November, 2024 South Caucasus Tertiary Education for Economic Growth in the South Caucasus: challenges and opportunities. Koen Geven, Felipe Puga Novillo P500971 Education 1 © 2024 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. This work is a product of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. 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Tertiary Education for Economic Growth in the South Caucasus: challenges and opportunities. © World Bank.” Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. 2 Table of Contents Acknowledgments ................................................................................................................................... 4 Executive Summary ................................................................................................................................. 5 Policy Priority 1: After improving access, now focus on improving opportunities .................................. 6 Policy Priority 2: Improve the Quality and Relevance of Tertiary Education........................................... 7 Policy Priority 3: Increase funding and improve the efficiency and management of spending ............... 7 Policy Priority 4: Building the infrastructure and culture for scientific research ..................................... 8 1. The Importance of Tertiary Education for Economic Growth ................................................................. 9 Three leading roles for tertiary education in economic growth in the South Caucasus ........................ 11 1. The skills role of tertiary education ............................................................................................ 12 2. The Innovation Role of Tertiary Education .................................................................................. 13 3. Spillover effects of tertiary education ......................................................................................... 14 2: Who has access to tertiary education, and who does not? ................................................................. 15 3: Quality and Relevance of Tertiary Education ...................................................................................... 19 4: Funding for Tertiary Education ........................................................................................................... 27 5: Scientific Research and Technology Transfer....................................................................................... 31 6: Conclusion ......................................................................................................................................... 34 Quick Overview Tertiary Education Systems in the South Caucasus ........................................................ 36 3 Acknowledgments This regional report was prepared under the leadership and direction of Shiro Nakata (Senior Economist), Renata Lemos (Senior Economist), and Anna Berdzenadze (Education Specialist). We gratefully acknowledge excellent research assistance from Farah Nadeem. The authors would like to thank the peer reviewers Roberta Malee Bassett (Global Lead for Tertiary Education), Diego Ambasz (Senior Education Specialist), for relevant insights and suggestions. We also kindly acknowledge valuable comments from Rita Almeida (Practice Manager for Education in Europe and Central Asia region), Maia Chankseliani (Associate Professor, University of Oxford), Miguel Eduardo Sanchez Martin (Senior Economist, Program Leader), Cindy Audiguier (Senior Economist) and participants at the Higher Education Regional Workshop in the South Caucasus on June 13, 2024. The authors would also like to thank Rolande Pryce, Country Director for the South Caucasus region, for her overall guidance and leadership in developing the report. 4 Executive Summary Policymakers in the South Caucasus region all know a difficult truth: the performance of their universities is disappointing. None of the institutions in the region can boast of a world-class status; none reach a meaningful rank in any of the university rankings. On average, as shown in Figure E.1 below, the countries’ institutions, on aggregate, perform much below what is expected given the level of economic development. This report aims to help policymakers in ministries of economic affairs, ministries of finance, and ministries of education understand this sector of national importance. Even more importantly, it hopes to convince the leaders of the tertiary education institutions themselves to take on challenges facing this sector more decisively. Figure E.1: Universities’ aggregate quality score in the South Caucasus countries is much below what is expected based on the countries’ GDP per capita (the green line) Source: Data on university rankings from Demirgüç-Kunt, A. & Torre, I., (2020). Measuring Human Capital in Europe and Central Asia. World Bank Policy Research Working Paper, Issue No. 9458. GDP per capita from World Bank WDI. The reason for this state of affairs has much to do with the choices the governments in the region have made since independence. Tertiary education has not been crucial in the countries’ development plans over the last three decades. Some of this withdrawal was for good reasons. As the countries transitioned from the Soviet economies, the newly formed states withdrew from managing and financing the tertiary education sector. As demand for tertiary education grew with a higher share of youth completing secondary education, new private universities came into being, while the public universities could survive by charging tuition fees to their students. Universities became more autonomous and learned how to fend for themselves in the market economy. However, as these countries’ economies change, tertiary education will become a valuable strategic resource for the region’s economic development. Governments in the region are advised to take a fresh look at tertiary education because it provides necessary skills, facilitates innovation, and has spillover effects for societies beyond immediate economic returns. In a world of fast-changing technologies, this sector has a much more important role 5 than in the early 1990s or 2000s. Notably, as the countries in the region have reached upper middle- income status, the economies struggle to diversify and grow through exports. Firms that can play this role demand workers with more advanced skills, including technical and behavioral skills, that students learn in tertiary education institutions. Some firms in the region can go further and want to invest in research and development to become regional or even global innovators. These firms need a local science and technology infrastructure that can help them on their path. In other words, the countries need tertiary education to avoid what the 2024 World Development Report calls the ‘Middle Income Trap’. Importantly, improvements are needed in universities, but also in all other types of tertiary education institutions, such as polytechnics and professional colleges, which have perhaps even been more neglected. Universities, particularly those that do research and development, are essential for the countries’ firms to come closer to the technology frontier. However, firms’ needs are often modest: they need employees with basic professional skills, including those who can speak foreign languages, who can navigate online services for professional goals, who can help their business transition to cloud software, and who can stay up to date with new technologies as they come out. Various professionally oriented tertiary education institutions typically provide these skills. This report uses data and evidence to review four key policy priorities for the region: access and inequity, quality and relevance of programs, public financing, and scientific research . The red thread throughout these four areas is that tertiary education institutions cannot address these challenges alone. They need a much more significant role from governments in directing a strategic vision and funding the sector while maintaining university autonomy and academic freedom. The focus of the report is on tertiary education as a source of economic growth, recognizing that tertiary education has other important spillover effects. There is plenty of evidence that tertiary education also helps societies beyond economic returns in terms of improved health, resilience, awareness of climate change, and better-governed societies. Scientific research is a global public good in and of itself, whether it helps societies to understand their cultural traditions better or helps them to find a cure for cancer. These non-economic returns do not, by definition, contrast with economic returns: non-economic and economic returns require accessible, high-quality, relevant, well-funded tertiary education systems that combine teaching and research. Policy Priority 1: After improving access, now focus on improving opportunities While larger shares of youth have gone to tertiary education, universities in the region have experienced volatile student numbers due to demographic declines. All countries have seen the population in the age group 20-24 dramatically decline in the last decade. In Armenia, the decline of youth in this age group was 40 percent (from 295 thousand to 174 thousand); in Azerbaijan, it was 26 percent (from 966 thousand to 713 thousand); and in Georgia, it was 39 percent (from 359 thousand to 220 thousand) between 2010 and 2020. This period of volatility seems to be over in the immediate future. This report projects that enrolment trends will stabilize in the next decade, thanks to more demographic stability and an increasing presence of international students in the region (particularly in Georgia). This projected stability offers an important opportunity for policymakers to develop and implement a more strategic policy agenda. Addressing inequality of opportunity can be helpful in improving the quality of tertiary education for all. High inequality of opportunity signals to young people that ability and effort do not matter for success, suppressing motivation and competition based on actual talent. The countries in the region have all tried 6 to improve merit-based admissions in tertiary education through competitive exams at the end of high school, which now seem to reinforce inequalities rather than reduce them. Further reforms are likely needed in pathways to tertiary education (e.g., through improved counseling and remedial programs), the exam systems, the student subsidy system, and university services to improve access for youth from poorer backgrounds. Policy Priority 2: Improve the Quality and Relevance of Tertiary Education There are serious concerns about the quality and relevance of tertiary education in the region . As already noted, the universities are ranked much below what should be expected for the countries’ level of economic development. There are also signs of serious problems with academic integrity, although no comparative data is available. Perhaps most worryingly, wage returns to tertiary education are much lower than in comparable countries, particularly Armenia and Georgia. While tertiary education graduates do better than graduates from secondary education, a substantial number of graduates end up in low-skilled jobs for which they would not need tertiary education. What is worse is that there are indications that tertiary education institutions themselves believe that their education is well aligned with the labor market. In contrast, graduates and employers often complain about low quality or a lack of a match with the labor market. Firms in the region often demand new types of skills, such as communication skills, teamwork, critical thinking, and problem-solving, which are not standardized across curricula. Given university autonomy and a lack of clarity of what the labor market demands, the solutions to this problem are manifold. For one, more diversity in their institutions and programs is needed. This could include professional degrees, short degrees, micro-credentials, part-time programs, dual degrees, or other types of education catering to professional skills in high demand in the labor market. Tertiary education institutions would also need to attract better professors, which will likely require a new career system for professors. Actions are necessary for academic integrity, which requires both tools to enforce compliance while providing training and resources to improve the culture. Policy Priority 3: Increase funding and improve the efficiency and management of spending One of the critical levers that influence the quality of education is the level of funding for tertiary education. The average country in the EU-28 spends about 8 times more than Armenia and Georgia and about six times more than Azerbaijan. The region's tertiary education systems rely mainly on tuition fees from students and families, and given that market forces determine these, it is unlikely that these can be raised much more. As student numbers have been somewhat volatile, the reliance on tuition fees has also introduced challenges in institutional financial planning. Over the next decade or so, institutional funding is expected to be more stable, given projected enrolment stability. This would be an opportunity to rethink the public budget for tertiary education. Public funding levels for tertiary education are too low to provide institutions with a stable base to finance quality education. Governments could increase the base levels with a clear plan for the institutions regarding what needs to happen to improve the quality and relevance of the degree programs. Governments could also use additional public funding to incentivize institutions to raise their own capital (e.g., private capital for university infrastructure programs, selling or renting out assets that are not being used, or increasing commercial activities), thereby leveraging additional funds. Additional revenues can 7 also be brought in through (further) increasing the number of international students, training programs aimed at professionals, international partnerships, and contract research. At the same time, governments can consider mechanisms to improve the efficiency of institutional spending and the transparent management of funds. One area that needs continued attention is the merit-based scholarship system commonly used in the region (as in the broader post-Soviet region). Given the high inequality in access to tertiary education, it would make more sense to use these scarce resources in line with policy priorities, such as addressing issues with affordability for students from disadvantaged backgrounds. Providing need-based scholarships could strengthen social mobility and lead to fairer competition between talents rather than reproduce existing inequalities. Policy Priority 4: Building the infrastructure and culture for scientific research Innovative firms need universities that can conduct scientific research at the global frontier of scientific development. Until recently, producing scientific research has not been a prominent objective for tertiary education institutions in the South Caucasus region. Like most post-Soviet countries, scientific research was conducted at research institutes, which were organizationally separate from the universities. None of the universities in the region produce scientific research at internationally competitive levels. Only Georgia has tried to integrate these institutions into the universities, although much work is ahead to make this integration functional. The post-Soviet legacy cannot be an excuse; over the last thirty years, Estonia has become a world leader in scientific research output. Estonia diversified its higher education into professional and academic higher education, merged universities during demographic declines, and funds science actively, strongly positioning itself in international research partnerships such as the EU’s Horizon program. Governments must build scientific infrastructure and promote dynamic research activities to change this scientific research culture. Much of the university's infrastructure and equipment is either outdated or non-existent. Given their lack of base funding, universities in the region cannot offer tenure-track careers to faculty that can compete with the broader region, let alone be globally competitive. While strategic investments in research are being made in all the countries in the region, these are often small and have short time horizons. The governments could change this by concentrating new investments in targeted areas where scientific capacity exists (based on competitive processes using scientific peer evaluation). In turn, that would need to be supported by career systems at the university level that reward scientific research output. If the countries in the region are serious about growing to high-income countries, they will need to solve a number of these policy challenges simultaneously. This will not be easy. There are no silver bullets that solve all these problems, nor are there any quick fixes. Increased public funding will help, but it will not guarantee results; without reforms, it is unlikely to translate into improved outcomes. Reforming tertiary education will require political capital at the national level and more potent leadership in the institutions themselves. Significant improvements will likely be necessary for the governance of tertiary education institutions. However, no one promised that it would be easy to transition from a middle-income country to a high-income country; the difficulty of this transition is precisely why the middle-income status can be a trap. 8 1. The Importance of Tertiary Education for Economic Growth Key insights: - As all countries in the South Caucasus want to transition their economies from upper middle- income to high-income status, they need to take a fresh look at their tertiary education system, which provides a vital role in this transition. - Tertiary education can produce advanced skills that are rewarded on the labor market, spur innovation through technology adoption and scientific research, and support regional economic development around institutional campuses. - Tertiary education includes degree programs, short-cycle programs, professional training, and micro-credentials and can be offered by colleges, universities, polytechnical institutes, professional schools, and so on. - These different types of tertiary education are essential because the labor market needs more than just highly trained scientists; it needs young people with a broad range of professional and academic skills. This report aims to help policymakers and leaders in the South Caucasus region, especially those in finance, economic affairs, and education, to find new ways to grow their economies. The three countries in the region, Armenia, Azerbaijan, and Georgia, have all reached upper-middle-income country status. Despite that achievement, and maybe even because of that, each of these countries is struggling to reach the next steps: to diversify their economies, to increase their productivity, and to become exporters in a more extensive variety of sectors. Policymakers know this is easier said than done, as most middle-income countries make the necessary transitions too slowly. Countries in the South Caucasus region all face the risk of what the recent 2024 World Development Report calls falling into the ‘Middle Income Trap.’ 1 There is a broad recognition that human capital plays a vital role in the economic growth of middle- income countries. Firms require workers with strong foundational skills and decent health to improve productivity. Workers in middle-income countries, in turn, require quality jobs with social protections to build a career. Skills are needed so workers are productive, health is necessary to stay productive, and high-quality jobs allow workers to grow roots in their communities so they won’t feel pushed to migrate. As the speed of technological change has increased globally, this foundational human capital is no longer enough to grow from middle-income to high-income status. Firms that want to be globally competitive need workers with more advanced skills who can use the latest production techniques. They need workers who follow the news in their industries and can keep up to date with new technologies as they are released. While these advanced skills may be enough to catch up with high-income countries, some firms will probably need to go even further and do the kinds of research and development to become global innovators themselves. These firms need access to cutting-edge technology at the so-called ‘technological frontier.’ The 2024 World Development Report argues that middle-income countries need to improve their economies' productivity through creative destruction to break out of the middle-income trap. Regardless of their size, firms will need to catch up with technological change, adopting technologies much faster than they do now. Technology adoption hinges on whether firms can adequately identify, nurture, 1 World Bank. 2024. World Development Report 2024: The Middle-Income Trap. The World Bank. 9 and promote talent. To compete globally eventually depends on how well countries can innovate to push the global frontier of technology. All policymakers in the region know that their tertiary education systems perform well below expectations in international university rankings, which is a sign of low attention to this sector. In Figure 1.1, we plot a combined quality score for the universities in the region based on aggregate university rankings relative to the country’s GDP per capita. While informative as an aggregate indicator of system quality, the rankings provide little information that is directly actionable for policymakers.2 Moreover, the rankings only measure a subset of what is essential about the tertiary education system (see Box 1). Figure 1.1: Aggregated quality score based on university rankings relative to GDP per capita Source: Data on university rankings from Demirgüç-Kunt, A. & Torre, I., (2020). Measuring Human Capital in Europe and Central Asia. World Bank Policy Research Working Paper, Issue No. 9458. GDP per capita from World Bank WDI. Even in high-income countries, university rankings do not capture the diversity of the tertiary education sector. Tertiary education institutions, including universities, polytechnics, professional schools, and colleges, play a crucial role in providing these skills (see Box 1). Unfortunately, policymakers, especially those at the highest levels of decision-making, have paid little attention to all these types of institutions, and the institutions usually don’t deliver what is expected from them. This short report aims to lay out in more detail how tertiary education institutions can play a strategic role in economic growth and whether the systems in the South Caucasus region perform this role effectively. It will start by reviewing the evidence on the role of tertiary education in economic growth. It will then review four main dimensions of tertiary education policy (enrolment, labor markets, funding, and science) using the latest comparative data available. Section 2 will review the expansion of the tertiary education system in the countries in the region, showing who attains tertiary education degrees and who doesn’t. Section 3 will review the returns from tertiary education on the labor market. Section 4 will review the funding of tertiary education. Finally, Section 5 will review the science production from the institutions in the sector. 2 Hazelkorn, E. Mihut, G. (eds.) 2021. Research Handbook on University Rankings. Edgar Elgar. 10 Box 1. Tertiary Education is offered in ‘World Class Universities’ and many other types of institutions The term ‘tertiary education’ refers to higher education and other types of post-secondary education, typically reflective of UNESCO ISCED levels 5-8. This can include shorter programs, such as short-cycle higher education (that is often offered at level 5). But it can also include other types of courses, post-graduate training or micro-credentials that are offered at these levels. ‘Tertiary education’ degree programs or shorter courses can be offered by a wide variety of institutions, including colleges, universities, polytechnical institutes, professional schools, and so on. A specific type of tertiary education, offered in what is often called ‘World Class Universities’, often receives special attention from governments. Already in 2003, a leading tertiary education researcher observed that ‘Everyone [in tertiary education policy circles] wants a world-class university. No country feels it can do without one.’ (Altbach, 2003). Since then, governments have taken various initiatives to establish a World Class University, which is particularly challenging in developing countries 1. By one count, 37 governments launched ‘Academic Excellence initiatives’ between 2004 and 2014, up from 13 such initiatives between 1989 and 20041 to create such universities. In the South Caucasus region, there are no institutions that can compete at this ‘World Class’ level. If anything, the universities in the region perform relatively poorly on quality scores developed from university rankings as shown above1. Nevertheless, there is interest in the region to establish such institutions. The government of Georgia, for instance, established the Kutaisi International University in 2017 with precisely this aim in mind. The Armenian government is also considering consolidating its university system and planning to establish an ‘Academic City’ that can compete globally1. The countries in the South Caucasus region would likely benefit from each having an institution that can compete globally in the production of international science and technology transfer. At the same time, policymakers may want to carefully consider how a diversified tertiary education system offers opportunities for skill development at all levels. Firms in the region need mid-level professionals trained well in technical and professional skills, as well as innovative ideas from a recent PhD who is on top of their scientific field. International experience has shown that the road to academic excellence is perilous and can drain resources. Simply merging institutions to perform better in international rankings, or just building infrastructure typically does not necessarily lead to better outcomes1. Three leading roles for tertiary education in economic growth in the South Caucasus Tertiary education plays three prominent roles in economic growth: providing advanced skills, research and technology transfer for innovation, and geographic economic spillovers. First, tertiary education can provide a wide range of advanced cognitive and non-cognitive skills that firms need in technical jobs, at mid-levels of management, and in leadership. Secondly, tertiary education links with global scientific production, allowing for innovation through technology transfer. Tertiary education graduates also use technology more comfortably in their jobs, significantly facilitating technology adoption. Third, campuses of tertiary education institutions are important sites for regional economic activity. We outline the evidence for these three roles in a short review below. 11 1. The skills role of tertiary education Tertiary education provides young people with higher-order cognitive skills3, knowledge, and attitudes. For this reason, tertiary education plays a unique role in what economists call the ‘race between education and technology.’4 In this ‘race,’ education systems play catch-up to technological development by delivering skills in the form of new highly educated graduates. When industrial demand for new technology develops faster than skills, there is an increased demand for higher-order skills in the labor market. The importance of advanced skills in the labor market is visible through high labor force participation rates of tertiary education graduates and high average rates of return from tertiary education. Figure 1.2a below shows that labor force participation rates of tertiary education graduates are substantially higher than for those with only secondary education (the difference is 15.5 percentage points in the average country worldwide). Figure 1.2b below shows that while the share of workers with tertiary education increased by 12 percentage points (from 17 percent in 1991 to 29 percent in 2023), the returns to tertiary education have been relatively stable across countries throughout 5. Figure 1.2a. Labor Force Participation Rates Figure 1.2b. Average rates of return to tertiary among Secondary and Tertiary Education education are stable over time, while the share of Graduates tertiary workers in the labor force doubled Source: Global Monitoring Database (GMD), Global Labor Database (GLD), Socio-Economic Database for Latin America and The Caribbean (SEDLAC), ILO Department of Statistics (ILOSTAT), China Family Panel Studies (CFPS), Living in Transition Survey (LITS). In the South Caucasus region, labor force participation rates among tertiary education graduates are higher than the global average. As Chapter 3 discusses below, wage returns to tertiary education in the region are also positive and higher than returns to secondary education. However, returns to tertiary education in the region are lower than the global and regional averages. This implies that there are 3 These skills can be higher-order generic skills like literacy, numeracy, or problem-solving (which can be measured using standardized assessments such as those included in adult skills surveys and include well-defined proficiency levels). They can also include field-specific skills which are typically measured less frequently through standardized tools (although exceptions exist such as Colombia’s Saber-Pro assessment). 4 Tinbergen, J. (1975). Income distribution: Analysis and policies. New York: North-Holland Publishing Company. Goldin, C., & Katz, L. F. (2009). The race between education and technology. Harvard university press. 5 Montenegro, C., Patrinos, H. (2021) A data set of comparable estimates of the private rate of return to schooling in the world, 1970–2014. International Journal of Manpower 12 mismatches between the skills provided at tertiary education and the labor markets in the region. Chapter 3 below will dive into this question in a little more detail. 2. The Innovation Role of Tertiary Education While innovation is often associated with the invention of new products that shake up an industry, innovation at its most basic level is simply the adoption and usage of new technologies in the workplace.6 One of the key determinants of technology uptake in countries is tertiary education attainment.7 This can be visualized for essential technologies like internet usage (Figure 1.3a) and computer ownership (Figure 1.3b). Firm-level data shows that firms in developing countries are often far from the technology frontier, which means there is still much to gain from using existing technologies more widely.8 Notably, the diffusion and adoption of new technologies are probably more important drivers of economic growth than invention.9 Therefore, Tertiary education can also play a role in innovation through its training and socialization function. Figure 1.3a. Frequency of internet usage by Figure 1.3b. Computer ownership is much education level and country income level. higher among tertiary education graduates Note: 1.3a. Respondents were asked to indicate whether they use the internet to obtain information daily, weekly, monthly, less than monthly, or never; the weighted averages were calculated over 2 LICs, 16 LMCs, 23 UMCs, and 21 HICs. 1.3b. Respondents were asked whether they owned a computer, and the weighted averages were calculated over 21 LICs, 39 LMCs, 28 UMCs, and 5 HICs. Source: 1.3a. World Values Survey – Wave 7: 2017-22. 1.3b. Global Monitoring Database (97 countries). Countries cannot innovate without having a competitive infrastructure for scientific research . Tertiary education contributes both directly and indirectly to innovation. Directly, it contributes through R&D activities (fundamental and applied research, inventing new products and processes, etc.). For instance, 6 See OECD (2005). "Oslo Manual: Guidelines for collecting and interpreting innovation data," 3rd/Ed. OECD Publishing, Paris. https://doi.org/10.1787/19900414 7 Cervellati, Matteo & Meyerheim, Gerrit & Sunde, Uwe, 2023. "Human capital and the diffusion of technology," Economics Letters, vol. 226(C). 8 Xavier Cirera Diego Comin Marcio Cruz. 2022. Bridging the Technological Divide: Technology Adoption by Firms in Developing Countries. World Bank 9 Comin, Diego, and Martí Mestieri. 2018. "If Technology Has Arrived Everywhere, Why Has Income Diverged?" American Economic Journal: Macroeconomics, 10 (3): 137-78. 13 most path-breaking patents can be traced back directly to scientific research 10. There is a considerable overlap between science funding, scientific findings, and public consumption of research findings11. This is one of the reasons that middle-income countries, including the Caucasus countries, are trying to compete globally in the production of science, with mixed success (see Figures 1.4a and 1.4b). Middle-income countries like the South Caucasus countries would do well to consider the balance between technology adoption and invention . One of the factors is that the Caucasus countries have more than the average number of researchers for a middle-income country (see Figure 1.4a); however, it does not produce nearly as much science as other countries (Figure 1.4b). Governments and tertiary education institutions can jointly run surveys to understand firm-level technology needs. In turn, governments can incentivize tertiary education institutions to expand technology usage in the classroom. However, it is unlikely that the universities in the region are ready to push the global frontier of technology, given the lack of research capacity and internationally visible research. Based on industry needs, specific sub-fields can be strategically selected to develop scientific capacity, drawing internationally mobile scientists back home and setting up new laboratories. Figure 1.4a. Research capacity in South Caucasus Figure 1.4b. Citable scientific documents and other developing countries (Number of produced per 10,000 inhabitants in researchers per million inhabitants) selected countries Source: 1.4a UNESCO Institute of Statistics (UIS). 1.4b SCIMago Web of Science. 3. Spillover effects of tertiary education Through mechanisms like those mentioned above (i.e., skills provision and R&D activities), tertiary education has essential spillover effects in communities, often referred to as the ‘third mission of tertiary education.’12 This includes economic, social, and cultural impacts that residents and businesses feel. The economic spillover effects include job creation, higher wages, and increased economic growth in the surrounding areas. Tertiary education institutions are important employers, and their employees live in nearby communities and spend money at local businesses, leading to additional job creation and 10 Ahmadpoor, M., & Jones, B. F. (2017). The dual frontier: Patented inventions and prior scientific advance. Science, 357(6351), 583-587. 11 Yin, Y., Dong, Y., Wang, K., Wang, D., & Jones, B. (2021). Science as a public good: Public use and funding of science (No. w28748). National Bureau of Economic Research. 12 Pinheiro, R., Langa, P. V., & Pausits, A. (2015). One and two equals three? The third mission of higher education institutions. European journal of higher education, 5(3), 233-249. 14 economic activity. Social spillover effects include increased civic engagement, volunteerism, health and wellbeing activities and opportunities, and community involvement13. Finally, cultural spillover effects of tertiary education may consist of increased cultural diversity, accessible arts and cultural events, and an overall higher quality of life14. The idea of the ’third mission’ indicates that institutions can positively impact their surrounding communities. Policymakers, especially local government leaders, typically have a keen interest in these spillovers, as they are directly visible in local communities.15 Globally, based on UNESCO (IAU) data on geospatial locations of universities, a 10% increase in a region’s number of universities per capita is associated with 0.4% higher future GDP per capita in that region.16 In communities further away from tertiary education institutions, firms employ fewer highly skilled individuals and have worse management practices.17 Hospitals closer to universities offering MBA and medical training have lower mortality rates from heart attacks and are much better managed than hospitals that are further away from such training.18 There are several regional universities in each country of the region, although these have not received much government support. In Armenia, regional universities operate in Shirak, Goris, Vanadzor and Gavar. Georgia. In Georgia, universities operate in Batumi, Gori, Kutaisi, and Telavi. The Georgian government recently established a university just outside Kutaisi to have an internationally competitive university in one of the regions. In Azerbaijan, regional universities are in Ganja, Lankaran, Mingachevir, Nakhchivan, and Sumgait. These regional universities provide national and local governments with essential opportunities for regional development around the university campus if they can offer degree programs linked to local firms’ needs. 2: Who has access to tertiary education, and who does not? Key insights: - Globally, there has been a significant growth in tertiary education enrolment. In the South Caucasus, the picture is more complex. In Armenia, enrolments increased but have sharply declined in the last decade or so. After a dip in the 1990s, student enrolments in Azerbaijan have been slowly rising. In Georgia, student numbers have recovered from a major decline between 2005 and 2010. - All countries have seen the population in the age group 20-24 dramatically decline in the last decade, which has put pressures on enrolments. In Armenia, the decline of youth in this age-group was 40 percent (from 295 thousand to 174 thousand), in Azerbaijan it was 26 percent (from 966 thousand to 713 thousand), and in Georgia it was 39 percent (from 359 thousand to 220 thousand) between 2010 and 2020. But this decline is projected to be over in the immediate future. 13 Howell, C., Unterhalter, El., Oketch, M. (2020) The role of tertiary education in development. A rigorous review of the evidence. British Council 14 McMahon, W. (2018). The Total Return to Higher Education: Is There Underinvestment For Economic Growth and Development? The Quarterly Review of Economics and Finance, Vol 70, 2018, pp 90-111 15 OECD (2007). Higher Education and Regions: Globally Competitive, Locally Engaged. Paris: OECD. 16 Valero, A., Van Reenen, J. (2019) The economic impact of universities: Evidence from across the globe. Economics of Education Review 68 (2019) 53–67 17 Feng, A., & Valero, A. (2020). Skill-biased management: evidence from manufacturing firms. The Economic Journal, 130(628), 1057-1080. 18 Bloom, N., Lemos, R., Sadun, R., & Van Reenen, J. (2020). Healthy business? managerial education and management in health care. Review of Economics and Statistics, 102(3), 506-517. 15 - Based on demographic trends, we project student enrolments until 2040 in a ‘business as usual scenario’. In Azerbaijan, we project student numbers to remain stable until around 2030 and grow substantially between 2030 and 2040. In Armenia and Georgia, we expect student numbers to remain stable in the coming two decades. - There has been a growth in the share of the population that has attained tertiary education in both Armenia and Azerbaijan. In Georgia, the share of the population with tertiary education has remained more stable over the last two decades. - The countries have high levels of inequality in student enrolments, showing low attainment rates for children of medium and low-educated parents and those from rural backgrounds. This signals that the education systems do not adequately reward merit. There has been an explosion in global enrolments in tertiary education in Low and Middle-Income countries over the last three decades. In 1990, low and middle-income countries jointly enrolled 28.4 million students in tertiary education. That figure went up to 162.3 million students by 2020, an almost sixfold increase in three decades. In high-income countries, enrolment also grew during the same period, but not as dramatically as in developing countries. Enrolment in high-income countries rose from 18.2 million in 1990 to 50.8 million in 2020, an almost threefold increase. Notably, most of the growth in high- income countries occurred between 2010 and 2015 and then leveled off again. In the South Caucasus countries, enrolment growth has been more restrained. In Azerbaijan, student numbers have grown since a dip in the mid-1990s. In Georgia, student numbers have grown somewhat in the last decade. In Armenia, however, student numbers have decreased substantially over the last decade, leading to pressure on universities to consolidate or close entirely. Figure 2.1a. Global rise in enrolments in tertiary Figure 2.1b. Enrolment in tertiary education, comparing High-Income Countries to education in the South Caucasus region Low and Middle-Income Countries Source: UNESCO Institute for Statistics (UIS). Notes: Data are combined into 5-year intervals for ease of reading. The intervals represent the 2 years above and below the intervals (e.g., the value for the year 2000 is the average yearly value between 1998 and 2002). Demographic decline has been the main factor holding back growth in tertiary education enrolment in the South Caucasus region, but these factors are stabilizing in the coming decades (Figure 2.2.a). In all countries, plummeting birth rates and out-migration led to a steady decline in the youth population over the last decade. In Armenia, the decline of youth in the age-group 20-24 was 40 percent (from 295 thousand to 174 thousand), in Azerbaijan it was 26 percent (from 966 thousand to 713 thousand), and in 16 Georgia it was 39 percent (from 359 thousand to 220 thousand) between 2010 and 2020. For all South Caucasus countries, however, the demographic decline seems over, and youth populations are projected to stabilize over the next twenty years. We use these demographic trends to project student enrolments in the South Caucasus countries in Figure 2.2b. These projections assume a ‘business as usual scenario’ and may differ depending on policy choices. In Armenia, we expect the student population to stabilize between 75.000 and 90.000 students. In Georgia, we expect the student population to balance between 150.000 and 125.000 students. In Azerbaijan, however, we expect the student numbers to remain stable at around 240.000 students on average from 2020 to 2030. Between 2030 and 2040, we expect a substantial increase in student numbers in Azerbaijan, from about 240.000 to 325.000 (a 35% increase). We should note that these are projections based on enrolment and demographic trends, and several factors may influence these trends. For instance, student enrolment may be lower if young people leave the region in higher numbers than expected, if universities constrain their enrolments, or if smaller shares of youth attain secondary education than expected. In contrast, student numbers may be higher if international students arrive in the region in larger numbers. Figure 2.2a. Youth population at eligible age for Figure 2.2b. Projected Enrolment in tertiary tertiary education (age 20-24) in South Caucasus education in the South Caucasus countries countries 1990-2040 1990-2040 Source: 2.2a Wittgenstein Centre population projections (Version 2 - 2018). 2.2b. World Bank projections based on UIS enrolment data and WIC Population projections. The forecast model used secondary and tertiary enrollment numbers from UIS and Attainment projections from WIC 2018. Notes: Youth population refers to individuals between 20 to 24 years old. After 2020, the figure shows projections of that age cohort. In Armenia and Azerbaijan, we observe a significant expansion in the share of the population attaining tertiary education (Figure 2.3a). In Armenia, there is a difference of 16.8 percentage points in the share attaining tertiary education between the age group 45-54 years old (25.1 percent) and the age group 24- 34 years old (41.9 percent). In Azerbaijan, the difference is 9.8 percent between the age group 45-54 years old (32.5 percent) and the age group 24-34 years old (42.3 percent). In Georgia, in contrast, the share of the population that attains tertiary education has not changed much and hovers around 37 percent in both age groups. In Armenia and Georgia, the share of women and men attaining tertiary education has been similar, with women having an advantage over men (Figure 2.3b). In Azerbaijan, men are still more likely to earn a tertiary education degree, although the difference between men and women has substantially narrowed between the age groups. 17 Figure 2.3a. Share of cohort attaining tertiary Figure 2.3b. Share of women and men education (age 25-34 and age 45-54) attaining a tertiary education degree by age cohort and country Source: Global Labor Database (GLD) 2022 for Armenia and Georgia. Living in Transition Survey (LITS) 2023 for Azerbaijan. Note: figure 2.3a. shows the share of women with tertiary education among the total population by cohort. Figure 2.3b. shows the women minus men difference in the share of tertiary education among each gender and cohort. Despite the larger share of youth attending tertiary education, inequality in tertiary education attainment remains high in the region. Parental education (Figure 2.4a) is a strong predictor of children’s access to tertiary education: around two-thirds of children of parents who have higher education also attain tertiary education. In contrast, between a fifth and one-third of children of parents with secondary education attend tertiary education. Regional inequality (Figure 2.4b) is also substantial, with about half of youth in urban areas attaining tertiary education versus between one-fifth and one-third of youth in rural areas. Figure 2.4a. Inequality in tertiary education Figure 2.4b. Inequality in tertiary education attainment by parental education attainment by geography Source: Global Labor Database (GLD) 2022 for Armenia and Georgia. Living in Transition Survey (LITS) 2023 for Azerbaijan. Notes: The shares represent the fraction of the sample, from 25 to 34 years old, with some tertiary education. For Armenia and Georgia, Parental education is the maximum education level attained between the father and the mother who live in the same household. For Azerbaijan, parental education is the highest level of their father or mother’s education as reported by respondents, regardless of whether these parents live in the same household as the children. 18 Increasing social mobility in education will help the countries in the region to become more competitive . Inequality in educational outcomes is often a signal that youth feel abandoned and unmotivated19. The challenge for education systems in the region is to become more meritocratic, with fair chances to succeed regardless of social background. Without tackling this problem, potential talent is disincentivized from investing in their human capital. In turn, this leads to a less competitive labor market, as potential talent will neither be motivated to learn nor receive the appropriate levels of training. Policymakers can aim to reduce inequities in higher education through various ways, including financial aid, providing better information to high school students, and providing systematic counseling to children in high school to help them transition towards tertiary education.20 Students from socially disadvantaged areas often lack essential information about the potential returns to tertiary education. Because they have few reference points and role models, they find it hard to predict whether they will do well in tertiary education. They may also perceive the costs of tertiary education as too high and be constrained in accessing funds to pay for tertiary education. There is also evidence that the exam system used in the region, introduced to tackle corruption in university admissions, may have the unintended consequence of reproducing inequalities. The general educational system fails to prepare those from different social backgrounds academically equally. In Georgia, for instance, there is evidence that the unified national exams lead to better outcomes for students from higher socio-economic groups. More affluent parents can invest more in private tutoring to prepare for the exams.21 Reforms to the entrance exam system may include options to give universities more control over who they admit, thereby reducing the stakes of the exams and better aligning the content of exams with the high school curriculum, which reduces the need for private tutoring. 3: Quality and Relevance of Tertiary Education Key Insights: - Policymakers have multiple reasons to be concerned about the quality of tertiary education, as shown by the low skills of tertiary education graduates in the labor market, low aggregate university quality scores, and concerns about academic integrity. - Returns to tertiary education in the region are also lower than average, although they are still positive. Women have substantially higher returns to tertiary education in Armenia and Georgia, although men in Azerbaijan have higher returns than women in tertiary education. - Despite the low quality, tertiary education almost guarantees access to the labor market in all South Caucasus countries. For women, tertiary education is a major entry point to the labor market. - A substantial share of tertiary education graduates is unemployed or have professions that are low-skill in nature. This may help explain the low wage returns for tertiary education graduates. 19 Daenekindt, S. (2017) The Experience of Social Mobility: Social Isolation, Utilitarian Individualism, and Social Disorientation. Soc Indic Res 133, 15–30 (2017). https://doi.org/10.1007/s11205-016-1369-3 20 Herbaut, E. K. Geven. 2020. What works to reduce inequality in higher education? A Systematic Review of the (Quasi- )Experimental Literature on Outreach and Financial Aid. Research in Social Stratification and Mobility, Vol. 65, https://doi.org/10.1016/j.rssm.2019.100442 21 Chakhaia, L. 2018. School graduation and university entrance exams in Georgia. NAEC 19 There are multiple reasons to be concerned about the quality of tertiary education. First, the low quality of tertiary education in the region translates into poor adult learning outcomes (Figure 3.5). In Armenia and Georgia, adult literacy scores among those with tertiary education degrees are near the bottom of international performance in comparable test scores. Substantially, the average tertiary education graduate is at level 2 out of 5 proficiency levels, meaning these adults can mix basic texts and information, paraphrase, and make low-level inferences. However, these adults can probably not manage dense or lengthy texts, have difficulty with complex steps to synthesize information from texts, and do not search for meaning across multiple texts. In other words, the average graduate scores much below the types of tasks usually required of tertiary education graduates (which would typically be at proficiency level 5). Figure 3.1: Low university quality is associated with low adult learning outcomes Source: Literacy proficiency - PIAAC & STEP, calculated for 47 countries; Numeracy proficiency - PIAAC, calculated for 35 countries; Problem-solving proficiency - PIAAC, calculated for 32 countries. Notes: Country-level average skills proficiency scores for tertiary graduates are plotted against the country-level aggregate university quality scores. The red markers indicate developing ECA countries. No data is available for Azerbaijan. Another core concern in the region is academic integrity at the tertiary education institutions themselves. Academic integrity is quickly becoming a complex challenge with cases of cheating on exams, plagiarism, and the use of large language models (such as ChatGPT) to create artificial content.22 Where institutions in the country have made important steps in improving integrity (including through projects with international partners), the reality remains that many students remain unaware of good practices. In a recent comparative study, 47% of students in Georgia and 36% in Azerbaijan claimed to have “received training in academic writing techniques and avoiding plagiarism.”23 In Armenia, where there is no data on student experiences, only 48% of teachers report that students have received such training, and only 40% of institutions are reported as having a policy to combat plagiarism. Notably, there are few administrative records of academic malpractice, the use of text-matching software remains low as a formative tool, and penalties for dishonest behavior are still somewhat low, only leading to a reduced mark. Perhaps the primary concern should be that tertiary education graduates in the region earn comparatively low wages. Globally, tertiary education graduates have substantially higher wages than those with lower levels of education. In Figures 3.2a and 3.2b, we plot wage returns to a year of tertiary 22Eaton, S. E. (2023). Handbook of Academic Integrity. Second Edition. Dordrecht: Springer 23Glendinning, I. (2021). Volume 6 Project on Academic Integrity in Armenia, Azerbaijan, Georgia, Kazakhstan and Turkey. Strasbourg: Council of Europe 20 education for the three countries compared to European and global values. Note that the figures represent the average wage return among graduates per year of tertiary education compared to the average wage of someone who has completed secondary education (in economist terms, the numbers represent the marginal value of completing a year of tertiary education). For Armenia and Georgia, wage returns to tertiary education have been slowly declining over the last decade. In contrast, global wage returns to tertiary education have been stable over the previous two decades. In Figure 3.2b, we plot the latest values for wage returns to education for the South Caucasus countries . South Caucasus countries have low returns to education in general (the blue bars). Returns to an average year of schooling (regardless of level) in the region range between 3% and 4.4%, which shows that the labor market does not reward education as much as in the ECA region in general (where returns are 7.6% and 7.8%). Globally, returns to an average year of education are even higher, at 9.0%. Returns to tertiary education are comparatively low, although higher than returns to schooling on average. In Armenia, graduates of tertiary education only earn 3.9 percent more per year of tertiary education than graduates from secondary education. In Georgia, graduates from tertiary education earn 5.8% more per year of tertiary education than those from secondary education. In Azerbaijan, the returns to tertiary education are higher, at 11.9%, which is comparable to the regional average, although still somewhat lower than the global average. Nevertheless, the data do show that wage returns to tertiary education in the region are still substantially higher than returns to secondary education (which are close to zero in all three countries). Figure 3.2a. Wage returns to tertiary education Figure 3.2b. Wage returns for education, globally and South Caucasus region over time South Caucasus countries over time (secondary vs. tertiary), latest available surveys Source: Global Monitoring Database (GMD), Global Labor Database (GLD), Socio-Economic Database for Latin America and The Caribbean (SEDLAC), ILO Department of Statistics (ILOSTAT), China Family Panel Studies (CFPS), Living in Transition Survey (LITS). The number for Azerbaijan 2015 is drawn from Garcia Moreno & Patrinos (2020) . Notes: Regional and world averages are weighted by the 2020 population of countries included in the sample. Globally, women tend to have higher returns from tertiary education than men (Figure 3.3). This is also the case in South Caucasus countries, except in Azerbaijan. In Armenia, the return to tertiary education for women is 5.8%, 45% higher than that for men (4.0%). In Georgia, the return to tertiary education is at 8.7%, 64% higher than the return for men (5.3%). In Azerbaijan, in contrast, the return to tertiary education for women is 9.6%, which is 24% lower than the return for men (12.6%). Nevertheless, returns to tertiary 21 education for women in the region are still much lower than those for women in Europe in general or globally. Figure 3.3 Wage returns to tertiary and secondary education by gender, latest values available Source: Global Monitoring Database (GMD), Global Labor Database (GLD), Socio-Economic Database for Latin America and The Caribbean (SEDLAC), ILO Department of Statistics (ILOSTAT), China Family Panel Studies (CFPS), Living in Transition Survey (LITS). Notes: Regional and world averages are weighted by the 2020 population of countries included in the sample. There is no easy explanation for why returns to education in the region are comparatively low. Still, it likely has to do with factors in the labor market and the quality and relevance of tertiary education. On the one hand, it is likely that the economic growth model in the region does not generate enough high- paying jobs that we typically see graduates perform in other countries. The growth model in the region has heavily relied on remittances from abroad and private consumption rather than export-oriented growth.24 There are also essential skills mismatches in the labor market. Almost three-quarters of employers in Georgia, for instance, report that they cannot find employees with the required skills, and the lack of experience is the most commonly cited problem.25 In surveys, employers name critical thinking, time management, and communication skills as their most desired skills, which are typical skills taught in academic core programs.26 The region also sees a lot of emigration of talented young people who seek better opportunities in Europe or elsewhere. In Figure 3.4, we plot the wage returns to tertiary education by economic sector for Armenia (Figure 3.4a) and Georgia (Figure 3.4b). Interestingly, the human development sector, including health and education, seems to provide the highest returns to tertiary education. In the private sector in Armenia, only the service sector offers substantial returns (at 9.5% per year of tertiary education) to the education and health sectors. In Georgia, only the agriculture sector provides somewhat substantial returns (at 8.8% 24 Honorati, M., Johanssen De Silva, S., Millan, N., Kerschbaumer, F. 2019. Work for a Better Future in Armenia. An Analysis of Job Dynamics. World Bank. IMF. 2019. Republic of Armenia. Selected Issues. 25 See data in Page 39 in Badurashvili, I. 2019. Skills Mismatch Measurement in Georgia. Turin: ETF. 26 Kheladze, A. 2024. Analysis and assessment of educational programs in terms of relevance to the demands of the labor market and contemporary challenges of employment. Unpublished Manuscript. 22 per year of tertiary education) beyond the education and health sectors. This may indicate that at least part of the problem is in the ability of the private sector to create rewarding jobs for tertiary education graduates. Figure 3.4a. Wage returns to tertiary education by Figure 3.4b. Wage returns to tertiary economic sector in Armenia education by economic sector in Georgia Source: Global Monitoring Database (GMD), Global Labor Database (GLD). Notes: given data limitations, it was not possible to disaggregate the wage returns by economic sector for Azerbaijan. Despite quality concerns, tertiary education boosts labor force participation (Figure 3.5). In Armenia and Georgia, nearly 80% of tertiary-educated graduates access the labor market, just below other European countries (87% for EU-28 and 85% for other ECA countries). In both countries, tertiary education graduates access the labor market at much higher rates than secondary education graduates. The difference is 17.3 percentage points in Armenia and 17.5 percentage points in Georgia. Almost all tertiary education graduates in Azerbaijan access the labor force, and there is no substantial difference between secondary and tertiary education graduates. Figure 3.5. Labor force participation by education level, highlighting latest values Source: Global Monitoring Database (GMD), Global Labor Database (GLD), Socio-Economic Database for Latin America and The Caribbean (SEDLAC), ILO Department of Statistics (ILOSTAT), China Family Panel Studies (CFPS), Living in Transition Survey (LITS). Notes: Labor force participation (LFP) measures the rate of the population employed and unemployed over the total population between 15 and 64 years old. We calculated the average LFP if a country had more than one data point in a year. After that, we use the 2020 population as weights to estimate regional and global averages. Importantly, tertiary education is a potent booster for female labor market participation (Figure 3.6). In Armenia, women with tertiary education are 27.3 percentage points more likely to enter the labor market 23 than women with secondary education. In Georgia, women with tertiary education are 27.5 percentage points more likely to enter the labor market than women with secondary education. In turn, this fact is a driving force for the increase in women who attain tertiary education, which was observed in Section 2. Again, in Azerbaijan, no substantial difference is observed in labor force participation between women with secondary education and women with tertiary education. Figure 3.6. Female Labor force participation by education level Source: Global Monitoring Database (GMD), Global Labor Database (GLD), Socio-Economic Database for Latin America and The Caribbean (SEDLAC), ILO Department of Statistics (ILOSTAT), China Family Panel Studies (CFPS), Living in Transition Survey (LITS). Notes: Labor force participation (LFP) measures the rate of the population employed and unemployed over the total population between 15 and 64 years old. We calculated the average LFP if a country had more than one data point in a year. After that, we use the 2020 population as weights to estimate regional and global averages. In Figure 3.7, we plot the types of jobs that tertiary-educated men and women obtain in the three countries. In all countries, we see large numbers of graduates in service jobs, both for men and women. However, we also see very gendered patterns in other sectors. As do industry jobs, public administration jobs tend to go to men with tertiary education degrees. Women tend to enter the education and health sectors. Very few women work in the agriculture sector, and the number of men in those jobs is also decreasing somewhat. Unemployment levels are comparably higher for men. This is another evidence that the labor market is not looking to reward talent. With women advancing fast in tertiary education, we should expect to see them enter traditionally male-dominated professions in higher numbers than they do now. 24 Figure 3.7 Job composition in South Caucasus countries, tertiary education graduates Source: Global Labor Database (GLD) and Living in Transition Survey (LITS). Notes: The cumulative height of each bar represents the Labor force participation (LFP) for tertiary-educated individuals -from 25 to 34 years old- per country and gender. The LFP for women and men is Armenia (66% vs 95%), Azerbaijan (89% vs 100%), and Georgia (72% vs 88%). Industrial classification is based on the International Standard Industrial Classification Rev.4. and measures the percentage of employed tertiary-educated individuals in each category over the total population in that age cohort. A common concern of young people with tertiary education is that they may enter jobs for which they are over-educated. While worries about overeducation in the region tend to be overblown27, there are some indications that young people aren’t necessarily entering highly skilled jobs. In Figure 3.8, we plot the skill level of the jobs among recent tertiary education graduates over time. We see large groups of young people in low-skill (blue and white-collar) professions in all three countries. In Azerbaijan, that includes about 43 percent of male tertiary education graduates. In Armenia, the share of men in low-skill jobs is 26 percent; in Georgia, 29.2 percent. In all countries in the region, the share of women with tertiary education degrees in low-skilled employment is lower than that for men. That means that despite a growing economy, young people are not readily finding jobs at their skill levels. 27 Arias, O., Sanchez-Paramo, C. 2014. Back to Work. Growing with Jobs in Europe and Central Asia. The World Bank 25 Figure 3.8. Skill types of jobs among young tertiary education graduates (age 25-34) Source: Global Labor Database (GLD) and Living in Transition Survey (LITS). Notes: Skill classification is based on the International Standard Classification of Occupations (ISCO) and measures the share of employed individuals with some tertiary education by category in that age cohort. High-skill white collar: Managers, professionals, and technicians; Low-skill white collar: clerks and market sales workers; High-skill blue collar: skilled agricultural and craft workers; Low-skill blue collar: machine operators and elementary occupations. It is unlikely that significant improvements in quality or relevance will come from a stronger focus on quality assurance and accreditation. Each of the three countries already has a functional quality assurance and accreditation organization. Both the Armenian (the National Centre for Professional Education Quality Assurance Foundation - ANQA) and the Georgian (National Center for Educational Quality Enhancement - NCEQE) quality assurance agencies have become members of the European Quality Assurance Register for Higher Education (EQAR) and the European Network of Quality Assurance Agencies in Higher Education (ENQA). The Azerbaijan quality assurance agency (The Agency for Quality Assurance in Education – TKTA) was more recently established and is now an affiliate of ENQA. Institutions in all countries have implemented internal quality assurance processes to improve the teaching process. In improving relevance, the dialogue and understanding between firms and tertiary education institutions is still emerging. In Georgia, there is a vastly different perspective between firms that believe that graduates lack labor market skills and professors, on the other hand, who think they prepare their students well for the labor market28. Yet, 65.5% of tertiary education institutions in Georgia do (mostly) agree that aligning programs to the labor market is frequently challenging29. Practically speaking, tertiary education institutions find it difficult to communicate with employers and lack resources to update their degree programs.30 One of the potential initiatives is the development of career centers that closely monitor labor market trends, which can help students prepare for the labor market by providing practical 28 Iakobashvili, N., M. Kondaridze. 2024. Crafting Tomorrow's Workforce: A Multi-stakeholder Approach to Curriculum Reform and Innovative Teaching in Higher Education. Unpublished Manuscript. 29 Kheladze, A. 2024. Analysis and assessment of educational programs in terms of relevance to the demands of the labor market and contemporary challenges of employment. Unpublished Manuscript. 30 Ibid. 26 training and implementing graduate tracer surveys to track how well graduates do in the labor market. In Azerbaijan, universities have recently expanded career centers that offer career guidance to students, although the results are yet to be seen.31 Improving the quality of tertiary education is easier said than done because it is closely linked to academic careers built on faulty incentive structures. In many countries, improving the quality of tertiary education has started with a more explicit career structure. In the South Caucasus, a core issue is a lack of university careers and low pay for professors in the region’s institutions. In a comparative study of 28 countries, Armenian professors have the lowest salaries.32 Moonlighting (having multiple teaching jobs at multiple institutions) is still very common, meaning university professors do not have stable office jobs where they can research when they are not teaching. In this environment, professors have little incentive to improve their teaching and stay connected to the world of research. 4: Funding for Tertiary Education Key Insights: - Governments in the South Caucasus region spend little on tertiary education in a comparative perspective. The average country in the EU-28 spends about 8 times more than Armenia and Georgia and about six times more than Azerbaijan. - The higher education systems in the region rely primarily on income from tuition fees, which is unlikely to be a further source of income growth for the tertiary education sector given the low wage returns and high inequality observed. Substantially, more students in the region pay full tuition to attend public universities than students in similar countries. - If the governments increase funding for the tertiary education sector, that will have to go hand in hand with pressure to improve the management and efficiency of public spending. Tertiary education is expensive, typically costing governments three times as much as primary education. This is because professors teaching in tertiary education institutions receive higher wages than those teaching in lower levels of education. Tertiary education is also more expensive because it is usually offered at larger campuses, which often include laboratories, lecture and seminar rooms, laboratories, and various services (such as dormitories or sports facilities) that incur substantial capital expenditures and maintenance costs. In recent years, technology costs of tertiary education have also increased substantially, particularly as universities moved their administration and services (including assisting teaching and learning) to the cloud. One of the critical challenges for governments around the world is, therefore, how to fund the expanding tertiary education system. This could be a severe challenge for Azerbaijan, given the rate of growth that can be expected in enrolments. This may be less of an immediate problem for Armenia and Georgia, as student numbers are expected to remain more stable in the coming decades. Nevertheless, the costs of tertiary education, particularly capital expenditures, are likely to increase in these countries as well. 31 Pashayeva, A. 2024. Work Integrated Learning and Career Services in Higher Education System of Azerbaijan. Unpublished Manuscript. 32 Altbach, P., L. Reisberg, M. Yudkevich, G. Androushchak, I. F. Pancheco (eds.). 2012. Paying the Professoriate: A Global Comparison of Compensation and Contracts. New York and London: Routledge. 27 Government spending on tertiary education per student is already low in the South Caucasus compared to the EU-28 and ECA countries. Georgia and Armenia spent about 1/8 of an average EU-28 country and less than half of Europe and Central Asia countries which are not members of the European Union. Funding per student has increased somewhat in the last five years in Azerbaijan, which lifts it above the ECA median (excluding EU and South Caucasus). In Armenia and Georgia, however, funding per student has remained stable at low levels. Figure 4.1: Tertiary education funding per student, Caucasus countries, EU and ECA Source: UNESCO Institute for Statistics (UIS). Notes: we estimate funding per student by dividing government expenditure in constant PPP$ over enrollment in public tertiary education institutions. Enrollment in public institutions is calculated by multiplying total enrollment in tertiary education by the percentage of students in public institutions. We use the median funding per student per year for EU and ECA. In Section 2, we saw that inequality in tertiary education attainment is high and at similar levels in the region. This also leads to inequality in public spending on tertiary education, which we plot in Figure 4.3. The figure shows that the countries in the region combine an overall low level of spending with substantial inequality in this spending (note that no comparable data for Azerbaijan is available). 28 Figure 4.2: Inequality in public funding by wealth quintile Source: UNESCO Institute for Statistics (UIS), Global Monitoring Database. Notes: Expenditure in tertiary education per quantile is calculated using the shares of individuals enrolled in tertiary education by quintile, multiplied by the total government expenditure in tertiary education. Expenditure per student is the total government expenditure in tertiary education divided by the total number of students enrolled in tertiary education, regardless of the type of institution (either public or private). No data on inequality by wealth quintile is available for Azerbaijan. Many governments, including the South Caucasus countries, have adopted ‘cost-sharing’ arrangements in which students and their families pay to attend tertiary education. The rationale is that children from more affluent families participate in tertiary education, and wage returns to tertiary education degrees are high globally. Moreover, governments have prioritized spending on lower levels of education, following a strategy called ‘progressive universalism.’ 33 For several reasons, we cannot expect increasing tuition fees further to grow the sector’s income in the region. First, the tertiary education institutions in the region already depend almost entirely on students for their income. In Armenia, between 75 and 80% of revenue for tertiary education institutions is generated from tuition fees.34 In Georgia, 75%-95% of the income of tertiary education institutions comes from tuition fees.35 In Azerbaijan, similarly, the institutions' revenue is said to come from mostly tuition fees, although there are no exact numbers publicly available.36 The governments do relatively little to offset the high cost of studying. Governments in the region often subsidize the tuition fees for students with high exam scores37. While this creates an incentive to obtain higher grades, the students who score highly are usually from more privileged families, who can better support their children's early education. Figure 4.2 below shows the share of students who must pay 33 Education Commission. 2016. The Learning Generation., 34 World Bank. 2019. SABER Tertiary Education Armenia. Washington DC: World Bank. 35 World Bank. 2018. Technical Assistance to Support Reforms to the Higher Education Financing System in Georgia. Washington DC: World Bank. 36 Erasmus +. 2017. Overview of the Higher Education System. Azerbaijan. Azerbaijan National Erasmus+ Office. 37 Smolentseva, A. 2020. Marketisation of higher education and dual-track tuition fee system in post-Soviet countries, International Journal of Educational Development, Vol 78. 29 tuition fees at public universities by country for the South Caucasus and comparable countries. A much larger share of students in the South Caucasus seems to be paying tuition fees (Figure 4.2). In other words, a much smaller share of students in these countries receive a tuition fee subsidy than in other post-Soviet countries. While there are some policies to support low-income students, including tuition subsidies for specific groups and student loans, none of the countries have a systematic student support system in place for those from low-income families. Figure 4.3: Share of students in public universities paying tuition fees, South Caucasus and reference countries Source: Smolentseva, A. 2020. Marketization of higher education and dual-track tuition fee system in post-Soviet countries, International Journal of Educational Development, Vol 78. https://doi.org/10.1016/j.ijedudev.2020.102265 Note. Data for Georgia is from 2016. Given low wage returns, it may also be difficult for institutions to raise additional revenue from students, especially if new entrants are from disadvantaged families to pay for their studies. Students deciding whether to enroll in tertiary education may have serious questions about whether it is worth it. Students may also turn to behaviors like working to maintain themselves during their studies, which distract them from investing time in their studies. This may be particularly salient for new entrants from low-income households with more difficulties raising funds for tertiary education. Governments could carefully consider what policy mix could best support these students, who may be talented but not have the financial means to make the most of their studies. If governments increase public budgets for tertiary education, this will need to be used as leverage for institutions to improve their financial management practices . Transparency of budgeting procedures remains low, and the use of digital tools such as Enterprise Resource Planning software is still in its infancy38. Universities can be incentivized to raise funds from other sources than tuition fees, which still make up virtually the entire budget of most universities. Given that student numbers have fluctuated, 38Kasradze, T., V. Antia, E. Gulua. 2019. Challenges of Financial Management of the Higher Education Institutions in Georgia. European Journal of Economics and Business Studies. Vol. 5(1) 30 universities control assets that are used to generate additional revenue or even sold to raise capital for other infrastructure investments. Other types of alternative sources of revenue could include contract research, short training programs aimed at professionals, or further increasing the number of foreign students. 5: Scientific Research and Technology Transfer Key Insights: - The South Caucasus countries produce very little scientific research, and public spending on scientific research is low. - Scientific research is still not fully embedded in universities. Scientific Institutes still operate independently from universities, even in Georgia, where these have been legally integrated into the universities. - A lack of competitive research constrains the country's innovation potential. Scientific research is a vital part of countries’ innovation ecosystems. Scientists know where the frontier of technological development is and can build new ideas on top of that frontier . Technology transfer between universities and firms can turn these ideas into new production processes and products. This is particularly so for science in the STEM subjects, which have received much attention from policymakers in the last few decades. Most of this scientific research is typically done in laboratories and offices in tertiary education institutions, where people are trained to do scientific research. Globally, middle-income countries have increased their role in the production of science . Figure 5.1a shows the total scientific output per country relative to the country that produced the most scientific outputs in that year. For the last few decades, there has been no doubt that the United States has produced the most scientific research. But in recent years, China has taken the top spot. Notably, scientific production in India has also steadily risen and now has the third spot. South Korea and Russia hold the fourth and fifth spots. Given the size of the South Caucasus countries, it is no surprise that they do not seriously compete at this level. Science output in the South Caucasus is low even when we adjust for population size. Per 10,000 inhabitants, Georgia and Armenia each produce nearly 60 scientific documents per year, whereas Azerbaijan produces about a third of that. In any case, all the countries in the South Caucasus region perform much below comparator countries in the figure. Interestingly, a few countries seem to punch above their weight. Estonia is one of the most science-producing countries relative to its population, far outranking both the United States and China. Interestingly, South Korea and Romania also punch above their weight in science produced per inhabitant. 31 Figure 5.1a. Citable scientific documents relative Figure 5.1b. Citable scientific documents to the country producing the most documents produced per 10,000 inhabitants in selected countries Source: SCIMago. Perhaps the main reason South Caucasus countries do not produce much science is the low level of funding (see Figure 5.2). South Caucasus countries spend only around 0.2% of GDP on research and development. Government expenditures for science in the South Caucasus countries are similarly low. EU- 28 countries, in contrast, spend close to 1.5% of GDP, almost 8 times more on research and development. The European Union has an ambition to spend at least 3% of GDP on research and development, with about one-third of that from public sources. The median country in the ECA region (excluding EU-28 and the Caucasus countries) spends twice as much as those in the South Caucasus region. Figure 5.2: Gross Domestic Expenditure on Research and Development Source: UNESCO Institute for Statistics (UIS). Notes: GERD refers to Gross Domestic Expenditure on R&D. We use the median GERD as a percentage of GDP per year for the EU, ECA, and the world. 32 Another indication of low science funding is that less than 1-5% of academic papers produced in the region have had government funding as their primary resource.39 In Armenia, 77%; in Azerbaijan, 77%; and in Georgia, 74% of academic publications have been funded from foreign bilateral sources, with other sources including philanthropic organizations, foreign universities, and multilateral organizations (including the World Bank). Many papers produced by scientists in all three countries have been funded by United States sources (12.7% for Armenia, 10.7% for Azerbaijan, and 17.1% for Georgia). Other significant funders include Russia, Germany, and the United Kingdom. The organizational structure of science remains a brake on research in the region. In the Soviet Union, science was primarily the responsibility of the Academy of Science and dedicated research institutes that were organizationally separate from universities. Over the past thirty years, there have been many attempts by countries in the region to reform this system and merge the institutes and universities. However, in most countries in the region, including Armenia and Azerbaijan, the structure of research institutes and the Academy of Science remains in place today.40 Georgia is the only country in the region that has integrated most of the research institutes within the universities. In 2004, the government transferred the responsibility for PhDs from the research institutes to the universities and subsequently started integrating the research institutes into the universities. In 2010, the government created the Shota Rustaveli National Science Foundation by merging the National Science Foundation and the Foundation for Humanities. Functionally, however, the research institutes are still relatively independent today, and universities do not play a significant role in science production, primarily due to a lack of stable base funding for research.41 The data presented in Figure 5.3 shows that in only five countries in the region (those that merged the institutes with the universities), the university sector now produces most of the research . In Georgia, universities now produce virtually all the scientific research from the country. Armenia is at the other extreme, with only about a third of research being conducted at the universities and two-thirds at independent research institutes. In Azerbaijan, over half of the research is produced at the research institutes. 39 Chankseliani, M. (2023). Who funds the production of globally visible research in the Global South? Scientometrics. 128:783– 801, https://doi.org/10.1007/s11192-022-04583-4 40 Lovakov, Andrey . M. Chankseliani, A. Panova (2022). Universities vs. research institutes? Overcoming the Soviet legacy of higher education and research. Scientometrics. Vol. 127, pages 6293–6313 41 Gulda, K., M. Schlicht, M. Spiesberger, M. Nedeva. (2018) Improving the Effectiveness of Georgia’s Research and Innovation System in Georgia through Prioritisation, Selectivity of Funding and Science-Business Links. European Commission. 33 Figure 5.3: Research output in universities versus research institutes Source: Data (reproduced with authors’ permission) from Lovakov, A., Chankseliani, M. & Panova, A. Universities vs. research institutes? Overcoming the Soviet legacy of higher education and research. Scientometrics 127, 6293–6313 (2022). https://doi.org/10.1007/s11192-022-04527-y The countries in the region do not necessarily need to become competitive in all fields of scientific research. If anything, they are probably better off choosing specific domains of technology in which they can push the technology frontier. This will need to be closely aligned with the needs of the industry so that technology transfer can happen faster and more organically. Starting in the 1990s, Estonia raised its investments in science and technology and linked this with its developing industry. By now, Estonia produces more science than any other country when adjusting for its small population. This would not have been possible without close synergy between the universities and the technology industry. 6: Conclusion A well-functioning tertiary education system plays a strategic role in countries’ transition from middle- income to high-income status. It provides the skills that employers need to improve their productivity. Tertiary education also facilitates technology adoption through scientific research and socializing technology in the classroom. Thirdly, tertiary education institutions' campuses are sources of economic, cultural, and social organization, facilitating regional development. However, tertiary education systems in the region do not fulfill their roles effectively in promoting economic growth. Therefore, this report aims to review the primary outcomes of the tertiary education system in the South Caucasus region. The governments and tertiary education institutions in the region seem to have two significant challenges. The first is to recognize the importance of tertiary education as a strategic resource that the countries need to grow toward high-income status. In a world of fast-changing technologies, the tertiary education sector has a much more critical role than in the early 1990s or 2000s. The three economies each struggle to diversify and grow through exports. Firms that can lead in exports demand workers with more advanced technical and behavioral skills, which students should learn in tertiary education institutions. 34 Some firms in the region can go further and want to invest in research and development to become regional or even global innovators. These firms need a local science and technology infrastructure that can help them on their path. The second challenge is implementing key reforms to improve the results of the tertiary education system. This will include complex steps in inequities, quality and relevance, funding, and scientific research. The low level of financing for tertiary education likely depresses the quality of the education offered. Wage returns can only increase if graduates’ skills align more with employers' needs. Tertiary education institutions must carefully review what they teach and how they teach it to help their students succeed later in life. In turn, increased returns will also help disadvantaged students access tertiary education, as these students need a return on investment to recuperate the cost of their studies. Improving the international reputation of the university systems will help improve the ambition and provide the standards with which to align . With the right policies and investments, the countries can aim to establish at least one university that can compete globally in science production. The policy agenda to do so is relatively straightforward and has been tested in many settings. Governments must concentrate resources, invest in capital infrastructure, award science funding based on merit, and display a long-term commitment to basic and applied science to bring back talent that now works abroad. While it takes effort and dedication to achieve this, long-term returns to a vibrant tertiary education system will be worth it. 35 Quick Overview Tertiary Education Systems in the South Caucasus Republic of Armenia Republic of Azerbaijan Georgia Number of students Number of students Number of students ISCED-5 (short-cycle): 13,384 ISCED-5 (short-cycle): 97,401 ISCED-5 (short-cycle): 3,847 ISCED-6 (bachelors): 68,874 ISCED-6 (bachelors): 198,569 ISCED-6 (bachelors): 37,382 ISCED-7 (masters): 9,729 ISCED-7 (masters): 29,440 ISCED-7 (masters): 13,458 ISCED-8 (doctoral): 838 ISCED-8 (doctoral): 117 ISCED-8 (doctoral): 930 Total: 92,825 Total: 325,527 Total: 55,617 Number of institutions Number of institutions Number of institutions Public: 26 Public: 33 Public: 19 Private: 31 Private: 11 Private: 44 Budget Budget Budget TVET: 11.0 billion AMD TVET: 64.2 million AZN TVET: 138 million GEL Higher: 12.6 billion AMD Higher: 70.6 million AZN Higher: 181.3 million GEL Total: 23.6 billion AMD Total: 134.8 million AZN Total: 319.3 milIon GEL 60.91 million USD 79.3 million USD 121.5 million USD Quality Assurance Agency Quality Assurance Agency Quality Assurance Agency National Center for Professional The Agency for Quality National Centre for Educational Education Quality Assurance Assurance in Education (TKTA) Quality Enhancement (NCEQE) Foundation (ANQA) Science funding organization Science funding organization Science funding organization Higher Education and Science Azerbaijan Science Foundation Shota Rustaveli Science Committee (under Ministry of Foundation Education, Science, Culture and Sports) Budget of science funding Budget of science funding organization organization Total spending on research and development (includes salary 4,011,164 AZN 33,695,300 GEL costs) 2,359,508 USD (approx.) 12,821,855 USD (approx.) AMD 16 million USD 43.13 million 36