LONDON LETTER

Let the Market In

By EDWARD M. WALSH

DUBLIN — At the start of the decade, Europe set out, in its ambitious Lisbon strategy, to build “the most competitive and dynamic knowledge-based economy in the world” by 2010. Six years away from that goal, EU GDP per capita lags behind the U.S. by over 20%.

The leading research universities in the U.S. have played a key role in driving the knowledge economy forward, while Europe’s once-great universities, with their monastic origins and relatively relaxed ways, have failed to incubate innovation in the same way. The debate underway in Britain and my country, Ireland, over tuition fees and other reforms is just the start of what is needed to close this gap.

A single U.S. university, the Massachusetts Institute of Technology, boasts that if the companies founded by M.I.T. graduates and faculty formed an independent nation, the revenues produced by these companies would make it the 24th largest economy in the world. Indeed, the 5,000 M.I.T.-related companies that exist today employ 1.1 million people and have annual world sales comparable to that of Thailand.

M.I.T. is but one of several U.S. research universities that make such contributions to the U.S. economy. Universities such as Harvard, Columbia, M.I.T., Stanford, Cal Tech, Berkeley, Yale, Princeton, Cornell and Michigan have become such icons of excellence and achievement that they attract, and can afford to exclude, all but the world’s most outstanding minds. With such talent, operating within sophisticated, cost-effective performance-driven structures, the leading U.S. universities have transformed themselves into the “idea factories” that have fuelled the world’s economy for the past 20 years.

In too many of Europe’s universities, by contrast, policy is driven by academics for academics, while public-sector employment practices inhibit entrepreneurial behaviour and create academic sanctuaries where mediocrity can linger unassailed and excellence is inadequately rewarded. The remarkable research achievements of the past, the colourful gowns, the magnificent buildings, the rich university traditions, may offer solace to the European academic community. Many are in denial that there is a growing U.S academic lead and are happy to refer to the doubtful academic establishments that exist at the bottom of the U.S. quality spectrum without recognizing the superb quality at the top.

While the EU is committed to increasing public research expenditure to an ambitious 3% of GDP by 2010, the competitive gap with the U.S. will not be closed without radical university reform. While there has been some recognition in Germany and elsewhere of the need for university reform, in the U.K., at least, debate has gone deeper, with the Labour government determined to drive through a (watered down) proposal to allow universities to introduce “top-up” fees. The fees of up to around £3,000 ($5,400) will be means-tested and repayable only after a graduate reaches a certain minimum level of income. (In an odd reversal of roles, the Tories have opposed the new fees, as have various left-wing groups across society.)

The top-up fees will be a start — but only a start — in the right direction. U.K. business has long complained that British universities are slow-moving, bureaucratic and risk-averse. Publicly funded Oxford and Cambridge remain renowned for academic excellence and yet because of incoherent governance (Cambridge’s ruling body, Regent House, has a membership of more than 3,000 academics and administrative staff) and the absence of a performance-driven remuneration system, they now struggle to compete with the best in the U.S. Head-hunters from well-endowed U.S. universities are stealing the seed corn; leaving proud Oxford without a single Nobel Laureate on its faculty.

The Labour government commissioned an independent review to examine how the links between business and British universities can be strengthened to benefit Britain’s economy. The Lambert review, released on Dec. 4, identified the need for reform of university governance and for high-quality leadership. But the review failed to sufficiently appreciate the direct relationship between state interference and underperformance.

The single biggest factor differentiating America’s leading universities from Europe’s has to do with the degree of involvement of the state. Most of America’s leading universities are private and even the leading public universities have managed to keep the state at bay, mounting legal challenges when necessary to rebuff state encroachment. U.S. public universities operate with a degree of entrepreneurial freedom unknown in Europe.

Almost all of Europe’s universities, including what were once the world’s greatest, are now under state control to varying degrees. As a result they are less flexible and less entrepreneurial in the pursuit of excellence than their U.S. counterparts. The public university monopoly goes unchallenged in most member states and continues to develop all the undesirable symptoms associated with state monopolies.

It is right that at least a big part of the debate about what to do focus on funding. From a business perspective fees make sense: A university without the discretion to set its fees is an institution isolated from the competition of the market place and all the healthy discipline related to quality, price and demand.

Fees make sense in terms of social equity also — for why should all the population subsidize the privileged group that goes to university? Market forces could be further strengthened by replacing the state block-grant to the university with a student voucher system. State subsidy would at least then follow the student.

Beyond fund-raising capabilities, universities must undergo wholesale corporate governance reform. Unfortunately, the U.K. Lambert review recommends that well-run universities should receive greater financial freedoms but fails to be specific about the need to replace the academic structures of self-interest with a performance-oriented system.

The practice, still retained in many EU states of electing, rather than selecting, the university head is an interesting historical remnant of an ancient past, when university communities were small and somewhat monastic.

Modern universities are large and complex organizations requiring leadership and executive skill on a par with any major public corporation. This need is recognized by the boards of U.S. universities in the intense head-hunting efforts undertaken prior to the appointment of a president. Commenting on the role of the governing board one U.S. leader described it as, “hiring the president, supporting the president and when necessary firing the president.”

Europe needs executive leadership at its universities with the freedom to make change, uninhibited by internal vested interests and by governing boards that meddle in management matters. And it needs the funding structures in place to encourage top research talent to push the envelope of innovation.

Mr. Walsh is Chairman of the Irish Council for Science Technology and Innovation and President Emeritus of the University of Limerick.