This report documents the depth of the crisis affecting higher education systems throughout the developing world and shows how developing countries can achieve the goals of greater efficiency, quality, and equity in higher education. A review of country experiences suggests four key directions for reform. First, reform programs should encourage greater differentiation of institutions, including the development of private institutions. The traditional European research university has proven expensive and inappropriate in developing nations. The development of non-university institutions and the encouragement of private institutions can help meet the growing social demand for higher education and make systems more responsive to changing labor market needs. Second, incentives should be provided to encourage public institutions to diversify sources of funding, including cost-sharing with students and linking government funding closely to performance. Third, the role of government in higher education should be redefined to reduce direct control and instead provide an enabling policy environment for public and private institutions. Fourth, policies should give priority to increased quality of teaching and research, increased equity, and increased responsiveness to labor market needs. Implications for the World Bank are discussed. An appendix outlines findings of the World Bank's Operations Evaluation Department. (Contains 153 references.) (JB)