15 There is no easy response to this dilemma. The politically least controversial response of assigning more resources to higher education through a higher overall budget to education runs into fiscal constraints."<sup>3</sup> Barring more public resources, the only option for expanding of investment in higher education (desired on efficiency grounds) without cutting public funding for primary education is by attracting greater private sector participation.

To facilitate greater private participation, it is useful to distinguish more clearly the roles of the private and public sectors. The classic assignment of responsibilities limits the public sector's involvement to the provision of public goods, as well as correction for market failures and externalities. In that context, it is often argued that the positive externalities from education are highest at the primary level and progressively decline at the higher levels; Schultz (1988). That is, at higher education levels, the individuals receiving the education capture a progressively larger share of the total social benefits yielded from the education in the form of higher wages. That being the case, there is less of a risk that private individuals left to their own devices would underinvest from a social viewpoint in higher education than that they would underinvest in primary education. The externalities from different levels of education are difficult to measure and compare empirically. However, if the rationale for state intervention in the provision of higher education services is based on the argument that rates of return were too low to induce the right amount of investment from the private sector, that rationale has certainly become less compelling with the significant increases in private rates of return observed in recent years.

The options for greater private sector participation in higher education are many. They range from greater participation in the funding of education services to greater participation in the direct provision of services.<sup>14</sup> At the very least, the rise in private rates of return for higher education makes a compelling case for increasing the level of cost-recovery in higher education, independently of whether it is the State or the private sector that provides those services. The lack of long-term financing for private investments in higher education represents an important obstacle to the implementation of this solution. That obstacle is rooted in a systemic market failure (due, among other, to bans on indentured servitude) that poses problems in most countries, but is especially pronounced in Mexico on account of its very weak financial system. The proper role of government is precisely to correct or compensate for such market failures. A promising way to correct these market failures in Mexico is through student loan programs, or means-tested financial aid and scholarship programs. These programs are currently almost non-existent in Mexico, as the public sector has relied mainly on the direct, costfree provision of higher education services. The scholarship programs suggested here as an alternative promise to yield a more efficient resource allocation than a cost-free

**3 A** sense of the potential magnitude of these fiscal costs can be obtained from **OECD (1997, Chart B 1.3). It** estimates that raising Mexico's enrollment ratios in tertiary education to the **OECD** average **level,** would involve an increase of expenditures on educational institutions by 1.4 percent of **GDP.** This is almost twice the size of the fiscal revenue shock (estimated at **0.8 percent of GDP)** caused by **the** decline of oil prices in **late 1997 and early 1998.**

**14 See OECD (1997,** pg. **54) for a** list **of various options for the funding of tertiary institutions.**