal regions. (c) Restructuring administrative departments and sections and "merging overlapping functional sections so as to smooth their relations." (d) Placing strong emphasis on teaching quality through appraisal, examinations and the award of prizes to the best teachers. (e) No longer giving jobs to "those evidently unqualified for them"; opening up jobs to anyone who wanted to apply; and making appointments on the basis of merit and ability rather than age or seniority (f) Rewarding teachers according to their performance. as compared with the old method of giving everyone the same bonus. Several universities had developed systems that spread departmental surpluses (derived from a universitywide bonus and departmental eamings) among staff according to their teaching quality. The decision was entirely the dean's although the department's share of the university bonus was decided by the president. (g) Introducing special increases in the hourly rates paid for teaching in order to emphasize its importance. 3.10 Despite these changes many presidents felt constrained in their freedom to make major changes in the staff structure of their universities. They felt that, without the power to dismiss some staff entirely, they would always be compelled to retain some unproductive or ineffectual teachers they would rather not employ. As long as society expected them to provide a total package of care for all their employees regardless of how much they contributed to the university, they could not become fully efficient. More  - 41 - recently the situation shows signs of change with the possibility of dismissal of inappropriate faculty growing. Existing Inefficiencies 3.11 One main task of presidents is to improve the efficiency of their university. By international standards there is a long way to go. Overall student-teaching staff ratios, for example, in the most efficient institutions were 8.3:1 or 9:1, but in many others were still at levels of 5:1 or 6:1. This compares with European or Australian ratios in the range of 15:1 to 20:1. Presidents are now setting academic staff numbers using target student-staff ratios according to the type of department and the teaching it provides. Overall, they were planning to achieve tighter student staff ratios, sometimes in response to ceilings set by the provincial authorities; Southwest Nornal University had 8.3:1 in 1994, but was targeting 9.5:1, Southwest Agricultural University had 9:1 and was aiming at 12:1, while Foshan University's current ratio was 11:1. 3.12 Another key ratio is that of total staff numbers to students. Because of the tradition of providing a welfare and support service for the whole life of staff, as well as complete municipal services, these figures are very high. Comparisons with European or North American universities (where ratios are around 1:7) are less relevant than with African institutions, where it is common to find one staff person for every two students. In China in 1993, the ratio was 1:2.5. In the near future the State will have to resolve the question of whether it expects public bodies to continue to offer life-long support to their staff; however, until some alternative sources of housing and social security support have been developed, it would be unrealistic to expect university presidents unilaterally to eject their staff from the university system (although a few isolated examples of this were found). 3.13 The use of space is another area where there is considerable potential for efficiency gains. SEdC norms say that each university must have 46 square meters of constructed floor space per student. In one New Zealand university the requirement per student has fallen from 15 to 9 square meters over the last five years. If SEdC acts to lower the space norms, this will have the effect of deferring the provision of further buildings and will force institutions to look hard at the way space is now used. Laboratory use in the mornings, lectures on Friday afternoons and early evenings will become the norm rather than a rarity. An item of expenditure that is often trimmed by poorly managed universities is that on the maintenance of buildings and equipment. In the long run this is a false economy and university councils should act to protect these elements in the budget. Delegation of Management Decisions 3.14 University presidents have been quick to appreciate that they cannot exercise detailed control over the affairs of academic departments and most have moved rapidly to a system of delegating responsibility to deans or heads of schools/departments (Box 3.1) on page 42. One president agreed on individual performance targets with his deans  - 42 - and heads of departments and allowed them to build up financial reserves and to reward academic staff with different bonus levels as they thought fit. In another university the vice president of finance was planning to delegate to heads the decision on whether to recruit staff on a full-time or part-time basis. Yet again, the move to such delegation is a worldwide phenomenon, but it is rare to find it adopted so rapidly after universities have gained their own as yet ill-defined autonomy. The lessons from international experience are that, if such delegation is to be effective, it has to be accompanied by sound information and reporting systems and good basic training in financial management for deans and heads of departments. Neither yet exists in many Chinese universities. Box 3.1: DELEGATING THE DIFFICULT DECISIONS In Tianjin University the president has decided to delegate the personnel budget to deans and to combine the change with a fonnula approach that only pays people according to their teaching load. If a professor does only half the teaching load, the other half of the salarv has to be eamned from research or consultancies. This causes enormous difficulties for some deans. One now has over 100 teachers and only 150 students. The formula used by the university means that the department will only get enough money to pay for 15 people. The dean is not allowed to fire anyone and he knows that most of the people in the department will be unable to eam the income needed to support themselves. When he allocates teaching duties, he will be giving out pay; those who get no teaching hours will have to find income from other sources. Source: He Jin.(1994), The Dean's Dilemma. Mission paper. Faculty Development 3.15 Chapter 2 has described what the government can do nationally to help provide suitable management training for those academic staff with managerial responsibilities. However, presidents must bear the principal burden of ensuring that those to whom they delegate are qualified to do their job. This will involve the development of internal programs to supplement those at national and provincial levels. Inadequate Information Support 3.16 While it was common to hear about the delegation of functions and budgets to deans and others. it was clear that the management information svstems were unable to meet the demands which were made of them. There was a wide range of different evidence on the quality of university management information systems. In Guangdong province, most of the universities claimed to have most of their information systems operational, while in Anhui only a few made this claim. The usual approach to developing such systems appeared to be to commission the software development from teaching staff in the computing department. This has rarely been a permanent or satisfactory solution in other countries, since teachers are rarely familiar with the requirements of commercial operations. There were only a few instances of a university importing an administrative software package from another university, nor were there any reports of universities using any common software (as in the college sector) other than that required by SEdC to produce its standard financial returns.  - 43 - 3.17 There is a massive task of training ahead in all aspects of designing and implementing integrated MIS. The length and cost of this process is universally underestimated. SEdC has begun to take some initiatives in this area by arranging for meetings of those concerned with the development of MIS. However, presidents cannot avoid the responsibility for developing their own university administrative computing strategies and devising plans to achieve whatever kind of MIS they decide to adopt. High Cost of Support Staff 3.18 One of the major management concerns of university presidents is the large number and high cost of their support staff. This was being tackled imaginatively by some but there were limitations on the flexibility and speed of actions that presidents could take because of social factors and the long-held traditions of care for workers. There were two main types of solution: (a) "commercializing" the support functions by making them better managed within the university system and encouraging them to undertake work for outside customers: and (b) "socializing" them by releasing them from full-time work for the university and letting them operate as free agents in the outside marketplace, as long as they perform some limited contracts for the university. At the end of the year, they would be expected to repay to the university the full cost of their salary. 3.19 Both these solutions are feasible in urban environments, but are not as easy in the more remote, rural areas or in poorer provinces. Neither solution removes the staff from the university that is still responsible for their total welfare. It was clear that many presidents would have liked to have made surplus support staff redundant, but were constrained because the necessary social underpinning was not yet in place. C. RECOMMENDATIONS AND ACTION PLAN 3.20 A possible action plan for the government's consideration, with suggested tasks for both SEdC and individual presidents in the area of institutional management is shown in Figure 3.1 on page 47. What the Government Should Consider 3.21 The government can strengthen the internal management of institutions by: (a) Including guidance about the role and composition of the university Governing Body or Council in its legal framework for universities. Such a body could play a valuable linkage role with society if its membership included not only students and senior academic staff, but also representatives of the local community, of the region, province or municipality, of a selection of enterprises and professional people such as lawyers, accountants and property specialists. The difference between a  - 44 - council and a fund-raising board of trustees should be clarified since many universities get their functions confused. The government could also issue a regulation suggesting the content of model Statutes that university councils should pass to control the detailed governance of the university. Annex I illustrates the possible coverage of university Statutes. (b) In consultation with the Ministry of Finance, clarifying the position of universities as regards their tax-free status and covering particularly their earnings from nonacademic activities and their consultancies. Tax incentives for donations to universities from enterprises and individuals should be considered. (c) Modifying its encouragement of the expansion of university enterprises so as to make clear that there are various options for managing the enterprises or for holding investments in them. The government might stress the distinction between retaining companies with wholly academic objectives and holding the others as investments within a commercially run portfolio. In general, direct management of enterprises by university staff ought to be discouraged. (d) In association with the other sponsors of universities, encouraging them to prepare their own strategic plans; this would involve clarifying any policy parameters within which the universities should plan, defining the State's attitude to diversity in the way universities choose to meet national objectives and confirming the link between strategic plans and the annual funding processes. SEdC and others might derive perforrnance measures from their policy objectives and ask universities to report on their success against such measures. A preliminary task for SEdC, ministries and provincial authorities would be to arrange the provision of training for university staff in the practical aspects of preparing strategic plans. (e) Continuing to encourage universities to collaborate in the costs of developing computerized management information systems. Even if existing software is imported from other countries, the cost of adapting such a system can easily exceed a million dollars for each institution. There is a strong financial and practical case for the government to follow the example of countries such as Australia and the United Kingdom where the government has funded universities to form consortia to share software development costs. (f) Providing funding for ways of promoting good management, beyond those suggested in Chapter 2, and helping universities to learn from the experience of others in improving their efficiency.  - 45 - What Universities Have To Do 3.22 The development of a strategic plan is a first major task for each university. Working within the framework provided by its sponsoring body, the university should assess its strategic options in the context of its history, academic strengths. and potential regional and local markets. The president should steer a planning process involving participation of the institutional body at various levels and members of the local community to produce a strategic plan to which senior members of the university are committed. 3.23 Plans for improving management efficiency will form an element of each university's strategic plan. Since the objectives and programs of each university will differ, there is no standard model of best practice. However, economy and efficiency exercises are being carried out in most universities throughout the world and Table 3.1 illustrates some of the questions and alternative approaches that are being considered. One of the roles of the university council (or equivalent governing body) will be to check that the president and his senior administrators are undertaking regular reviews of all these issues. No university can afford to stop questioning whether it can do things more efficiently. In many countries this process is taken for granted by funding agencies, which assume that universities are capable of making annual efficiency savings of between 2 and 4 percent per year. 3.24 University enterprises have enormous potential for losing the university money. Every council should therefore initiate a review of all the existing enterprises in order to make a clear distinction between those that are expected to generate profits and those that have primarily academic objectives. In the former case, the management of the activity must be as commercial as possible and external managers should therefore be closely involved. The council should consider whether it wishes to continue in the business of employing enterprise staff or whether it would be preferable to sell the operation to an independent private company. Where this is the case, the university will be freed of the burdens of management and will receive its income in the form of dividends. 3.25 In managing the university reliable management information is a prerequisite. The president will therefore need to have a strategy for computerizing the university's basic administrative systems so as to derive information from them. Such a program will take time to implement and could also be very costly unless advantage is taken of software developed elsewhere. It will therefore be in the interests of the university to collaborate with others either in sharing the costs of software or by purchasing ready- made programs. The government has a plan for a nationwide information highway which should establish a framework for such collaboration. Any strategy that is agreed should be compatible with the network and communications policy of the university, so that administrative and academic users do not duplicate facilities.  - 46 - TABLE 3.1: WAYS OF ACHIEVING ECONOMY AND EFFICIENCY I eachers: Equipment and teaching materials: Set target student/staff ratios for each department Form purchasing consortia of universities to get better terms/discounts trom suppliers. Set teacher workloads (class hours etc.) and allocate time between Teaching, Research and other activities such as Establish central purchasing systems to identify the cheapest Enterprises supplier for standard or bulk items Monitor and control teachers' time spent on activities Encourage the sharing of expensive equipment within the university and between universities in a city Use altemative teaching/leaming method-CAL. Open leam- ing, self study packs Charge out the use of sophisticated equipment to commercial users Introduce Computer Assisted Testing for students to save teacher time When technical staff are trained in the maintenance of such equipment, charging their services to other owners in the Share specialist staff with other universities (or employ them region. on a part time basis) Buildings and Space: Use qualified people from industry/commerce as part time lecturers, where relevant Ensure that timetables use all the working hours and that no times are regarded as unusable Support staff In departments: Make all classrooms centrally bookable and do not allow Set target support staff ratios for particular departments departments to claim any as their own Ensure that Vice Dean manages the time of' departmental When modifving or rebuilding buildings. replace all old mate- support staff rials with maintenance-free materials Use support staff as teaching assistants, for non professional Before building a specialist facility, check that no one else in supervision. or management of open leaming materials or the region has one which could be shared terminals. Design first and second year undergraduate laboratories as Delegate non prot'essional work of teachers to support staff multipurpose for use by several disciplines wherever possible Design lecture and seminar rooms with movable walls to Libraries and computer centers: accommodate ditTerent class sizes Set up local collaboration between libraries on joumal pur- Use loose fumiture that can be moved around to make flexible chasing, access via network to each other's catalogues, teaching layouts Negotiate contracts between librarics for exchange of faxed Check how rooms are actually used compared with their aticles or inter library loans. timetabled and booked use by departments Encourage access by teachers and students to all university Use the statistics on room usage in planning the provision of libraries in the same city. new accommodation Use students as part time labor in stacking and shelving. Contract out building maintenance tasks on a competitive tender basis with fixed prices for standard tasks Get income from the sale of photocopies in the library. Service staff: Obtain income from sale of computers or accessories to teach- ers. Contract with staffon independent basis to provide services to the university Use packaged administrative sot'warc or software dcveloped by other universities Obtain tenders tor contracts with private cnterprises to provide the services and compare their cost with the in-house staff Administrative staff: Place the intemal services. wherever possible. on a customer Simplify and redesign routine operational processes to remove service basis so that users are paying for service delay and duplication General: Integrate computerized operational systems to remove dou- ble/treble entry of the same data. Ensure all division managers set performance targets for their staff each year Delegate some functions to teaching departments to cut out delay and confusion. Encourage administrative managers to promote a culture of service and support to the rest of the university Contract out routine administrative support functions to pri- vate enterprises, e.g.; printing, accounting, building design, Establish performance measures for administrative departments legal advice, project construction management. which assess their efficiency and the quality of their service Restructure departments and divisions to reduce duplication Reward excellent administrative performance as much as good and number of senior posts. teaching or research performance Provide training and travel funds to let administrative mana- gers visit other universities and conferences to learn good ideas  -47 - FIGURE 3.1: ACTION PLAN ON MANAGEMENT Goal: To improve the quality and effecliveness of university management OBJECTIVE MEANS INDICATOR ACTION A. Government Level Ensure roles of govemment. Pass a HE Act saying what Act passed SEdC university councils and respective powers and duties are of presidents are clearly understood Government and University Councils Pass Regulations defining Regulations issued SEdC. State suggested contents of Statutes that Council university councils may submit for approval Clari4' universities' tax-exempt Pass necessary legislation in a Act passed SEdC. Ministry status on their earnings and Finance/ Taxation Act of Finance confirm that donors can get tax Numbers of donations benefits from gifts increase Improve quality of management Sponsor or fund collaboration Number of universities SEdC information between universities in developing implementing MIS and implementing administrative software Ensure universities get the most Issue guidance on types of Improvement in income from SEdC benefit from their enterprises and enterprise and how they should be enterprises and reduction in commercial activities managed numbers becoming bankrupt B. University Level Provide strategic direction tor the Develop a planning process from Completed plans linked to President universities which a strategic plan emerges to budgets which all are committed Provision of training workshops Numbers of participants NAEA. etc. on strategic planning for university staff Improve operations efficiency Undertake regular reviews of Reduced unit costs and University and reduce costs potential efficiency savings improved efficiency ratios Council. President. Senior Staff Maximize income from Review all enterprises, set each Profits from enterprises paid Council university enterprises one financial targets and to university professionalize its management where relevant Ensure availability of high- Prepare strategy for developing Reliable statistics, ratios, etc. President quality management information computer-based MIS, using bought software where possible  - 48 - 4. FINANCING HIGHER EDUCATION: DIVERSIFICATION OF RESOURCES A. THE CURRENT CONTEXT OF HIGHER EDUCATION FINANCE 4.1 Public Finance. Since China embarked on economic reforrn in 1978, the Gross Domestic Product (GDP) grew by an impressive 9.8 percent per year in real terns, from Y 1,006 billion to Y 4,501 billion in 1994 (in constant 1994 prices) (Table 4.1, Annexes 13A and 13B). However, the growth of government revenue fell far behind that of GDP, increasing at an annual average of only 2.6 percent over the period. This resulted from decentralization and from permitting production units to retain much of their earnings without simultaneously putting in place a national tax administration until 1994. The revenue-to-GDP ratio declined from 34 percent in 1978 to 13 percent in 1994 (Annexes 13A and 13B). Government expenditure, however, increased at 3.3 percent per year, higher than revenue, resulting in budget deficit in all but one year (Table 4.1). Between 1987 and 1993, the public sector deficit hovered around 11 - 12 percent of GDP and was a key factor underlying inflationary pressures in the economy. In 1994, however, the public sector deficit declined to 9.9 percent.' 4.2 Public expenditure on education increased from Y 21 to 98 billion (in constant 1994 prices), by an annual average of 10 percent between 1978 and 1994, far exceeding the respective growth rates of the total government revenue and expenditure (Table 4.1, Annexes 13A and 13B). As the overall public spending shrank over the years, public expenditure on education as a percentage of total government expenditure rose from 6.2 percent in 1978 to 17 percent in 1994. Public expenditure on education as a percentage of GDP rose from 2.1 percent in 1978 to the height of 3.1 percent in 1989, and then fell back to 2.2 percent in 1994 (Annex 13B). This level of public spending on education is low in comparison with least-developed countries' average of 2.8 percent. developing countries' average of 4.1 percent, and developed countries' average of 5.3 percent.2 The Chinese Economy: Fighting Inflation, Deepening Reform (World Bank, 1996), p. 10. 2 UNESCO, Statistical Yearbook 1995, p. 2.28.  - 49 - TABLE 4.1: AVERAGE ANNUAL GROWTH RATES IN REAL TERMS, 1978-94 (All Yuan are in constant 1994 prices) Average Annual 1978 1994 Growth Rates GDP (Billion Yuan) 1,006.3 4,500.6 9.8 Total Government Revenue (Billion Yuan) 345.8 521.8 2.6 Total Government Expenditure (Billion Yuan) 343.6 579.3 3.3 Total Government Education Expenditure (Billion Yuan) 21.4 97.9 9.9 Total Government Higher Education Expend. (Billion Yuan) 4.2 18.6 9.7 Total Institution-Generated Revenue (Billion Yuan) 0.2 4.2 22.3 Students in Regular Higher Education (Million) 0.9 2.8 7.7 Teachers in Regular Higher Education (Million) 0.2 0.4 4.2 Nonteaching Staff in Regular Higher Education (Million) 0.3 0.6 4.6 Total Staff in Regular Higher Education (Million) 0.5 1.0 4.5 Average Annual Wage in Higher Education (Yuan) 1,527 5,992 8.9 Note: The numbers on students, teachers, and staff in regular higher education institutions were rounded in this table. However, the calculation of the average annual growth rates was based on the original numbers (in hundreds of thousands). Source: Summary of Annexes 1, 5, 6, 13A and B and China Statistical Yearbook 1995, pp. 115-117 for infornation on wages. 4.3 Total public allocation to higher education grew from Y 4.2 to 18.6 billion (in constant 1994 prices), by an annual average of 9.7 percent between 1978 and 1994 (Table 4.1, Annexes 13A and 13B). Public spending on higher education increased from 20 percent of total public expenditure on education in 1978 to the peak of 29 percent in 1984, then declined to around 17 percent between 1989 and 1992, and climbed back to 19 percent in 1994 (Annex 133B). Since under 2 percent of the age cohort were enrolled in higher education in much of the 1980s, the high share of public spending devoted to them reflected the effort to rebuild the higher education system. 4.4 At the same time, given the very low enrollment ratio in China, public spending on higher education was high by international comparison. For example, Indonesia, Malaysia, Thailand, Taiwan (China), Republic of Korea, and Japan, which had a much higher enrollment ratio in higher education, spent only 11 to 17 percent of their respective total public education expenditure on higher education, and mobilized the rest of the resources from private spending; the rest of their public expenditure was spent on lower levels of education (Table 1.2). In 1980, China spent 27 percent of its public education expenditure on the primary level, 34 percent on the secondary level, 0.5 percent on preprimary education, and 18 percent on others.3 By 1993, the share of primary 3 UNESCO, Statistical Yearbook 1995, p. 4-50.  - 50 - education went up to 34 percent and that of secondary education to 38 percent, while preprimary and other types of education claimed 1.3 and 9 percent, respectively. Since the lower levels of education are where the poor have access to, whereas middle- and upper-class_students tend to be overrepresented in universities, allocating more public resources to lower levels of education is more equitable. Table 4.3 provides a regional comparison of public spending per-student as a percentage of GDP per capita by level of education. In China, in 1990, public spending per-student in higher education was 193 percent of GDP per capita, that in secondary education was 15 percent, and that in primary education was 5 percent. In 1994, this was 175 percent.4 While improvement has been made, this percentage is still considerably higher than the 1990 average of 98 percent in East Asian countries (Table 4.3). The relatively low per-student spending at the tertiary levetlin East Asia was made possible by the relatively large enrollment in higher education and efficient use of resources, resulting in reduced unit cost. 4.5 The public -allocation per student in real terms peaked in 1984, and then went on a decline with year-on-year fluctuation (Table 4.2, Column 6). The increasing share of university-generated income and student fees made up for the shortfall (Table 4.2, Column 7). In 1994, the total allocation per student amounted to Y 8,168 of which Y 6,645 were public allocation and Y 1,515 were allocated from university-generated resources (Table 4.2, Column 8). In other words, in spite of rapid enrollment expansion, the total public and institutional allocation per student maintained the average unit allocation at a relatively, stable level for higher education. B. REFORMS IN HIGHER EDUCATION FINANCE AND THEIR CONSEQUENCES 4.6 Before the reforms in the 1980s, higher education institutions received their funding almost exclusively from government appropriation according to the unitary State budgetary plan. Based on the previous year's allocation, the government would make some incremental adjustment-according to the needs and development of the institution and the total budget for higher education. Unused funds had to be returned to the government at the end of the year. Thus, the tightly controlled budgetary system provided no incentive for efficiency gains, and hampered the initiatives of universities and lower-level governments. In recent years several significant reforms covering financial decentralization. new funding mechanisms and resource mobilization were implemented. 4 This is calculated by dividing the public expenditure on higher education per student by the GDP per capita. In 1994, it was Y 6,645 divided by Y 3,800, which is equal to 175 percent.  - 51 - TABLE 4.2: FUNDING SOUCES FOR HIGHER EDUCATION AND SPENDING PER STUDENT, 1978-1994 (In constant 1994 prices) Total Govt. Total Total Government Universitv- Total Expenditure University- Public & Student Allocation Generated Spending on Higher Generated Own Enrollment Per Student Income Per Student Education Income Spending (Million Per Student Year (Bi. Yuan) (Bi. Yuan) (Bi. Yuan) Persons) (Yuan) (Yuan) (Yuan) 1978 4.2 0.2 4.4 0.9 4.892 196 5,087 1979 6.3 0.2 6.5 1.0 6.157 239 6,396 1980 7.4 0.2 7.5 1.1 6.448 161 6,609 1981 8.2 0.0 8.2 1.3 6.413 N.A. 6,413 1982 8.8 0.2 9.0 1.2 7.649 178 7,827 1983 10.8 0.3 11.1 1.2 8.963 208 9,172 1984 12.6 0.3 12.9 1.4 8,990 241 9,231 1985 13.5 1.2 14.7 1.7 7,913 716 8,629 1986 15.1 0.0 15.1 1.9 8,042 N.A. 8,042 1987 15.2 1.4 16.5 2.0 7,736 708 8,444 1988 14.7 1.7 16.3 2.1 7,131 803 7,934 1989 14.4 1.6 16.1 2.1 6.947 770 7,717 1990 13.2 1.9 15.1 2.1 6.414 904 7,318 1991 13.5 2.0 15.6 2.0 6,642 999 7,641 1992 14.9 2.7 17.6 2.2 6,820 1,252 8,072 1993 15.5 2.8 18.3 2.5 6.119 1,092 7,211 1994 18.6 4.2 22.8 2.8 6.645 1.515 8,160 Sources: The implicit price deflators from 1978 to 1993 were taken from China: Macroeconomic Stability in a Decentralized Economy (World Bank, August 1995), Statistical Annex Tables 1.1, 1.3 and 7.6; those figures for 1994 were taken from Chlina Statistical Yearbook 1995 (State Statistical Bureau, 1995), pp. 32 and 215. The price deflator was rebased, using 1994 prices as constant. Educational expenditure data were drawn trom SEdC and State Statistical Bureau sources. TABLE 4.3: CROSS-REGIONAL COMPARISON OF PUBLIC SUBSIDIES PER STUDENT AS A PERCENTAGE OF GNP PER CAPITA BY LEVEL OF EDUCATION, 1980-94 Region/Country Preschool (No. of countries) Year & Primary Secondary Tertiary China 1980 4 13 362 1990 5 15 193 1994 - - 175 Latin America (19) 1980 8 14 56 1990 11 13 80 East Asia (8) 1980 5 14 182 1990 8 19 98 South Asia (4) 1980 15 27 84 1990 10 20 76 Middle East and North Africa (9) 1980 - - 63 1990 - - 81 Sub-Saharan Africa (23) 1980 13 46 796 1990 14 51 481 Source: UNESCO, WVorld Education Report 1995, Table 12, pp. 104, 156-159.  - 52 - Financial Decentralization 4.7 As part of the overall economic reforrn that allowed provinces and ministry- owned enterprises to retain a higher portion of their earnings for their own development, the central government has delegated financial responsibilities to provincial governments and line ministries in financing higher education. 4.8 Financial decentralization has encouraged experimentation and innovation. For example, Guangdong Province recently invested massively in education, raising teachers' salaries across the board to almost twice the national average, improving their housing, and matching central government's allocation to SEdC universities and colleges within the province. However, the financial capacity varies from province to province. Regional disparities in funding of higher education have serious implications for the ability of poorer provinces to attract and retain capable faculty members and to provide quality education. Table 4.4 shows the very wide range of allocations per student in a sample of provinces. TABLE 4.4: GOVERNMENT ALLOCATION OF FUNDS PER STUDENT TO PROVINCIAL UNIVERSITIES AND COLLEGES IN SELECTED PROVINCES, 1992 (In Yuan) Total Govt. Recurrent Capital Provincial Percentage of Allocation Allocation Allocation GDP GDP for Higher Provinces Per Student Per Student Per Student Per Capita Education Beijing 7,007 5,309 1,698 6,434 2.9 Guangdong 6,630 5,157 1,473 3,514 1.5 Shanghai 5,341 4,707 634 7,925 2.4 Anhui 4,154 3,613 541 1.243 1.8 Sichuan 3.471 3.019 452 1.357 1.6 Source: Constructed by the Bank mission according to information from the State Education Commission of China. 4.9 Even within a province, disparity is evident in the resources available for provincial universities and national universities. For example, of the Y 1,115 million revenue in higher education in one province. Y 787 million (including government allocation, own-generated income, and tuition fees) were spent on SEdC and line- ministry universities. and only 328 million on the provincial universities and colleges. Of that Y 328 million, 260 million came from the provincial government, and 68 million from student tuition fees and own-generated income generation. Consequently, the unit expenditure per student for provincial universities was Y 4,162, while that for national universities in the same province in the same year was Y 7,494 in 1992. Obviously, the provincial universities and colleges were heavily disadvantaged. Changes in Funding Mechanisms 4.10 In conjunction with financial decentralization, the reform replaced the nonfungible line item budget with a block grant allocation from the state to the universities, and gave higher education institutions the autonomy to decide how to spend the money. The state exercised only audit and supervisory functions holding universities  - 53 - accountable for the appropriate utilization of public resources. The state has also abolished the regulations for retuming the unspent funds to the government at the end of each year. 4.11 The incremental approach to allocating recurrent funds was replaced by a formula-based approach. The major allocation parameter is the number of full-time equivalent students. Appropriation for special items and capital outlay is based partially on enrollment. and partially on ad hoc considerations. Although the enrollment-based approach has improved the transparency in resource allocation, it does not provide incentives to improve efficiency or quality. Moreover, some of the national norms for allocating public funds are extremely generous. For example, for each student enrolled, the institution is required to provide 66 square meters of land and 46 square meters of constructed floor space (including classrooms, dormitories, sports facilities, and laboratories) (Annex 10). Resource Mobilization 4.12 In parallel with the reduction of public subsidies, government has encouraged higher education institutions: (a) to generate their own revenue; and (b) to charge tuition fees. (a) Universitv-Generated Income 4.13 The reforns gave higher education institutions more autonomy to generate their own revenues. In 1992, central. provincial, and municipal government allocations accounted for 82 percent of the total revenue in public higher education institutions; income generated by higher education institutions themselves from various sources represented 14 percent and tuition fees accounted for 4.6 percent (Table 4.5). TABLE 4.5: PERCENTAGE DISTRIBUTION OF FUNDING FROM DIFFERENT SOURCES Source 1978 1990 1991 1992 (1) Total Budgeted Allocation From Government 95.9 87.7 86.9 81.8 1.1 Allocation for Recurrent Expenditure 74.8 64.9 65.3 61.4 1.2 Allocation for Capital Expenditure 21.1 22.9 21.6 20.4 (2) Total University Generated Revenue 4.1 12.3 13.1 18.2 Total of (2. 1) and (2.2) 4.1 10.5 11.4 13.6 2.1 Net Income from University funded 10.3 10.7 12.8 activities, among which: income from university enterprises 2.8 3.1 3.7 income from commissioned training 2.1 1.9 2.3 income from educational services 0.9 0.9 1.1 income from research and constancy 1.0 1.2 1.3 income from logistic services (dining 0.7 0.7 0.7 halls and guesthouse, etc.) income from other funded activities 2.7 3.0 3.7 2.2 Donations and Others 0.2 0.7 0.8 2.3 Student Tuition and Fees 1.8 2.9 4.6 Total 100.0 100.0 100.0 100.0 Source: Estimated and constructed by the mission according to information from the State Education Commission, and from Chen Liangkun (1994).  - 54 - 4.14 The four principal sources of income are: (a) Income from university enterprises, which accounted for 3.7 percent of total higher education revenue. The most successful examples are found in the major cities. In Shanghai, 50 higher education institutions operated about 700 enterprises in 1992, the total business volume of which in 1992 was about Y 1 billion. Fudan University's enterprises had a total output value of Y 20 million, among which Y 2 million were given back to the university. However, not all institutions have the relevant management expertise and not all investments produce positive returns. For example, a language institute in Sichuan Province lost about Y 3 million by investing in mining in a neighboring province. Success in generating income also depends a great deal on the location; universities in poor provinces are at a particular disadvantage. (b) Providing commissioned training for enterprises provides the second largest share of independent revenue (2.3 percent of total higher education revenue), while providing education services netted I .1 percent. Departments that offer applied knowledge are in the best position to generate this type of revenue. For example, the Department of Law of Peking University generated much income by running short-term training courses on the large number of newly adopted laws to employees in state- owned and joint-venture enterprises. Commissioned training has great potential to generate further income because the demand for skill upgrading can only grow with economic development-although the potential for rural universities may be limited. (c) Income from research and consultancy accounted for 1.3 percent of total revenue in 1992. Research universities are in the best position to offer this kind of service. For example, the annual income from research in the 36 national key universities was Y 1.12 billion, compared with their state allocation for recurrent expenditure of Y 1.17 billion in 1993. Universities are also able to charge an overhead ranging from 5 to 15 percent, depending on the nature of the research and the source of funding. For many provincial colleges or teachers' colleges, where the research budget is very small, their ability to provide research and consultancy is limited. Logistic services (such as running dining halls and hostels) were not very lucrative, netting only 0.7 percent. (d) Donations now contribute 0.8 percent of income compared with zero in 1978. However, most of these donations are for the construction of buildings, which bear the name of the donor or are in the form of merit scholarships for students in China or for faculty members to study overseas. The beneficiaries tend to be prestigious universities with large networks of influential alumni. Small provincial universities in the  - 55 - interior are rarely the recipients of donations. This again heightens the disparity between national universities and the others. (b) Tuition Fees 4.15 Before 1978, university admissions were tightly controlled by the state, students paid no fees and were assigned jobs upon graduation. The 1985 reform allowed higher education institutions to admit students outside the state plan, as long as they are either sponsored by enterprises or self-financed. In 1992, students in the state plan were charged an annual tuition fee of Y 300-600 and room and board of Y 100-300. Enterprise-financed and self-financed students were charged an annual fee ranging from Y 2,000 to Y 6,000 inclusive of room and board. Regional figures display even higher proportions of self-financed students than the national figure. For example, in 1993, 50 percent of the new student intake in Shanghai was self-financed or commissioned by employers. In Anhui, these categories of new students amounted to 63 percent, the highest in the country. In fact, enrollment grew by 22 percent in 1994, far above the growth target of 6 percent in the state plan, and a large part of the growth was attributable to the increase in self- or enterprise-financed students. This reflects the strength of social and private demand for higher education. 4.16 Since 1989, universities and colleges have charged a low level of fees to state- financed students. The fee level varies by region and subject speciality. Students in agriculture, forestry, normal education, minority education, physical education, and maritime education are exempted from tuition fees. In 1992, they enjoyed subsidies of about Y 80-150 per month to compensate for the future low salaries in these public services or to support special subjects. Revenues from tuition fees at the national level in 1992 accounted for less than 5 percent of total revenue on higher education (Table 4.5). 4.17 The policy changed in September 1994 and the distinction in fee levels between students financed by the state, enterprises, and themselves was eliminated. For most universities, the tuition fee level was set around Y 1,300 per student in the state plan in 1995, although for a few subject specialities in some universities, the fee level can be higher, but cannot exceed Y 2,700. Students in teacher training programs are exempted from fees. The goal is to recover 20 percent of the cost of higher education by 1997. 4.18 This policy has implications for enrollment, job placement, and student financial aid. Previously, the rationale for setting enrollment quotas was to ensure that needed personnel were trained and the state had the financial capability to finance their training. Once a uniform rate is charged to all categories of students, the justification for setting enrollment quotas disappears. Instead, enrollment would be driven by the private demand for education, which, in turn, is responsive to labor market signals of employment prospects and wages. In this sense, raising tuition fees closer to the level that reflects the cost has put in place a self-regulating market mechanism. 4.19 There are, however, two negative impacts, and that is where the state can play a role in regulating the system. First, institutions have incentives to increase their revenue  - 56 - by expanding enrollment, irrespective of their capacity to deliver and of quality. Since students have no information on the quality of education provided by individual institutions, they can be misled into paying an enormous amount. Therefore, the state has both a role in the accreditation of universities and colleges, particularly newly formed private institutions, and the obligation to publish institutional performance indicators to enable students to make informed decisions about which institution to attend. The details will be discussed in Chapter 5. 4.20 Second, charging tuition fees can have a negative impact on equity if qualified students who cannot pay are forced to give up their places. Therefore, in conjunction with charging tuition fees, the former merit scholarships and grants system introduced in 1983, which distributed funds equally to all students, was changed into a new system of merit scholarships, grants, and loans for needy students in 1987. The coverage varies from one institution to another. Some universities charge a higher tuition fee while providing more scholarships. In 1992, financial aid covered between 50 to 80 percent of students. However, the sums awarded were very small, ranging from Y 60 to 300 per year, which provided inadequate support (Table 4.6). TABLE 4.6: FINANCIAL AID TO STUDENTS, 1992 Annual Amount (Yuan) % of Students Covered Scholarship over 100-1,000 less than 10 Grant-in-aid 200-600 40-50 Student loan 300-600 less than 10 Work Study hourly pay less than 1O Source: Universities' reports. 4.21 When the total amount of tuition fees received in 1993 was compared with the amount of financial aid universities have to provide to its students, it was found that the financial aid varied from the equivalency of 39 percent to more than twice of tuition revenue (Annex 18). Henceforth, the expectation that charging tuition fees can recover the target share of the cost should be tempered by the realization that cost recovery must be accompanied by student financial aid if equity is to be protected. 4.22 Conclusions. Financial decentralization has made possible the mobilization of previously untapped resources and encouraged innovation on one hand, but has heightened the disparity based on natural endowment and comparative advantage on the other-hand. Since most provincial universities are much more disadvantaged than national universities (and yet enroll over 50 percent of students), their financial plight has serious implications for the higher education system as a whole. Moreover, while the new funding mechanism has raised universities' cost-consciousness, the norms for resource allocation have not provided any incentives to improve operational efficiency.  - 57 - C. THE CHANGING PATTERN OF HIGHER EDUCATION FINANCE: INSTITUTIONAL PERSPECTIVE AND IMPLICATIONS 4.23 Annex 14 provides a summary of the revenue and expenditure of 14 universities in 1993. Data on revenue and expenditure for these same universities from 1980 to 1993 are presented in Annex 15. It should be noted that these universities were not drawn from a representative sample, and, therefore, the data have no nationwide generalizability. Nonetheless, they provide a glimpse of the financing issues confronting individual institutions. 4.24 On the revenue side, the institutional data confirmed that state allocations constituted the bulk of revenue for them, except where the university can obtain a large share of its resources from "other source or donation," as in the case of a university in Guangdong province. It is also clear that revenue fluctuated widely across institutions and within institutions from year to year. This makes long-term planning difficult, and there is a case for state funding of nonpersonnel cost on a triennial basis, channeled through a university and college council, which would allocate funds on the basis of strategic plans and evidence of improvement of efficiency and productivity. 4.25 On the expenditure side, the major components of recurrent higher education expenditure are: personnel cost (salaries and benefits), student financial aid (which each institution provides to its students in need), administration, instruction, equipment, maintenance and repair, and logistical services (such as running canteens and dormitories); capital expenditure is mainly for construction of buildings for instructional and administrative purposes, student dormitories and residence for faculty members and other staff. Research is not funded on a regular basis, but research expenditure is considered as part of total spending. Several observations can be made from these institutional data. 4.26 First, no uniform pattern of spending has emerged from these institutions' data. Each institution's history, the size and age profile of its staff, assets, programs offered, and other related factors play an important role in affecting spending. For example, universities with an aging staff find themselves having to spend more and more on personnel cost, due to the need to pay for medical care and pension of these staff, and to continue to recruit new staff to replace them. 4.27 Second, salaries and benefits have been on the rise in all institutions in real terms, although their percentage share rose or fell as the total revenue and spending changed (Annex 15). The increase in salaries and benefits averaged 10.7 percent per year between 1980 and 1993, faster than the 8.9 increase in average annual salaries. This reflected in part the increasing pension and welfare responsibilities of universities. For example, Hefei University of Technology, with an enrollment of 7,200 regular students and 2,000 adult students, will have 2,000 retirees by 2000. Unless alternative provincial, regional, or national health insurance and retirement pension systems are developed, the welfare burden of universities is likely to grow.  - 58 - 4.28 On the other hand, however, personnel cost did not exceed 50 percent of total spending in these institutions; some even spent as little as 11 percent on salaries and benefits. This is unusual in comparison with other countries, where personnel cost in higher education can be well over 50 percent. This is attributable to wage compression in the public pay scale. In 1994, the average annual wage in higher education institutions was Y 5,992 ($704), which was 23 percent above that in secondary education, 33 percent above that in primary education, and 32 percent above the national average in all sectors (Table 4.7). These relatively higher wages reflected the policy to increase wages of "intellectuals" in order to attract and retain capable persons in higher education. On the other hand, these wage differentials were small relative to the substantial differentials in skill requirements between faculty members and secondary and primary school teachers. In view of the fact that holders of the doctorate and master's degrees have highly p6rtable skills, unless the terms of service and research environment are sufficiently attractive, higher education institutions would be hard pressed to attract and retain capable individuals in the future. To the extent that wages reflect quality of the service provider, the quality of education in private universities and colleges in China is highly questionable. The state can avoid aggravating the situation by removing any ceiling on tuition fees to enable public and private universities to charge fees at a level that students are willing to pay in order to attract capable persons into teaching, but to ensure that financial aid is available to help the needy students. TABLE 4.7: AVERAGE ANNUAL WAGE OF STAFF AND WORKERS BY LEVEL OF EDUCATION, 1994 (In Yuan) State- Urban owned Collective Other Level Average Unit Unit Unit Higher Education 5,992 5,993 4,569 3,944 Secondary Education 4,943 4,949 3,686 12,177 Primary Education 4,914 4,537 3,055 11,383 National (All Sectors) 4,538 4,797 3,245 6,303 GNP Per Capita 3,802 Source: China Statistical Yearbook 199S, Tables 2-10, p. 32 for GNP per capita; Table 4-26, p. 116-117 for annual wages. 4.29 Third, administrative costs are not very high, fluctuating between 2 to 6 percent in these institutions. Spending on logistical services varied between 5 to 12 percent across institutions, but mostly stayed on the low side. Instructional expenditure fluctuated from 4 to 14 percent across institutions, with most around 6 percent. Spending on equipment fluctuated even more widely across institutions from 2.4 to 18 percent of expenditure. These data indicated that the leadership in these universities has done a good job in  - 59 - containing the administrative cost, spending as much as possible on instruction and equipment. That, however, does not mean that universities have sufficient funding for improvement of instruction. Devaluation of the Chinese currency5 and the rising prices of international journals and books have an adverse impact on the ability of higher education institutions to access the most updated knowledge and to purchase new equipment. Institutions are under pressure to reduce their purchase of library books and subscriptions to academic journals. For example, Fudan University, one of the national leading universities, reduced its journal subscriptions from 1,600 in 1988 to about 800 in 1993. The University of Malaya in Kuala Lampur, to use an Asian comparator, holds well over 1.300 titles. Harvard University holds about 100,000 periodicals and 13.5 million books. 4.30 Fourth, research spending was most variable across institutions, going from zero to 39 percent. This revealed the extreme variability in the ability of universities to attract funding, with implications for the quality of research and instruction associated with it. 4.31 Fifth. capital expenditure varied from 7 to over 52 percent over the period within and across institutions (Annex 14). This fluctuation indicated the lack of predictability in resource availability and could easily crowd out other expenditures. National data show that capital expenditure accounted for 20-22 percent of total public allocation between 1978 and 1992; however, this share declined to 7 percent in 1993 and 16 percent in 1994. This extreme fluctuation of capital expenditure at the national level corroborated with the trend shown in institutional data, reflecting that in the face of resource constraints, capital expenditure was cut to give priority to recurrent spending. 4.32 The reason that institutions spent so much of their total expenditure on capital construction is because of the need to finance the construction of student hostels and housing for university staff. Of the total floor space in regular higher education institutions, only 33 percent were used for instructional purposes and 6 percent for administrative purposes. but 62 percent for residential purposes (see Annex 10 for sources). Of the residential buildings, 31 percent of the floor space was for housing for faculty members and staff, while 15 percent for students' dormitories. Of those buildings under construction in 1994, staff residence accounted for as much as 40 percent of the total floor space. The total floor space per student in 1994 was 44 square meters, of which 14 square meters were for instructional use, and 7 for student hostels and the rest for other purposes such as sports and recreation. The total and instructional floor space in China was much higher than the Republic of Korea's total square meters of 8 in 1985 and 10 in 1991. This wasteful result is probably due to the common problems of most Chinese state-owned units, namely, overstaffing, poor use of existing capital assets, s According to China Statistical Yearbook 1995 (p. 799), the exchange rates of the Chinese currency fell from Y 3.2 to $1 in 1985 to Y 8.6 to $1 in 1994. This report adopted the exchange rate of Y 8.5 to USS in 1994, which was used in another World Bank report (1995), China: Macroeconomic Stability in a Decentralized Economy, in order to attain consistency within Bank documents.  - 60 - emphasis on creating new ones and higher priority to the interest of staff than those of clients. 4.33 A major impediment to improving the efficiency of use of capital expenditure is the obligation to provide housing for staff. Under the socialist system. all government units, state-owned enterprises. and universities are obligated to care for the welfare of their staff. A private housing market was nonexistent. Retired staff and descendants of deceased staff continue to stay in their university housing. Even today, the absence of affordable housing in the private sector does not provide any alternative arrangement for universities. Any enrollment expansion and staff increases necessitate a proportional investment in capital construction. And the lack of resources for capital construction have been cited frequently as a major constraint to enrollment expansion.6 One option (adopted in some universities already) is to sell the right to live in university accommodation either at or slightly below construction cost. However, there are a number of unresolved issues. First, the legal right of the university to dispose of its property has not been spelled out by law. Second. selling the quarters at the cost of construction will not reflect the value of the land, which has skyrocketed in recent years; also the proceeds from sales of housing units at or below construction cost cannot provide substantial capital for university development. Third, after the sale, certain portions of the university's property will not be available for redevelopment, therebv limiting the management and financing flexibility of the institution. Therefore, how to ensure that the university does not give away its valuable assets and that university housing is not inheritable by descendants of university staff is a major policy issue. The complexity of this issue requires housing reform on the national level, and is beyond the scope of this study. However, the issue does require immediate attention because 25 percent of all the faculty members in the country are currently in their 50s, and due to retire in the first decade of the 21 st century. Unless housing reform is in place, universities would have to house minimally 25 percent of the staff recruited to replace the retirees. This financial burden would undoubtedly crush any hope for expansion and qualitative improvement. 4.34 Nonetheless, institutional data show that most of the 14 universities do have surpluses which indicates that the policy of requiring universities to be responsible for their own finances has some success in fostering fiscal discipline (Annex 15). Because institutions' financial situations differed, expenditure per student also varied enormously from under Y 6,000 to over Y 14,000 in 1993 (Annex 17). 4.35 Conclusion. This analysis of the reforns for diversifying sources of funding and changing the pattern of spending has found that part of the financial difficulties experienced by institutions stems from disparities in their natural endowment and location, part is due to the funding mechanism which does not provide incentives for 6 An article in People's Daily (October 6, 1995) pointed out that because the capital investment cost for every new enrollee to be Y 60,000 in 1993, the government cannot finance such construction to enable an annual growth rate of enrollment at 8 percent.  - 61 - efficiency improvement. and part stems from the welfare burden that the socialist system requires institutions to bear. Changing the funding mechanism will improve efficiency and reduce some disparity in natural endowment, but systemic change is required to reduce the welfare burden. D. POLICY OPTIONS FOR FUNDING HIGHER EDUCATION, 1995-2020 4.36 The demand for highly educated personnel depends to a large extent on how fast the economy grows. According to the Ninth Five-Year Plan (1995-2000), the Government's target for GDP in 2000 is to quadruple that in 1980, and that for GDP in 2010 is to double that in 2000. This entails an average annual growth rate of 8 percent between 1995 and 2000. and over 7 percent between 2000 and 2010. Given the momentum of China's historical growth rate, it is realistic to expect the GDP to continue to grow at an annual average of 7 to 9 percent in real terms over the next 25 years. Annex 22 provides the estimation of GDP per capita based on three scenarios of average annual GDP growth rate: (a) slow growth at 7 percent; (b) medium growth at 8 percent; and (c) fast growth at 9 percent and projected population based on a set of assumptions outlined in Annex 21. According to these projections, China's GDP per capita would be $600-$700 by 2000; $1100-$1,600 by 2010; and $2,100-$3,500 by 2020. In other words, in five years' time, China would be on its way to becoming a lower-middle- income country, and in 25 years' time, it would be poised to join the league of upper- middle-income countries7 (Table 4.8 and Annex 22). To sustain these growth rates, the demand for well-educated personnel is likely to be high. 7 The World Bank's definition of country income level is as follows: low-income countries are those with a GNP per capita of $695 or less; lower-middle-income countries are those with a GNP per capita between $696 and $2,784, and upper-middle-income countries are those with a GNP per capita between $2,784 and $8,626 (World Development Report 1995).  - 62 - TABLE 4.8: PROJECTED GDP PER CAPITA, PERCENTAGE OF RELEVANT AGE GROUP ENROLLED IN HIGHER EDUCATION, AND TUITION FEES AND SPENDING PER STUDENT, 1995-2020 (In Constant 1994 Yuan) 1994 2000 2010 2020 GDP Per Capita in Yuan Slow Growth (r=7%) 3.800 5.400 9,900 18,300 Medium Growth (r-8%) 3,800 5.700 11,500 23,300 Fast Growth (r=9%) 3,800 6,000 13,300 29,600 In Dollars (8.5 Yuan = $1) Slow Growth (r=7%) 447 630 1,200 2,200 Medium Growth (r-8%) 447 670 1,300 2,700 Fast Growth (0=9%) 447 710 1,600 3,500 Becoming Lower- Becoming Country Income Level Low Lower-Middle Middle Upper-Middle Enrollment Ratio (%) r-7.6% 2.4 4.9 7.7 18.8 r=-9.8% 2.4 5.5 10.7 25.4 Enrollment (Million Students) r-7.6% 2.8 4.4 9.0 18.7 r-9.8% 2.8 4.9 12.5 25.4 Note: The numbers are rounded. Sources: Summary of Annexes. 4.37 To enable higher education institutions to educate as many students as possible under conditions of public resource constraints, it is imperative to pursue three policies simultaneously: (a) improving the operating efficiency of the system; (b) enhancing institutional capacity for resource generation; (c) implementing cost-recovery policies while providing financial assistance. Efficiency Improvement 4.38 Contain staff growth. Enrollment expansion must be accompanied by efficiency improvement in order to attain savings. The underutilization of staff is a prime case. Between 1976 and 1994, total staff increased at an annual rate of 4.5 percent, with teachers increasing at a slightly lower rate than nonteaching staff (Table 4.1). At this rate, if enrollment expands at 7.6 percent per year over the next 25 years, the student-to- staff ratio would be 3.7:1 by 2005, and 5.8:1 by 2020, still lower than the current European and North American average of 7:1 (Annex 24). However, if staff growth is slowed to 1 percent per year, and if enrollment expands at the historical rate of 9.8 percent over the next 25 years, the student-to-staff ratio would be 6.7 by 2005 (closer to the current European and North America average), and 19:1 by 2020 [closer to the current Korean and Taiwanese (China) ratio] (Annex 24 and Table 1.6).  - 63 - 4.39 Given the average wage increased by 8.9 percent in real terms between 1978 and 19948 (Table 4.1) and the scarcity of skills that is likely to occur in a rapidly growing economy, higher education cannot compress wages without losing its ability to attract and retain capable teaching staff. Therefore, the key is to contain the growth of nonteaching staff, not to suppress wages. Projection shows that if staff growth continues at the historical rate of 4:5 percent, and if wages also grow at the historical rate of 8.9 percent at the GDP growth rate of 7 percent, the wage bill would grow from 41 percent of the public expenditure on higher education in 1994 to over 100 percent after 2005, and over 500 percent by 2020 if other things remain unchanged and public expenditure continues to grow at the historical rate (Annex 25). This is clearly unsustainable. Even if staff growth rate is reduced to I percent per year, if wages grow at 8.9 percent per year and GDP at 7 percent, they will take up 89 percent of total public spending on higher education by 2020, and universities would have to generate sufficient revenue to cover spending on administration, instruction, and capital construction, which may consume half of the total higher education expenditure. 4.40 Encourage the growth of existing public institutions in size through expansion or merger, and the expansion of private universities. As Table 1.1 has shown, the average size of a university was 2,390 students in 1993. This compares poorly with many other countries; in New Zealand no university has less than 7,000 students, in the United Kingdom a small percentage of the 130 institutions have less than 4,500 students, and Australia has recently merged all its universities into large comprehensive institutions. Merger can pool resources (such as libraries, laboratories, specialities of faculty members) together and better serve the diverse needs of students. At the same time, it important allow private universities to function in order to meet increasing demand and to create competitive pressure for public universities to improve their performance. The government, however, has a role to provide the infrastructure and information to the public about the quality of all public and private institutions through various mechanisms to be discussed in Chapter 5. 4.41 Devise funding mechanisms that encourage efficiency and reward cost- effective provision. The current resource allocation formula of x Yuan per student takes no account of marginal cost. In the United Kingdom, a new bidding system was introduced in which universities were asked to tender for teaching more students at less than the average cost. To the surprise of the fuinding body, all the universities submitted bids for far lower unit costs than they were being funded for. Other incentives to foster efficiency could also be built into the system; for example, funding bodies could ask universities to report on the number of courses for which fewer than, say, 10 students were enrolled. Rewards could be offered to those universities that rationalized their program offerings. A multiparameter funding formula could be devised to take into s In current prices, these were Y 545 in 1978 and Y 5,992 in 1994 (China Statistical Yearbook 1995, p. 115 and 11 7).  - 64 - account policy issues such as the number of poorly subscribed programs, the relative wealth of the province, or the size of the university. 4.42 Review the norms and space formulas for allocating capital funding as it is clear that they are extremely generous by international standards, and do not encourage institutions to make effective use of their space by such methods as double shifts, or seven-day timetables. Many Chinese universities are extremely well endowed in terms of the size of the land and the spaciousness of the buildings and classrooms. While student hostels and staff quarters are often overcrowded, facilities for teaching and research are not. Thus, these available facilities can accommodate the expansion of enrollment. 4.43 Allow flexible duration of study as long as course requirements are fulfilled. In order to maximize the use of available buildings and staff, it is worth considering shortening the duration of a bachelor's program from the current four to three years, but run regular courses in the summer to ensure that the total amount of instruction time will not be shortened and the content of study would not be compromised. From the university's point of view, the merit of this system is to enable maximum use of classroom, student hostels, staff time, and staff quarters. This would enable universities to enroll 33 percent more students every four years. From the student's point of view, they can finish their study one year faster and can begin to reap the economic benefits of their own education earlier. 4.44 Universities in Hong Kong have adopted a uniform three-year system in 1993 in order to enroll more students rapidly. They follow the British system in having seven years of secondary education so as to compensate for a shorter duration of study at the university level. If China shortens the duration of its bachelor's programs, it does not have to make systemic change in the secondary education. It can consider adopting the American model of the credit unit9 system, which enables students to take courses in the summer and graduate within three years or less, as soon as they fulfill all the course requirements. Many foreign students in American universities speed up their studies by taking an above average course load in regular semesters and in the summer, in order to save the additional year of room and board, and to start entering the labor market ahead of time. Running regular courses in the summer can also apply to short-cycle programs. 4.45 To be sure, if academic staff are to teach in the summer, they have to be compensated for. In fact, many engage in part-time employment anyway. Therefore, asking them to take up additional teaching during the summer would only legitimize activities that have been ongoing, and would work to the advantage of all parties concered. 9 Currently, a few universities are experimenting with a fledgling credit unit system. The full range of flexibility, however, calls for a quality assurance and accreditation system upon which recognition of equivalencies is based.  - 65 - 4.46 Better use of educational technology to reduce cost and assure minimum quality. China is not alone in facing the challenge of having to expand enrollment under conditions of resource constraints. Table 1.2 shows that many countries have increased enrollment in higher education massively between 1980 and 1993. One way to meet this challenge is to take advantage of modem instructional modalities by using radio, television, and computer to supplement classroom teaching, or to provide open learning and distance education opportunities. The use of educational technology can reach a large number of students quickly and at relatively low cost. There is no need to wait for new buildings, student hostels, and staff residence to be built, and hundreds of thousands of faculty members to be upgraded to expand higher education. The success in training a very large number of students in China's television universities (1.3 million graduates with college diplomas in the 1979-91 period and over 3 million students who passed TVU courses not for credit) illustrates the potential of using educational technology to extend access (see Annex 29 on the history of television higher education). 4.47 Because high quality products incur high production cost, an option is to purchase existing telecourses and distance education packages, particularly those on natural science, technology, international commerce, foreign languages, for adaptation and use in China. Providers of these courses can be found in Britain, Canada, the United States, and Japan. The University of Singapore has purchased the franchise from the British Open University to run their academic programs. The Open Learning Institute in Hong Kong also has purchased a range of British Open University courses. The University of the Air in Japan produces high-quality programs, which may serve specific needs of Chinese students. The benefits of purchasing existing materials from reputable universities and distance learning institutions are that these are usually well-tested and are of reasonable audiovisual quality, and that through the use of these materials, Chinese students can obtain a window to the world and learn what students in other countries are learning. There are, of course, the added benefits of cost savings and extending access to more students within a relatively short time. The cost of adaptation and translation, however, could be substantial, and this calls for central government, provincial authorities, or a consortium of universities to act together in the purchase and use of the materials. Enhance Institutional Capacity for Resource Generation 4.48 The projection on growth of personnel cost shows that wages can easily consume the entire public expenditure on higher education (Annex 25). This requires the generation of additional resources through universities' own means, an imperative in order to finance administration, instruction, equipment, maintenance and repair, and capital construction. The trend between 1990 and 1992 shows that different components within own-generated revenue grew at differentiated rates. Revenue from enterprises increased at an annual average of 15 percent, revenue from commissioned training at 4.5 percent, revenue from educational services at 10.5 percent, revenue from research and consultancy at 14 percent, revenue from logistical services did not grow, revenue from other sources by 17 percent, and revenue from donation by 200 percent.  - 66 - 4.49 Most of these historical growth rates are used for projection for future own- generated income, except for enterprises, other sources, and donation mainly because revenue generated from these three channels has increased so fast that it is unrealistic to expect it to grow at the same speed in the future. A more realistic expectation is for enterprises to generate incremental increased income at 9 percent on par with the economy, for other income to grow at half its historical level, and for donation to grow no more than 1 percent per year. If this growth rate continues, university-generated income will be around 10 percent of total income by 2000, and 13 percent by 2020 (Annex 26). The potential for universities to increase their own income can be enhanced by the following strategies: Implement Cost-Recovery Policies and Provide Financial Assistance (a) Charging Tuition Fees 4.50 As China's economy grows, it would be realistic to expect tuition fee income to represent a growing percentage of total university income. The current government policy is to target 20 percent of the cost to be recovered from charging tuition fees by 1997, although institutions are given much flexibility in implementing this policy. Within each province, the percentage would obviously differ. Given current economic and higher education policy trends, the income from this category could be close to the target by the turn of the century. Annexes 28A and 29B project the total public and private resources at different enrollment and GDP growth rates. According to these projections, if the assumptions hold, student tuition fees could contribute between 24 to 38 percent of the total resources for higher education by 2020. (See Annex 20 for explanation of the assumptions of the projection.). Nonetheless, growth estimates are not precise because they depend as much on unknown variables such as the political. In the United Kingdom, a 15 percent share of income in 1988-98 shot up to 34 percent in 1992-93 and then fell back again because of a political decision in 1993-94. Income from student tuition fees in public universities constitute over 25 percent and 40 percent of recurrent expenditures in Chile and the Republic of Korea, respectively. These two countries also have had extraordinary growth rates in higher education in the past decade. (See Figure 4.2 for a cross country comparison of the percentage of cost recovery in public institutions). 4.51 Institutions should be allowed to set their own fee levels for all categories of students, irrespective of whether they are from the state plan, self-financed, or enterprise- financed. The level might vary for different categories of students, and for students in different academic disciplines, depending on the private and social demand for each subject speciality. In this way, institutions can align their income with the teaching and research demands imposed on them. Institutional control over tuition levels has helped North American universities to withstand cuts in public funding. Responsiveness to the general market from competitor institutions will provide the pressure to keep fees within limits, if there is an abundance of providers. Competition will provide the motivation to maintain quality of instructional programs.  - 67 - 4.52 An alternative cost-sharing approach might be considered in which for particular fields of study at certain institutions, students might be asked to pay for the first one or two years only; if they perform satisfactorily, the government and employer will support them for the last year of study. This will provide an incentive for efficiency gains, because if students drop out or repeat, they will have to be responsible for costs. 4.53 Certain methods of payment and measures can assist families to pay tuition fees. First, payment by installment permits the financial burden to be spread over the year. Second, banks should encourage to set up education savings accounts with the explicit aims of promoting family savings for education long before the child has reached the college-going age. Savings accumulated over the years would cushion the sudden need to set aside family income to support students through college. Third, it is important to promote a flexible schedule for completion of study so that students can reduce their direct and opportunity cost. 4.54 To what extent fees should be raised is an empirical question that requires further data collection and analysis. It is important to differentiate between three groups of students: (a) those who attend without much financial difficulty; (b) those who are marginally able to finance their education; and (c) those who will be denied access because of total inability to pay. For Group (a), their demand for education is not likely to change very much even when tuition fees are raised. Group (b) might join the rank of Group (c) if fee increases exceed their financial capacity. On the other hand, the demand for education is likely to increase as household income increases. Given that most urban households have only one child and that household income will rise as the economy grows, Group (b) might join the rank of Group (a). Household demand for education is expected to grow stronger, even when tuition fees are high. Cost recovery, therefore, should remove subsidies for Group (a) in order to free up public resources, but should target assistance in the form of loans to Group (b), and a mixture of grants, loans, work study, and national service to Group (c). 4.55 Policymakers are advised to monitor the price elasticity of demand to see how the demand for education by various groups changes as tuition fees increase. In group (a), the demand for higher education does not change very much in response to tuition fee increases because the majority of students is from families of means. Not only can they afford to forgo their eamings by attending school, but they also would have had access to high quality primary and secondary education, thereby being well prepared to pass the many levels of examination to move up the education pyramid. 4.56 However, tuition fees tend to have differential adverse impact on the poor, minority groups, rural students, and women. The first three categories of student tend to suffer from the lack of access to good quality schooling. Furthermore, poor rural households tend to have more than one child, and thus have more difficulty in supporting all children to pursue education. When faced with choices, parents often hold daughters back to enable sons to pursue education. Female enrollment, as a consequence, tends to be lower across all levels of education. Elasticity of demand, therefore, should be  - 68 - disaggregated by student family income level, gender, rural background, minority status, and geographic location. If an academically-qualified student would be forced to turn down the admission or to drop out because of financial difficulties, and the place be given to a less qualified student who is able to pay the fee, not only would the system be unjust and social mobility sacrificed, but there will also be an efficiency loss to society because talented but disadvantaged people have been excluded. (b) Financial Assistance to Students 4.57 The key policy question is: if substantial cost recovery is implemented, what is the economic burden on the poor, particularly rural households whose per capita income is half that of urban income, and what kind of financial assistance can be provided to the qualified but disadvantaged? Data on student background from selected Chinese institutions found that throughout the 1980s and in the early 1990s, children of peasants accounted for about 30 percent of the student population in comprehensive universities, over 40 percent in medical and normal (education) universities, and some 75 percent in agricultural and forestry universities. Given that over 70 percent of China's population reside in rural areas, higher education is one of the very few channels for mobility for young people from rural backgrounds; it also provides the technical skills for rural development. In 1994, rural income per capita was Y 1,798 and urban income per capita was Y 3,502. Figure 4.9 illustrates the unequal economic impact of university tuition fees on rural and urban households. This calculation uses the figures of 1994 as the basis, and assumes that the level of the unit cost of higher education, and the rural and urban per capita income remain stable over the years. FIGURE 4.1: DIFFERENTIAL ECONOMIC BURDEN ON RURAL AND URBAN HOUSEHOLDS Rural Urban Income Per Capita (Yuan) 1.789 3,502 Family Income with 2 wage earners (Yuan) 3,578 7,004 Unit Cost 8,160 8,160 Tuition Fees Per Child Per Year ( 24% cost recovery (Yuan) 1,958 1,958 @ 31 % cost recovery (Yuan) 2,530 2,530 @ 38% cost recovery (Yuan) 3,101 3,101 Tuition Fees Per Child as % of Family Income with I wage earner @ 24% cost recovery (Yuan) 109% 56% @ 31 % cost recovery (Yuan) 141% 72% ( 38% cost recovery (Yuan) 173% 89%  - 69 - Tuition Fees Per Child as % of Family Income with 2 wage earners @ 24% cost recovery (Yuan) 55% 28% @ 31% cost recovery (Yuan) 71% 36% @ 38% cost recovery (Yuan) 87% 44% 4.58 If the same level of tuition fees is charged to rural and urban households, the economic burden will fall disproportionally on the former. Tuition fees would account for 109 to 173 percent of the average rural family income with one wage earner, or 55 to 87 percent with two wage earners. However, they constitute 28 to 89 percent of the average urban family incomes, depending on the number of wage earners in the household. Given that rural households tend to have more than one child, in spite of the single-child policy, rural students (particularly girls) are even less likely to be supported by their families to pursue higher education, whereas it is well within the means of the average urban households to do so. Minority families, who tend to live in poorer areas, and who tend to have more children because they are exempted from complying with the one-child policy, also tend to have more difficulties financing their children's education. Furthermore, because rural students account for a disproportional share of the total enrollment in agriculture, forestry, medical and normal universities, who will enter the low-wage profession in the public sector, they are even more adversely affected by tuition fees. To the extent that their future life-time eamings will be low, and that they provide important social services, they can be considered to have paid their tuition fees through national services. The Chinese government's policy of exempting students of normal universities from tuition charges is, therefore, justifiable and commendable. 4.59 Agricultural, forestry, medical, education, and minority students together account for nearly 40 percent of total students in higher education. These groups, together with poor students in comprehensive and other universities, account for over 50 percent of the total student body who need adequate financial assistance in order to pursue higher education. For the poor, the foregone eamings often are more substantial than the direct cost of higher education. Of the direct costs of education, housing and food are as substantial as tuition fees, transportation, and books. That is why any form of financial support for Group (c) should cover not just tuition fees, but also living expenses, transportation, and books. 4.60 Loans would enable students to finance their education by borrowing against their future eamings. Loan schemes can either be open to all students, regardless of their parents' wealth, or only to those who have satisfied means-tested requirements. For the very poor students, however, even the availability of credit is associated with high risks because at the time of entering university, successful completion of study programs and finding employment after graduation are unknown factors. This will discourage many from taking loans and they may opt out of further studies. Therefore, the form of financial assistance for the very poor should encompass a package of grants and loans, as  - 70 - well as work study programs or national service. Eligibility for grants should be means-tested. 4.61 If it is assumed that about half of the students do not contribute significantly to fees either through tuition fee exemption or through grants, what is the net contribution of tuition fees to the total revenue of higher education? The implicit assumption is that the other half of the student body will in some form or other enjoy less public subsidies proportional to those who benefit from them. These include students in subject fields which have high private economic returns (such as law, business, and engineering), and those who live in higher income cities and provinces, particularly along the coast. Differential fee payment is justifiable because these students also benefit most from high- paying occupations and working in a labor market which is freer than those in the interior. 4.62 Given the diverse jurisdictions and modes of financial support institutions of higher education function within, it is very difficult for individual institutions to come up with resources to provide financial assistance to students. For comprehensive universities, it is possible to use the differential fee scheme to cross-subsidize students. However, for universities that have a single mission-such as education and forestry- they do not have the diversified programs and students to do so. Therefore, the role of the central government is crucial in providing student financial assistance. The central government can target general tax revenue to fund agriculture, education, and medical universities where graduates are likely to work in low-wage occupations but perform important social services so that these institutions either do not have to charge fees or charge very low fees. This method of channeling funds to institutions directly can cut down the administrative cost, but is likely to weaken institutions' responsiveness to labor market demand. Furthermore, this method is likely to be caught up in the politics of the budget process. 4.63 An alternative is to set up a national fund that provides needs-based grants and student loans. Applications for financial assistance from individual students will be reviewed and approved at provincial offices of the national fund. Given the enormous number of students and potential applications, the administrative cost to operate this system is likely to be high. Nonetheless, if the funds can be made available at the national level, this will have an equalizing effect for the country as a whole. Financial institutions usually require physical capital or financial resources to guarantee the loan, but students can only offer their human capital as collateral. Without the State's provision of funds initially, it is difficult to start a loan scheme, although commercial banks or new independent financial organizations can be contracted to administer the lending and collection processes. 4.64 Student loan schemes have been implemented in over 50 countries. The vast majority of these countries offer a traditional loan, which enables repayment over a  - 71 - specified period. 1