Bold action is needed to reform overspecialised vocational, technical and higher education in Eastern Europe, according to the World Bank in its first overall review of education since 1980.
Governments should encourage new private colleges and universities, the report says.
Their policies should boost private financing of public higher education to stimulate competition, innovation, and responsiveness to the labour market, it recommends.
The report says the political freedom won by universities in eastern and central europe needs to be accompanied by more autonomy in the use of public funds and in mobilising additional resources.
"At the same time, governments should establish open, transparent mechanisms for allocating public funding with incentives to improve efficiency and restructure academic programmes," the report says.
When Communism collapsed, large numbers of students were taking courses designed to supply state-owned enterprises and public services with graduates.
In Romania, for example, around two-thirds of all higher education students were enrolled in narrowly defined engineering programmes. Numbers on specialised courses have since dropped dramatically. Now, most students take foreign languages, law, economics, management and other social sciences, while higher education has seen rapid growth. But in Russia little progress has been made in reforming the structure of secondary and higher education programmes.
The Bank believes that all countries need to give priority to basic education for the masses. Education is crucial to economic growth but too often governments pour disproportionate amounts of taxpayers' money into higher education, which benefits the elite and produces fewer social benefits.
The Bank wants to see more higher education funding coming from private sources. Conflict between students and government would be much less intense if university funding came from a variety of sources rather than being centralised on the state, the report says.
In Romania, for example, university students besieged the national Ministry of Education and the parliament in 1993 to protest at overcrowding in student hostels.
Priorities and Strategies for Education, a World Bank Sector Review: World Bank, 1818 H Street, Washington DC 20433, United States