Capitalism in the Classrooms?

Beyond “Garage Universities”

Students in Sáo Paulo, Brazil, are among commuters to classes in rush hour. Photo by Marina De Moura.

All over Latin America, for-profit private universities are flourishing. They range from excellent elite institutions in wealthy neighborhoods to so-called “garage universities” of uneven equality that teach varied trades and professions. However, Brazil’s strenuous exit test on completing university provides a critical weapon to prevent fly-by-night for-profit universities. Institutions that fall below a certain level get great public exposure in the press and stiff penalties from the Ministry of Education. Brazil is an example of a country that has shown that it is quality that counts in higher education, not whether universities are for profit or not.

Saint Thomas Aquinas expressed the view that those who make profits are as evil as assassins. Although successful countries today have embraced the market economy, capitalism is still rejected as sinful and perverse in the area of education, even in the most market-oriented nations. Here, we explore the theme of profits in higher education from an empirical perspective. Concretely, what do the numbers tell about profits and the resulting quality of the education offered? If for-profit institutions cannot provide quality education, we need to worry, considering their growth in the recent past. If it turns out that profits do not harm quality, what can be wrong with them? Brazil was chosen as a case study because reliable and universal measures of school achievement exist for graduates of four-year colleges. No other country has such indicators.

The Unique Case of Brazil

Probably no other country can provide a better testing ground for such queries than Brazil. The number of institutions is large and varied. In addition, tests allow for convenient comparisons because of universal examinations at the end of the four-year university cycle. In the mid-’90s, the Ministry of Education created what was then called the “provão”, a test applied to graduating students, covering the core subjects in each career. Thus, as Brazil expands its education system, measurements are readily available—a unique case in Latin America and indeed the entire world.

In the last half-century, after a long period of backwardness in all levels of instruction, enrollment in higher education expanded at a brisk pace. In 1945, enrollment in higher education was 43,000 students. By 2010, Brazil boasted an enrollment of 6,552,000 students. In the early 1960s, the federal government worked energetically to expand its network of universities. The option for expensive institutions, research emphasis (at least in intention) and lavish campuses was clear enough. But operating with costs per student similar to those established by the Organisation for 
Economic Co-operation and Development (OECD) averages, the federal government soon ran out of resources to keep expanding such an extravagant system—particularly considering the poor quality of basic education.

Since the 1990s, the political pressures for more vacancies in higher education could not be met by the public system. This led to more liberal policies towards the private sector. In 1995, a change in legislation allowed higher education institutions to declare a profit motive—something that was already legal in primary and secondary education.

In 2010, statistics show that 12 percent of the students are in public institutions and 88 percent in private, with 37 percent of private institutions declaring a profit motive. And this proportion is progressively increasing. The numbers are quite large, with more than 3,000 institutions.
Despite some imperfections and unresolved technical issues in the tests, they provide a way to determine how effective higher education is. The tests are professionally prepared and, certainly, far better than what teachers use to grade students and determine whether they reach the levels required for graduation. The Ministry of Education data compares institutions using a composite index that includes test results, percentage of faculty with Ph.Ds and those working full time, as well as several other indicators of institutional processes. We object to the idea of mixing process variables with a measure of what students learned. Therefore, for the purpose of measuring quality, we used only the tests—from an analytical point of view, the other variables are extraneous.

It is worth mentioning another recent development, even less typical for universities and colleges. The vigorous growth in enrollment started to attract the attention of the financial world ever since the late 1990s. In fact, this being a seller’s market, the economic margins were huge. 
Beginning in the year 2003, some of the bigger schools partnered with banks to open their capital (in technical jargon, to have Initial Public Offerings, or IPOs). As of this day, four have offered IPOs. Since they have been aggressively buying small and large institutions, in order to grow fast, the figures for colleges belonging to institutions with IPOs has now reached 23. If the devil of capitalism flirts with for-profit colleges, what can we say of large institutions, partnering with banks, to put their equity in the stock market?

In addition, U.S. for-profit institutions, including Laureate, Apollo and DeVry, have partnered with local colleges in Brazil. In other words, there is an ample supply of for-profit colleges and an expanding number offering their capital at the stock exchange.

Does the profit motive kill educational quality?

To determine quality, we compared public universities to their private counterparts. We also categorized the private institutions as for-profit or not. A last subcategory includes the for-profit institutions that have had IPOs.

How would the test scores for each category of institutions compare?

Public universities have high costs, offer the most favorable conditions to faculty and charge no tuition. Hence, they attract the best students.

Therefore, we assumed that public universities graduate students who tend to perform better in the tests.

Within the private sector, there are religiously affiliated (Catholic and Protestant) institutions, community institutions, as well as others that do not declare a profit motive (called Associações). The latter group cannot legally distribute to the owners whatever surplus they generate, but must reinvest the money in education. How do these non-profit private institutions compare with those that declare profit motives?

It stands to reason that for-profits want to make profits, because the owners want to make money. In fact, the market system would collapse if it were otherwise. Not-for-profits may also have surplus, but must use it to grow or to improve quality, since the owners are not allowed to do otherwise. Such a difference would suggest a superior quality for the latter category.

Most observers assume that between the for-profit and the not-for-profit institutions, there is a clear quality advantage in favor of those that are not for profit. This thesis, if confirmed, would vindicate the Thomas Aquinas thesis of the evil profits. However, the world is more complicated than that.

When Schools Meet Banks, They Don’t Speak the Same Language

The first IPOs were made less than ten years ago and little attention has been devoted to study how these alliances work. Let us try to understand how banks and educators reach an agreement. As quarterly bank reports show, the analysts only look at profit rates and enrollment growth figures. This situation may lead school managers to promise extravagant short-run profits with accompanying growth in enrollments that is also blown out of proportion. As a result, they feel pushed to cut costs. The easiest way is to hire cheaper teachers. Quality would suffer, morale also.

Under those conditions, it makes sense to think that these institutions with IPOs are not in the market to offer high quality education. In so many words, they will be offering a commodity. As a consequence, they will have to compete in price.

And indeed, the real price of tuition in Brazil is seriously falling. For example, in the fiercely competitive area of Business Administration, mean monthly tuition has gone down from 532 Reais in 1999 to 367 Reais in 2009 (comparisons removing inflation). What is even more surprising to foreigners, price wars have erupted in the large capitals. Therefore, we postulated that the institutions that had IPOs would be found at the lower end of the quality distribution.

What do the Numbers Say?

The numbers confirm some assumptions but show some surprises. And let us not forget that these are very reliable numbers because of Brazil’s robust measures of academic quality.

Well-informed observers proclaim the superiority of public over private institutions. The reality is not as simple. As the numbers show, the mean score of the public sector is somewhat higher. However, the overlap between the two curves is considerable. One simply cannot say that the public institutions are good and the private ones bad. The differences between means is quite modest, showing that categories overlap, more than differ. The accompanying graph summarizes the numbers (The top and bottom line in each box represent, respectively, the means of the top and bottom quartile. The wider apart they are, the greater the variance).

Contrary to expectations, the public sector is far more heterogeneous than the private. Even more surprising, it can be just as weak. To sum up, there are more top quality institutions in the public sector but the bad ones are just as bad as the bad ones in the private sector. In other words, being public is no insurance against poor quality.

Even though the public institutions have somewhat higher mean, both the private for-profits and the not-for-profits also have some outstanding examples of quality education.

Perhaps the single most surprising aspect we found comes from comparing the three types of private institutions. As we can see, the scores are quite close. In fact, the differences are immaterial. For all practical purposes one can say that the profit motive does not hurt significantly the quality of education. Why would that be?

Both categories of institutions have all the reasons in the world to make their revenues at least as large as their costs. If they fail to do so, they will go out of business (as has happened to many U.S. non-profit colleges, in the last several years). Whether they opt to be elite or mass institutions, the rationale is the same: generate more revenues and cut costs.

The only major difference is that owners of for-profit institutions can take home as much of the surplus as they please. However, when competition is stiff, as is presently the case, wise entrepreneurs want to make sure that, at least, they retain their market share. They may find it safer to reinvest to expand or to ensure a solid position in the market.

We can assume that some for-profits cut corners in quality more than others. But there are many not-for-profits that are quite amateurish and incompetent. Perhaps those differences even out the results.

Looking now at those that have had IPOs, we also find that the performance of their students is not inferior. In fact, they show a slight superiority. Surprise! The proximity to bankers and their rates of return is not so deleterious to education, after all. These results put to rest the “holier-than-thou” attitudes of some philanthropic institutions, sneering at their for-profit and IPOs counterparts. Whatever the profit motive does, it is clear that, on average, it does not hurt quality.

However, the curves also show that IPOs are institutions of a different breed. They are insignificantly better in terms of their mean scores.. However, their variance is so much less. They do not inhabit the high end of the distribution. But even more striking, they are a much more homogenous group with no very weak institutions among them.

Within those institutions with IPOs, their weakest are less weak than some public universities. It appears that their internal rules were more effective in pruning bad apples than the other groups were. However, these internal rules also do not permit them to rise above levels that remains quite modest.

The data warrant some strong conclusions.

1. Comparing means, public institution graduates display slightly superior academic results, compared to those of private institutions. However, there is great overlap, showing that the average institutions lie in a range of quality almost equally shared 
by both categories. This is an extraordinary result, considering that public universities are far more expensive 
to maintain.
2. Contrary to public belief, public institutions are far more heterogeneous than their private counterparts. There are more cases of outstanding performance, but several are just as bad as the weakest in the private sector. 
3. Within the private sector, there are no differences between for-profits and not-for-profits.. Both groups are just about equal in quality of graduates. Saint Thomas Aquinas would not be happy, if he were confronted with data showing that the profit motive does not hurt quality. 
4. We thought that institutions with IPOs would be placed below the average for the privates. This was a wrong assumption. The mean is the same as those of other private institutions. 
5. IPOs display a very compact distribution, that is to say, a much smaller variance. They are never outstanding institutions. In contrast, they have less real flops among them, compared to all the other categories—including the public universities.

Fall 2012Volume XII, Number 1

Claudio de Moura Castro is the President of the Advisory Council of Faculdade Pitágoras in Brazil. A Brazilian economist, he studied at the University of Minais Gerais and received his Ph.D. in Economics from Vanderbilt University.

Luciana Lima is a statistician who studied at the Federal University of Minas Gerais and works at the education evaluation unit of the Kroton-Education Group.

Aldo Giuntini, who holds a Ph.D. in Civil Engineering, is an associate professor at the Federal University of Minas Gerais.

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