Editor’s note: this guest entry was kindly prepared by Dr. Adolf Stroomberge, Chief Economist, Infometrics. Dr. Stroomberge has a PhD in general equilibrium modelling and 25 years of experience in economic consulting, specialising in economic modelling, econometrics and public policy research in areas such as education, taxation, savings and retirement, energy and environment, trade and transport. He has been a member of the New Zealand Advisory Committee on Economic Statistics since 1996 and was an Expert Reviewer for the IPCC Working Group II Fourth Assessment Report released in 2007.
This is the first of a series of entries, we hope, regarding the ways in which the state, often via the contracting out process to firms like Infometrics, begins to calculate the economic impact of an emerging industry (in this case, ‘export education’). In our research we have noted substantial differences, across space, regarding the nature of the calculative process.
In countries like New Zealand, Australia, and the UK, the state has a relatively clear understanding of the economic impact of the export of education services (e.g., see ‘Graphic feed: Australia’s dependence (2007-2008) upon foreign students‘, ‘International education activity in Australia up 23 per cent from previous financial year‘, and ‘Value of educational exports to the UK economy‘). This said there are clearly debates underway about which analytical models to adopt, and about the impacts of this development approach. Other countries have made relatively little effort, or progress, in calculating such impacts. The reasons for this are many, ranging from lack of capacity, inadequate data, ideological unease with the idea of thinking about (and especially speaking about, in public at least) education as an ‘industry’, and limited inter-governmental engagement about this issue within some countries.
At the multilateral scale, this entry should be read in association with debates about the trade in education services (e.g., see the series of UNESCO/OECD forums on trade in educational services), as well as GATS (see ‘GATS BASICS: key rules and concepts‘). And from a broader perspective, it is worth thinking about the power of numbers, and the role of the calculative process in assessing, and at the same time constituting, what is undoubtedly an emerging global services industry.
Our thanks to Informetrics (especially Adolf Stroomberge) for outlining how the analytical process works in New Zealand, and to the New Zealand Mission to the European Union for insights on this topic. Readers interested in this topic are advised to see this 2008 report (‘The Economic Impact of Export Education‘) by Infometrics, NRB and Skinnerstrategic which was prepared for Education New Zealand & the New Zealand Ministry of Education. An earlier (2006) version of this report is available here.
It had been suspected for some time that the contribution of the export education industry to the New Zealand economy has seen impressive, if volatile growth, to reach around $2 billion in 2007/08. Our research in 2008 sought to establish the truth of these suspicions.
Export education is a term used to describe the foreign exchange earned from delivering education to foreign fee-paying students. In general the goods and services bought by foreign fee-paying students are consumed within the destination country – analogous to the situation with foreign tourists. In addition though, some delivery of educational services takes place in students’ own countries, such as by distance education or through educational institutions establishing a presence in foreign countries. For New Zealand, however, over 95% of the earnings of export education are earned in New Zealand.
There are two main areas of expenditure by foreign fee-paying students; tuition fees and living costs.
For New Zealand data on tuition fees is collected by the Ministry of Education from educational institutions, along with data on the number of foreign students and the courses taken. Thus estimating total tuition income from foreign fee-paying students is relatively straightforward. It was not always so.
In contrast, there is no official data on student spending on living costs. Our 2008 study (‘The Economic Impact of Export Education‘) was the first study in New Zealand that incorporated a dedicated and purposely designed survey of expenditure by foreign fee-paying students.
Collecting data on student spending might seem simple, but there are a number of obstacles to obtaining accurate data including:
- Poor English on the part of respondents.
- Memory recall errors.
- Measurement of irregular expenditure as the survey takes place over a limited time period.
- Under-sampling of short-stay students.
- Allowing for earnings from employment whilst in New Zealand (which do not constitute foreign exchange income).
Summing up expenditure on tuition fees and living costs gives the direct impact on the country’s gross domestic product. However, the net impact will be less than this as some of the foreign exchange earned by export education leaks out of the country as payment for imports of goods and services. Some imports such as petrol may be consumed directly by foreign students, while other imports are consumed indirectly. An example is clothing made from imported fabric.
Economic impact multipliers are used to estimate the direct and indirect consumption of imports of goods and services. Each dollar spent on the output of one industry leads to output increases in other industries, or to an increase in imports. For example for a university to deliver education services to a foreign student it requires inputs of books, energy, communication services and so on. Part of the tuition fee is used to cover the cost of these items. Another part covers the cost of the buildings and equipment (spread over their useful lives) and there is a large portion for staff wages and salaries.
The supplying industries such as energy require inputs themselves, pay wages and salaries, and so on. The effect on these supplying industries is known as the upstream or indirect production effect and is commonly measured by a number called a Type I multiplier. In essence the indirect upstream effects is just a representation of the process whereby the expenditure and income sides of the national accounts equilibrate. No additional value-added is created from this effect.
The supplying industries pay wages and salaries which are used to purchase household consumption goods, some of which are imported. This generates flow-on effects in an analogous manner to the original increase in export earnings and therefore generates an additional gain in gross domestic product. The effect is generally known as the downstream or induced consumption effect. Again the effect may be measured by a multiplier known as a Type II multiplier.
Multipliers are typically calculated for different measures of economic activity such as gross output, value-added and employment, but gross output multipliers lead to double counting. For example the value of food and drink supplied at a restaurant is counted as part of the gross output of both the Food and Beverage Manufacturing industry and the Restaurant industry. If one’s aim is to measure overall business activity this double counting may be useful, but from the perspective of economic contribution it is value-added or gross domestic product that is of interest.
While very useful, economic multipliers have limitations. For example they do not include the effects of increases in government consumption made possible by higher tax revenue, or the effects of changes in investment that may be required to expand output. It is also implicitly assumed that all factors of production are in excess supply and that that there are no price changes (such as if a factor is in limited supply) which may lead producers to change inputs, thereby altering their production structure and hence the associated economic multipliers.
All of these limitations have the potential to undermine the result of multiplier analysis – the wider the attempted coverage of indirect and induced effects, the greater is the potential for miscalculation and error. Rather like a stone thrown into a pond; the more the ripples spread out, the more likely they are to encounter some form of obstacle – ripples from another stone, a cross current, the embankment.
A superior, but more costly approach is to use a multi-industry general equilibrium model. These types of models incorporate all of the key inter-dependencies in the economy, such as flows of goods from one industry to another, plus the passing on of higher wage costs in one industry into prices and thence the costs of other industries.
Our estimates show that in 2008 the economic impact of New Zealand’s export education industry was $2.1 billion, implying a four-fold increase since 1999. Few industries would be able to claim an average growth rate of 16% pa for almost a decade.