Measuring the economic impact of ‘export education’: insights from New Zealand

adolf3Editor’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.

Kris Olds

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nzreportcover1It 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:

  1. Poor English on the part of respondents.
  2. Memory recall errors.
  3. Measurement of irregular expenditure as the survey takes place over a limited time period.
  4. Under-sampling of short-stay students.
  5. 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.

summarytable1

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.

Adolf Stroomberge

International education activity in Australia up 23 per cent from previous financial year

Australia is continuing to see rapid growth in the export of education (including higher education) services, and the associated generation of export income.  Today’s Australian Education International‘s AEI eNewsletter, which is well worth subscribing to if you are interested in GlobalHigherEd (which you must be if you are visiting this weblog!), includes a link to a new Research Snapshot (November 2008) that notes:

International education activity contributed $14.2 billion in export income to the Australian economy in 2007-08, up 23.4 per cent from the previous financial year. Over the 10 years to 2007-08, education exports have grown at an average annual rate of 16 per cent, compared with an average annual rate of 7 per cent across all services exports.

Here is a copy of a relevant table from the new Research Snapshot:

ausserviceexports

This document updates some data we profiled in our 24 June 2008 entry titled ‘Analysing Australia’s global higher ed export industry‘.

The international comparability of export earnings data is something we intend on focusing on this year. If readers of GlobalHigherEd entry have insights on this topic, or would like to prepare a guest entry on it, please do not hesitate to contact us.

Kris Olds

Analysing Australia’s global higher ed export industry

The globalization of higher education and research is creating and attracting new players and new analysts. Credit ratings agencies have, for example, started to pay more attention to the fiscal health of universities, while fund managers are seeking to play a role in guiding the investment strategies of university endowments in the United States, and more recently Saudi Arabia.

On this broad theme, and further to our recent entry (‘New foreign student and export income geographies in the UK and Australia‘), the Reserve Bank of Australia released a June 2008 report titled ‘Australia’s Exports of Education Services‘. The Reserve Bank of Australia‘s:

main responsibility is monetary policy. Policy decisions are made by the Reserve Bank Board, with the objective of achieving low and stable inflation over the medium term. Other major roles are maintaining financial system stability and promoting the safety and efficiency of the payments system. The Bank is an active participant in financial markets, manages Australia’s foreign reserves, issues Australian currency notes and serves as banker to the Australian Government. The information provided by the Reserve Bank includes statistics – for example, on interest rates, exchange rates and money and credit growth – and a range of publications on its operations and research.

The scale and economic impact of this new industry is reflected in the Bank’s interest in the topic.

‘Australia’s Exports of Education Services‘ highlights key dimensions of the development of what is now one of Australia’s leading export industries such that it now generates $12.6 billion (2007 figures), and is Australia’s third largest export industry (see the two figures below from the report).

While the report is succinct, and can be downloaded for free here, I would like to flag three key themes from the perspective of the GlobalHigherEd analytical agenda.

First, reading through the report one cannot help but note the mercantilist approach that is infused in the analytical terms and data categories associated with the report, and Australian higher education ‘industry’ discussions more generally. From the dominant Australian perspective, global higher ed is unabashedly an export industry that needed to be created in a regulatory and ideological sense, and then subsequently, nurtured, reshaped over time, and more generally planned with strategic effect. Global higher ed is also situated within a broader array of educational services:

  • Higher Education
  • English Language Intensive Courses for Overseas Students (ELICOS)
  • Vocational Education and Training (VET)
  • Schools
  • Other Awards Sectors (e.g., “bridging courses and studies that do not lead to formal qualifications”)

Data on international student enrollments (1994-2007) using these categories is also available at the Australian Education International website (see the site too for clarification about source data and a key methodological change in 2001).

This strategic cum assertive/aggressive approach to the creation of ‘customers’ means that Australia will also ensure it has a capacity to monitor its primary competitors (especially New Zealand, the United States and the UK), and its emerging competitors (especially the group of countries that make up the European Higher Education Area, as well as Malaysia, Singapore, and China). Competition can occur through enhanced capacity to attract the mobile students who should have come to Australia, enhanced capacity to keep them at ‘home’ (via “import-substitution” policies and programs), or the external profile of weaknesses in the quality of Australia’s higher educational offerings, especially for fee-paying foreign students.

Second, the emergence of China and India as sources of mobile students is abundantly evident in the report (see Graph 5 and Table 4). Recall our 22 June entry, too, which presented data on Asian student numbers from the new Asian Development Bank (2008) report titled Education and Skills: Strategies for Accelerated Development in Asia and the Pacific. In short, Australia has strategically hooked into the highly uneven development wave evident in the ADB report, and shifted from ‘scholarship to dollarship’ (a phrase Katharyne Mitchell has used more generally) with respect to the country’s primary overseas student target. As the Bank’s report puts it:

Until the mid 1980s Australia’s involvement in providing education services to non-residents was directed by the Australian Government’s foreign aid program. Nearly all overseas students studying in Australia over this period were either fully or partly subsidised by the Australian Government, with the number of overseas students capped by an annual quota. Following reviews into Australia’s approach to the education of overseas students, including the 1984 Jackson Report, a new policy was released in 1985. This policy introduced a number of measures, such as allowing universities and other educational institutions to offer places to full fee-paying overseas students, which encouraged the development of Australia’s education exports sector. There were also changes in overseas student visa procedures aimed at helping educational institutions market their courses internationally. As a result of these changes, overseas student numbers increased significantly, and there has been a rise in the proportion of university funding sourced from fee-paying overseas students.

Third, the expansion of such a market, and the creation of significant export earnings, has created dependency upon full fee paying foreign students to bankroll a major component of the budgets of Australian universities (see Graph 4 above).

Thus, when between 15-20% of average annual revenue comes from “fee-paying foreign students”, especially the parents of Asian students, a condition of broad structural dependency exists, all ultimately shouldered upon household decision-making dynamics in places like Kuala Lumpur, Beijing, Mumbai, Seoul and Singapore. And it should also be noted that the income streams being generated from these students are proportionally being reinvested into the enhancement of the faculty base; indeed, as the figure below from a new Association of Universities and Colleges of Canada report (Trends in higher education – Volume 3: Finance) demonstrates, Australia has seen a massive increase in student numbers (local + foreign) but relatively little faculty growth.

Is it any wonder then, that the Brisbane Communiqué Initiative, an initiative that we will profile in early August, was developed in 2006, largely in response to the Bologna Process?

The Brisbane Communiqué, and related initiatives in Australia, remind us that structural dependency upon foreign (Asian) students exists. Given this, Australia cannot help but be concerned about any initiative that might lead to the possible realignment of Pacific Asian (especially China), and South Asian (especially India) higher education systems to the west (aka Europe), versus the south (Australia), when it comes to the mechanisms that enable international student mobility.

Kris Olds