HESA

Higher Education Strategy Associates

January 10

The Politicization of University Accounting

Back in the fall, the Canadian Alliance of University Teachers (CAUT) published an interesting little guidebook called CAUT’s Guide to Analyzing University & College Financial Statements, written by Cameron and Janet Morrill, two profs at the University of Manitoba’s Asper School of Business.  Stripped to its essentials, it purports to be a DIY guide for faculty to help hold their institutions to account over finances.

Nothing wrong with that.  Learning how to read financial statements is a good thing.  The issue is the subtext (“THEY’RE LYING TO YOU!”) and the curious way in which they treat the matter of internally restricted funds.

In practice, universities have three types of funds.  There are unrestricted funds: money which they can do whatever heck they like with.  For the most part this is equivalent to the annual operating budget.  There are externally restricted funds – money which can only be used in manners specified by outsiders who have provided them money.  These include most research budgets and infrastructure money (you can’t take CFI money and blow it on beer and popcorn) as well as – of course – money destined for the school’s endowment.

But then there’s a third and slightly more curious type of money called “internally restricted funds”.  These are funds which institutions have set aside themselves for various purposes, usually related to the long-term health of the institution.  They don’t show up as a separate category on balance sheets, though a quick read of notes accompanying the financial statements is usually sufficient to work out their size (admittedly not the most exciting pastime).

The CAUT document is implicitly a guide for how to hunt for evidence that administrators are lying about the institution’s health.  The document starts off in fact by the authors telling the tale of how gradually they came to understand that their own university’s financial position was not fragile but loaded, thanks to their sophisticated understanding of “interfund transfers” (i.e. the process of putting money into internally restricted funds).  Left unsaid: hey, these internally restricted funds could be going to increase professor’s salaries!

Occasionally the document seems to accept the existence of and rationale for internally restricted funds, but the kicker is in the appendices, where they produce a step-by-step guide to working out how much unrestricted cash an institution really has on hand, and use the financial statements of the University of New Brunswick and the University of Ottawa as their case studies.  The formula they use is a little complex but basically it comes down to 1) find out how much money they have in “investments” 2) subtract the endowment and externally restricted funds 3) the residual is “unrestricted cash and investments”.  Which of course can only be true if you completely ignored internally restricted funds.

According to the Morrills, UNB has about $130 million in “unrestricted cash and investments” – you know, just loose money hanging around – while Ottawa has $331 million.  This is preposterous, as even a cursory look at each institution’s financial statements.  At Ottawa, for instance, note 19 of the financial statements clearly notes that the university has $297 million in internally restricted funds (ie., almost exactly what the Morrills claim to be “unrestricted cash and investments”) and note 12 of the financial statements lists a number of the uses of these funds, including: a $57 million for capital expenditures (e.g to match an external grant), $30 million to support faculty research activities, $31 million in a sinking fund to retire long-term debt, etc.

At both UNB and Ottawa – and I think it’s safe to assume it’s true at other institutions as well – internally restricted funds also cover money set aside to cover the unfunded costs of benefits programs, and funds for strategic priorities.  They also cover (and this is one of Canadian higher education’s dirty little secrets) many millions of dollars which are under the control of individual faculties and departments with respect to which the central administration has barely any understanding let alone control.  How did they get these?  Simple: many universities allow faculties/departments to roll over any unspent non-salary-related money in their budgets from year-to-year.  Over time, these can become formidable war chests.  I know of one medium-sized university in western Canada where such funds add up to around $60 million.  But is this really “unrestricted cash/investments”?   I can’t imagine any university administrator trying to take such funds away from lower units.  The words “from my cold dead hands” leap to mind.

So what we have here is a document from CAUT which is encouraging its member locals to label “internally restricted funds” as “unrestricted cash and investments” and hence, presumably, available for distribution to faculty members during collective bargaining talks.  And there is a sense in which this is correct: the designation of certain funds and certain priorities are political designations within the university itself.  It was a decision by the Board of Governors which restricted these funds and the Board could just as easily have not restricted these funds, or restricted them to some other purpose.

It might be a good idea to have an honest discussion about the size and use of these funds, and the trade-offs they entail.  Should professors get more pay at the expense of paying off the institutional debt or covering the unfunded costs of future benefits?  Should the institution have a lower tuition increase this year paid for by raiding faculty funds built up over the years for internal priorities?  I think those kinds of discussions would be helpful and clarifying.

But that’s not what the Morrills and CAUT are trying to do here.  Quite clearly, by claiming that internally restricted funds are in fact “unrestricted cash & investments” what they are trying to do is get more of their members to believe that universities have plenty of money lying around to spend and hence that any holding out at the bargaining table is chicanery rather than prudence.

Let’s not beat around the bush.  This is a lie, one designed specifically to increase labour strife by increasing distrust in university financial statements.  I wonder what CAUT has to gain by publishing it?

January 09

Welcome 2017

Sometimes New Year’s messages write themselves.  I mean, it can’t be as bad as last year, right?

The first half of this year is going to be dominated by two issues: Science and Skills.   This month, former University of Toronto President David Naylor will release his review of the Government of Canada’s Science Policies.  There were a lot of high hopes for this report, some of which are likely going to be disappointed when it actually comes out.  Too many people bought into the whole “Harper War on Science” thing and assumed that a new government and a new broom would clean things up and we’d go back to the peaches and cream days of the early-2000s.  The fact is, the problems in Canadian Science run a lot deeper than that.   I have no doubt the report will lay bare how complex the problems are: the question is whether the government is prepared to take the necessary steps to deal with it (though canning CIHR President Alain Beaudet was a hopeful start).

We’re also going to hear a lot about science through the Minister for Innovation, Navdeep Bains.  I’m going to go lightly on this one because I suspect I will have to weigh in on this repeatedly over the course of the next couple of months.  But basically it sounds increasingly like our “innovation” policy is merely a pro-tech industrial policy.  The logic, I think, is contained in a recent David Wolfe piece in Policy Options  and goes something like this.  A) we need a high tech economy, which means adopting tech more intensively throughout the economy (so far so good), B) therefore let’s spend a lot of money on the ICT industry (wait, what?  How does that follow?)  and C) here are a bunch of things we can do to boost the tech industry (all of which are sensible if you accept point B, less so if you don’t).  Universities will no doubt be pleased because there will be money available for tech investments, but as innovation policy it sure looks like a mess.

On the skills side, there are three piece to watch.  On the innovation agenda, skills showed up unexpectedly as a fairly large theme in their consultations.  But these aren’t “skills” in the Tory sense of “we need more apprentices”; it’s much more about having specific highly-qualified personnel in various science and tech fields.  For the most part that’s going to be handled by immigration, but the government is making (frankly idiotic) noises about “more STEM graduates” (even though there’s little evidence that this is a problem) and more coding in schools.  This is part of a long-standing problematic bias in Canada public policy: any time we have a problem in some area, we assume it’s a quantity problem not a quality problem.  This needs to change.

There are two other skill-related pieces coming in the next couple of months.  The first is that the Advisory Council on Economic Growth is meant to have a piece out fairly shortly on skills.  It was supposed to be out in late December, but for some reason it was yanked and delayed until January (one possibility: the initial set of recommendations didn’t test well among the people the government trusts on economic issues).  The second is the Expert Panel on Youth Employment, chaired by Vass Bednar.  I have literally no idea what the  latter will say: there are not a lot of clues in the panel’s interim  report, but it seems certain to bring yet more attention to the skills issue.  Possibly, all this adds up to some early actions on skills in a February budget but that may be a little rushed.

That’s the big stuff for the next couple of months.  On top of that, there will be the usual shenanigans on various campuses (it’s budget season, and that’s always good for some laughs).  The British Columbia election is scheduled for May 9th, and presumably that will be an occasion for opening up the goodie box – we’ll see if higher education gets included.  Globally, the big issues will remain Brexit and its ramifications for UK higher education, and China’s attitude towards foreign higher education.

You’re now completely ready for the new year.  Onwards and upwards!

December 16

Farewell 2016

So another year ended.  This one, few will mourn.  Despite their medieval roots, universities fundamentally serve the enlightenment; and the enlightenment, with is emphasis on toleration, progress, science, empiricism, was under attack this year as in no year since 1945.  Though higher education itself was not the target of populists’ wrath, the part of the culture we inhabit certainly was.  And that could make life pretty uncomfortable over the next few years.

I wrote back here  about how the revolt of the mid-west in the US election was about nostalgia for the days when you didn’t need an education to get a full-time job (one can also make a similar argument about the Brexit vote) .  That is, in part at least, an indictment of the education system.  A significant fraction don’t attend because they hate being in school; another significant fraction don’t attend because they don’t think it provides value.  One doesn’t have to accept wilder propositions about the system being “broken” for those two facts to prompt serious thought about how well the education system as a whole is doing its job.

Some have posited that this new revolt of the masses is about inequality and social mobility.  Higher education is having some problems in this respect, especially in the United States and the UK.  And I don’t think there is much doubt that in America a new form of hereditary upper caste is emerging from increasingly stratified education systems feeding students into (see Lauren Rivera’s quite excellent Pedigree).  Canada, thank God, does not face this problem in so virulent a fashion.  As Joe Heath pointed out a couple of years ago, the top three Ivy League schools enrol about 0.1% of all undergrads nationally while Canada’s top three schools enrol about 14% of all undergrads nationally.  Our bottle-necks are thus wider and that spares us the kind of vicious competition for places in top institutions the way we see south of the border.  But let’s not get complacent: there is still a lot more we could and should do in terms of ensuring fair chances for students from non-traditional background.

But there’s also an issue about economic growth here.  The fact is that part of the social bargain since the Second World War has been about delivering inclusive growth.  Now we haven’t always been very good at that – certainly in the eighties and early nineties there was growth that was perhaps the opposite of exclusive (average and median pay fell in this period, before picking up in the mid-90s and staying positive ever since).  The problem right now, is that our economies simply aren’t delivering growth.  And sure, part of that is the huge post-financial crisis debt hangover in the US, and part of it is due to changing demographics, and part of it is due to a whole bunch of other reasons around having picked the low-hanging fruit of productivity gains (do read Robert Gordon’s Rise and Fall of American Growth over the hols if you get a chance).  But universities the world over have grabbed a whole lot of public money over the past couple of decades by selling the public the notion that that research = productivity = growth.  And so it’s reasonable to ask: where’s the growth?  Now, sure, there’s no good counter-factual that allows us to look at what growth would have been like had investments in research not been made.  Maybe things would have been worse without it.  But the fact that there isn’t a slam-dunk positive story that everyone can recognize makes the sector vulnerable.

The populist case against higher education isn’t that hard to construct.  Universities spend billions on research without much proof that it leads to growth.  Spots at elite institutions tend to go to children of the elite.  Full-time academics are mostly in the top 10% of income distribution and a non-negligible proportion in the top 1% yet for some reason in Canada we see at least one faculty strike per year because as a group they believe themselves to be underpaid.

I know some of you hate-read this blog because I’m always on about unsustainable finances and say not-nice things about how institutions spend their money.  But higher education needs public support.  If the public starts to get the idea that higher education is not good value for money, or worse, that it does not serve the greater public good, that support will erode and with it the ability to support all the activities they currently undertake.

In Canada, we aren’t there yet, and with luck we never will be.  But remaining in the public’s good graces takes constant vigilance.  Pay attention to the dollars and cents.  Pay attention to outputs and impacts.  Do not take the public for granted.  In a populist age, nothing could be more dangerous.

That’s it from me for the term.  Normal service will resume January 9th, though you will probably hear from me once next week if, as is widely rumoured, the Finance Minister’s Advisory Council on Economic Growth puts out a report on “skills and innovation” which is as dumb as a bag of hammers. As always, it’s been a pleasure hearing from so many of you over the past few months.  If you have any thoughts on how to improve the blog, things you’d like to hear more of/less of, or just general feedback, I’d love to hear it.  Just write me.

Happy holidays.

December 15

Books of the Year

I read a lot of books.  My guess is most of you do, too.  Here are the best ones on related to higher education which I read in 2016.

The year started with a lot of hype about the “4th Industrial Revolution”, a meme propagated by the Davos Crowd and which is meant to get us all in a chin-stroking mood about the future of work (and by extension, education).  There was even a book by Davos CEO Klaus Schwab, called The Fourth Industrial Revolution.  It’s garbage.   A grab-bag of new industries, no matter how gee-whizzy, does not a revolution make.  There is no fourth industrial revolution, and people who use this term should be publicly shamed.

Slightly more interesting on the pop econ side were a bunch of books from 2015: Martin Ford’s Rise of the RobotsJerry Kaplan’s Humans Need not Apply, Susskind and Susskind’s The Future of the Professions: How Technology will Transform the Work of Human ExpertsOf these, the Susskinds’ book is the only one that  deals with the issue sensibly, as it points out that, strictly speaking, robots replace human tasks not human jobs, and that jobs are going to increasingly be re-designed to focus on tasks that computers cannot do.  For the most part, those jobs are going to be ones requiring understanding of context and empathy (higher education, take note).

It was also a year to read about innovation policies.  I wrote approvingly back here  about The Politics of Innovation, which made the bold statement that countries need to perceive some kind of external threat in order to adopt consistently pro-innovation policies (comfortable, fleece-wearing Canadians, take note).  But there was another, much more technical book on innovation from a Canadian scholar (Jingjing Huo of the University of Waterloo) called How Nations Innovate: The Political Economy of Technological Innovation in Affluent Capitalist Economies.  This book reminded me a lot of Kate Pickett and Richard Wilkinson’s The Spirit Level, mainly because it uses the same shtick of running a lot of regression analyses on various types of data on OECD countries.  It’s interesting, and I certainly appreciated how Huo handled issues regarding the relationship between varieties of capitalism (co-ordinated v. laissez-faire) and varieties of innovation (process vs. product), but at the end of the day you have to believe that regression on 30 or so observations are meaningful, and I’m not sold on that.  Still, definitely one for innovation policy wonks to read if they haven’t already.

Related to issues of innovation generally were books about economic clusters and emerging industries.  Of these, the two that mattered were The Smartest Place on Earth: Why Rustbelts are Emerging Hotspots of Global Innovation by Antoine van Agtmael, Fred Bakker and Christopher Lane, and Steven Klepper’s Experimental Capitalism: the Nanoeconomics of American High-Tech Industries.  The former is a lot more positive about the role of universities in clusters than the latter, but a lot of the “success” factors for university-based clusters still come down to “there’s a cluster champion with some magic fairy dust”.  Alex Ross’ Industries of the Future is an OK airplane read but I doubt anyone will remember it five years from now.

On the history of education front, there was Rens Bod’s A New History of the Humanities which is an enormous act of scholarship but not exactly a page-turner.  For a somewhat racier read (the term is relative) have a peek at James Turner’s Philology: The Forgotten Origin of the Modern Humanities.  John Axtell’s Wisdom’s Workshop: The Rise of the Modern University was meh (if American higher ed history is your thing, stick to Roger Geiger and John Thelin).   But maybe the best one I read all year was Tamson Pietsch’s Empire of Scholars: Universities, networks and the British academic world 1850-1939 which is a really well-done short (academic authors, take note) history which illuminates the way in which the settler universities of the British Dominions were intimately linked to one another through personal scholarly connections.

I read more books than I care to remember on global access and admissions systems.  The only one I can recommend for a general audience is College Admissions for the 21st Century Admissions, by Cornell University’s Robert J Sternberg, which details his work developing new types of testing to get at students attributes such as creativity and wisdom.  Lesson Plan, by Mike McPherson and (the since-deceased) Bill Bowen is a decent tour d’horizon of current US policy debates.  A.J. Angulo’s Diploma Mills is a very good short (again!) history of US for-profit education.  William Massy’s Re-Engineering the University is a very, very good book about financial management in universities which deserves an awful lot more attention than it has received.  If it had been this book that had gone viral in Canadian university administration five years ago rather than Dickerson’s Prioritizing Academic Programs and Services, we’d probably all be in better shape than we are today.

I do need to give a shout-out to one quite excellent work which almost no one in North America has read or will read, and that is Knowledge Production and Contradictory Functions in African Higher Education, which is hands down the best book to come out of any “developing country” on higher education in the last five years.  It’s a collection of pieces edited by Nico Cloete and Peter Maassen from work in the HERANA project, which is itself a genius project.  And from Routledge, the new book on University Rankings edited by Ellen Hazlekorn entitled Global Rankings and the Geo-politics of Higher Education is genuinely the best book ever written on the subject.  Yes, OK, I have a chapter in it and I would say that – but I genuinely think my co-contributors (including St. FX President Kent MacDonald) put me in the shade and it’s a great volume from start to finish.

But my number one book of the year?  It’s Sara Goldrick Rab’s Paying the Price.  Not because I agree with her conclusions, which involve making public 4-year universities tuition-free (I think that’s defensible for some 2-year programs, but deeply regressive at the 4-year level).  But rather because she has done such an incredible job bringing to life how tiny details of student aid policy can make such an enormous difference to the lives of students who depend on the system for money.   Her blend of research, policy and anecdote is extremely good, the stories of students trying their best to succeed in post-secondary education are inspiring, and her explanations of the minutiae of student aid policy are clear and concise.

Goldrick-Rab’s views on free tuition seem to be driven in part by frustration at all the petty problems inherent in student aid, and there’s a desire here cut through the brambles and do something radical.  What’s interesting though, is to compare her complaints about the US system to the actual reality of the Canadian system which – though far from perfect – has actually addressed many of the problems she confronts.  In particular, her view that universal benefits are preferable to targeted ones because “programs for the poor are usually poor programs” is directly contradicted in the Canadian case by things like the massively pro-low-income overhaul to student aid that we saw in Canada/Ontario earlier this year (see here and here).

But this is a quibble.  Goldrick-Rab wrote a page-turning best-seller about student aid.  I’ve been in the student aid business a long time and never thought this possible.  It’s a great book: read it.

December 14

More on International Fees in Canadian Universities

Due to a few unexpected issues yesterday, we had to postpone the One Thought. With no further ado, here it is:

The day before yesterday we looked at what universities in different parts of the country are charging in terms of international tuition fees.  Here’s a quick graph to refresh your memory:

Figure 1: International Undergraduate Tuition Fees, by Province, Canada, 2016-17

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Figure 2 shows the same data but with a different Y axis.  Instead of showing the figure in dollars, let’s show the figure as a percentage of national average total institutional expenditures per FTE students (minus sponsored research), which in 2014-15 was $24,732.

Figure 2: Provincial Average Tuition as a percentage of National Average Institutional Expenditures per FTE student

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What figure 2 shows is that on average international students are covering more or less (95%) covering the cost of their education through tuition, but that is mostly because of policies in Ontario, where the figure is 120% of cost.  In the other three “big provinces” the fees are about 85% of cost, whereas elsewhere the figure is lower; as low as 38% in Newfoundland’s case.

Now, let’s think about these figures in terms of how Canada positions itself as an education market.  Are we a bargain player, or a luxury player?  This isn’t quite a straightforward question to answer because not everyone reports data in the same way.  But, basically, here’s the basic story: in the US according to the College Board’s Trends in College Prices 2016, 4-year private non-profits charge US$33,480 (for both national and international students); out-of-state charges at public 4-year universities are US$24,930.  In the UK, international fees vary substantially based on whether the course is a lecture course, a laboratory course or a clinical course; the Times Higher 2016 survey of fees, the average for these three types of courses are, respectively, £13,442, £15,638 and £20,956.  In New Zealand, the most recent data available comes from the Education Counts website; according to this, in 2015, the average tuition at universities was NZ$24,150.  So far as I can tell there is no “official” average for fees in Australia (not even for domestic students), but this 2014 survey shows that the average in “indicative fee” for international students is A$23,521.  Given that a couple of years have passed and fees certainly aren’t going down, we can probably round that up to an even $25,000.

Now, let’s translate all those figures into a common currency.  And let’s do it the way an international student likely would; namely, in $USD, using current exchange rates.  Normally, I do these kinds of comparisons in $PPP but since international students have to convert money to buy in each currency, exchange rates make more sense.  So, at current rates of exchange, here is what the competitive picture in each jurisdiction looks like:

Figure 3: Average International Student Tuition Fees, Selected Jurisdictions, in $USD

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In brief, prices for international students in the US are substantially higher than they are elsewhere in the Anglophone world: US privates are charging 85% more than Canadian universities, and the publics are charging about 35% more.   National averages for Canada, Australia, New Zealand and UK (lecture courses) are all very tightly bunched together at between $17-18,000 US.  Only Ontario seems to be trying to play around the same price point as US publics.

One question that arises from this chart is: why exactly aren’t universities in the rest of Canada charging more?  What do Manitoba and Nova Scotia, let alone Newfoundland, gain by having such low fees?  Well, part of the story has to do with the way provincial subsidies work in these provinces.  In both Manitoba and Newfoundland, institutions get block grants and so all money from international students is “additional” to institutional budgets (I have a feeling this is true in Nova Scotia as well but wasn’t able to confirm before publication).  They can set them low because they simply do not need to get income equivalent to cost of education, the way Ontario universities do.  But while that might make sense from an institutional point of view, it’s not as clear why that makes sense from a provincial one: what’s in it for provincial governments to provide this level of subsidy for international students?

One possible argument is that these provinces need to price low in order to attract students (Winnipeg winters are perhaps a tough sell in South East Asia); and since education is a funnel for immigration, maybe the way to think about this money is as a “loss leader” for future population growth.  But then again, we already know that Atlantic Canada has a harder time hanging on to students after graduation than the rest of the country , so maybe this isn’t such a winning idea after all.n

I’d argue in fact that low-pricing is self-defeating in international higher education.  A degree from a (reasonably) prestigious institution is in fact a Veblen good: higher prices drive greater demand because they give an aura of exclusivity.  It’s the one type of good where demand curves don’t slope downwards and institutions would be kind of crazy not to take advantage of that.  There’s a good case to be made that institutions in the Atlantic and prairie provinces could increase international student tuition.

 

December 12

How International Tuition Fees Keep Canadian Universities Afloat

Everyone knows that international student numbers have been going up over the past decade or so. What you might not know is what kind of effect that’s having on university budgets. So, today, a few brief tables and charts.

First, tuition fees for international undergraduate students. Nationally, these have been growing at a rate of inflation +4% over the past decade, which is substantially faster than the rise in domestic tuition (roughly, inflation +1.5%). Nationally, the average international tuition is $23,589, but both this figure and the recent run-up in tuition is due almost entirely to what is going on in Ontario. Ten years ago, international student tuition in Ontario was barely different from the national average; now, after a decade of annual increases of inflation +6%, it lies a full $6,000 above it.

Figure 1: International Undergraduate Student Tuition, Canada and Selected Provinces, 2006-07 to 2016-17, in constant $2016

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Now of course, if you have increasing numbers of international students paying increased fees, it stands to reason that their financial contribution is also increasing. Now, no institution actually publishes data on the amount of money they receive from international students, so no one has ever looked at the extent to which Canadian universities are dependent on that type of revenue with any degree of specificity. But if one simply multiplies out student numbers (using data from Statscan’s Post-secondary Student Information System) by average fees (from Statscan’s Tuition and Living Accommodation Costs Survey), one can get a rough sense of the magnitude of their contribution (some quirks in the way Statscan deals with business students means we can’t quite capture data on MBA students accurately, so we are probably undercounting a bit). What we find when we do this (see Figure 2) is that nationally, roughly 23% of all fees paid come from international students.

Figure 2: International Students’ Fees Paid as a Percentage of all Fees Paid, Canada and Selected Provinces, 2008-09 to 2013-14

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Now a careful examination of Figure 2 reveals some interesting facts. The proportion of fees coming from international students is highest in Quebec (44%) not just because fees are high, but because tuition for domestic students is so low. Conversely, the proportion in Ontario is relatively low even though international tuition is high because domestic fees are also high.

We can move on from this to show what percentage of all operating revenues are accounted for from international fees, which I show below in figure 3.

Figure 3: International Tuition Fees as a Percentage of Operating Income, Canada and Selected Provinces, 2008-09 to 2013-14

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Nationally, income from international students at Canadian universities was equal to a little over 7% of operating income in 2013-14 (also true in Ontario, which you probably can’t see on the chart because the lines are almost entirely parallel); however, the averages by province vary enormously, from 12% in British Columbia to 4% in Alberta to even lower in Prince Edward Island and Saskatchewan.

(In the preceding graphs I stuck to only showing the largest four provinces, because including all ten makes for a gory visual mess; but for all the other provinces, information for 2013-14 is shown below in table 1. And for those who might be kvetching because I am not presenting college data – we asked colleges for data to do precisely this kind of analysis, and by and large they refused.)

Table 1: Data on International Fees, Canada and Provinces, 2013-14

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A final point here: at most Canadian universities, total operating income plus capital expenditure per student is in the range of $25,000 a head. What that suggests is that in most provinces, international students, despite paying what is allegedly “market” tuition, are in fact still not paying the full cost of their education and are in fact being subsidized. Only in Ontario is this clearly not the case; elsewhere, it would appear that foreign students – far from being “cash cows” – are in fact being subsidized by Canadian taxpayers.

More thoughts on this tomorrow.

December 09

Does Student Debt Matter If You’re Not Going to Pay It Back?

You can accumulate one hell of a lot of debt these days in the UK.  Just in an undergraduate degree, fees are ‎£9,000 per year plus you can get another ‎£10,702 in maintenance loans per year of you’re studying in London.  Over a three-year degree that’s ‎£59,106 or a tad over $100,000 (yes, really). So, at face value one can understand the spate of stories coming out of the UK these days talking about how their massive debt loads are going to paralyze them for life, stop them being able to buy housing etc.

Except, wait – these are income contingent loans, not mortgage-style loans.  The maximum payment you have to make in any given year is 9% of marginal income over 21,000.  And the debt incurred doesn’t necessarily need to be paid back.  Loans are forgiven after 25 years, regardless of how much you have repaid.  Estimates vary, in part because it depends on what discount rates one chooses and in part because the government criminally keeps messing with the terms of the loans, but at the moment it is expected that between 25 and 40% of student loan balances will never be repaid and a higher proportion of students (perhaps 50%) will receive at least some forgiveness on their loans.  For those who do not repay their loans, the UK loan system is more like a tax than a loan – a 9% surtax on income over 21,000 which lasts for 25 years after graduation (more on that here).

Despite massive nominal debts, students simply aren’t facing massive repayment burden.   A graduate making 30,000 is only repaying 810 per year, or about 3.1% of after tax income, which is a heck of a lot less than the amount that the average Canadian graduate with student loan debt is paying (our grads pay close to 8% of after-tax income on average).  And they’re paying that regardless of how big their debt is, which is not true in Canada either: at any given level of income over $25,000 per year, Canadian student loans borrowers’ rise along with the amount of debt they have up to a maximum of 20% of family income.

(If you’re wondering how that works – how UK loans can be so big and yet borrowers repay so little – it’s precisely because the government expects quite large losses on the program.  Student loan burdens are easy to reduce if you’re prepared to go to extreme lengths to subsidize them).

The point of income-contingent loan systems like those in the UK, with their guarantees, their maximum payments and their generous forgiveness systems is precisely  to do everything possible to make life easier for borrowers, to ensure that their student loan debts are not going to affect their ability to borrow for other things later on.

But perception is everything.  If graduates feel that their large debts constrain their ability to do make certain life choices like buying a house even though (technically) they don’t, then can we say the policy is actually working? There’s an interesting side point here. When deciding on applications for mortgages or other types of consumer debt, it’s unclear whether banks in places like Australia and UK actually treat income-contingent student loan debt differently than Canadian and US banks treat mortgage-style debt.  They should, but apparently nobody knows for sure because no one’s ever checked – not that banks would necessarily fess up if they didn’t.

Now, I’m not saying that these stories coming out of the UK are in fact true; people in opposition to government policies will tend to come up with whatever argument sounds good at a particular moment. But even if such views aren’t widespread, the point raised is a good one.  Student loan policy wonks have always assumed that if you provide guarantees and limit liability/risk on student loans, then students will be ok with debt.  But if the facts of the policy don’t change people’s attitudes about risk, then the policies will fail, no matter how well they deal with the actual problems at hand.

But what’s the alternative?  It’s a bit of a scary thought.

December 08

Cluster Theory

Unless you’ve been under a rock for the last twelve months, you’ll have noted that the Government of Canada has become enamoured of “innovation clusters” as a means of raising national productivity levels.  What should we make of this?

For some annoying reason, the Liberals act as if cluster theory is something new rather than something which dates back to the mid-1980s (Michael Porter’s The Wealth of Nations gave the idea its first mass-market outing in 1990; six years later, Saskia Sassen gave us what is probably still the most engaging short book description of cluster formation in Regional Advantage.  In fact what is actually new – in Canada at least – is the idea that the federal government should encourage cluster formation/densification with great huge wads of cash.  $800 million over four years, in fact, according to Liberal manifesto and the 2016 Budget.

There are three reasons to be skeptical about this set of developments.  One is political, the second administrative, and the third is empirical.

The political problem is this: we live in Canada.  There is no way on God’s green earth that doling out money for what amount to economic development (or, say it softly, “industrial policy”) isn’t going to get 100% enmeshed in regional pork-barrelling.  Initially, the Government’s plan was for five clusters (I’ve heard it may now be for as many as eight).  Well, isn’t that convenient – five clusters, five regions.  I mean put away all your crystal balls about what’s going to get funded: It’ll be something Ocean-y in the Atlantic, something aerospace-y in Quebec, ICT-y in Ontario, Energy-y in the Prairies and (probably) life sciences-y in BC.  Whether each of these clusters is equally deserving of, or has the capacity to absorb, public dollars is irrelevant once regional politics comes into play.   Inevitable result is sub-optimal investments

The second issue is an administrative one.  Say you want to spend $150 million (or so) on “a cluster” in a variety of ways which increases research productivity, corporate partnerships, etc., etc.  It’s not just a question of deciding among hundreds of worthy micro-projects within a $150 million budget.  Who actually manages the project?  It’s not like giving money to a university or a hospital – a cluster has no corporate entity.  Occasionally, you get a trade organization that might conceivably act as a co-ordinator of a cluster, like say Communitech in Waterloo, and you could use them to distribute money in a way that made sense regionally.  But i) not every cluster has one of those and ii) even if they do, they’re going to tend to be biased towards established players rather than new ones.  The only alternative is to manage it all from Ottawa, but that’s a frightening prospect for a project that’s meant to improve industry flexibility.

Which brings us to the third, empirical, problem.  I’ve said this before but it bears repeating: a lot of the research on innovation is American, and assumes things like having DARPA around, and being at the technological frontier and having access to lots of venture capital and all that good stuff.  Most countries in the world don’t have that.  In fact, when most countries in the world (including us) think about “clusters” they are thinking about something fundamentally different than what Americans think of when they use that term, because our cluster thinking is designed as much around attracting established foreign companies as it is around developing native entrepreneurial talent.

And here’s a little secret: there are almost no good examples anywhere of clusters having been built on government money.  In fact, to the extent that anyone can work out what it is that makes a great cluster, it’s the presence of one or two industry-leading companies plus one heck of a lot of spin-offs related by disgruntled former employees who want to do their own thing (see especially Steven Klepper’s recent posthumously-published book Experimental Capitalism).  This is actually something most Canadian clusters are really bad at: the OECD Cluster rankings, although now a bit dated, show Canadian clusters generally in the bottom half of clusters across the OECD for new company formation.  Government can do something about this, but it’s not by spending money, it’s about using law and regulation to make sure non-competes are unenforceable.  Surprisingly, given that this is supposed to be a government devoted to evidence-based policy, that issue doesn’t appear to show up at all in our government’s thinking on clusters.

So what are we spending money on, exactly?  And why?  To what end?  Although the government’s had over a year to work on this, it’s really hard to get a sense of what the plan is.  I suspect that a lot of this money will end up in the hands of universities because they know the “apply for government money” game really well and can play to the Minister’s predilection to be photographed in front of a lot of shiny hi-tech gadgetry.

But will any of it have the slightest effect on national productivity?  I have my doubts.

December 07

Two (Relatively) Good News Studies

A quick summary of two studies that came out this week which everyone should know about.

Programme for International Student Assessment (PISA)

On Tuesday, the results for the 2015 PISA tests were released.  PISA is, of course, that multi-country assessment of 15 year-olds in math, science and reading which takes place every three years and is managed by the Organization for Economic Co-operation and Development (OECD).  PISA is not a test of curriculum knowledge (in an international context that would be really tough); what it is instead is a test of how well individuals’ knowledge of reading, math and science can be applied to real-world challenges.  So the outcomes of the test can best be thought of as some sort of measure of cognitive ability in various domains.

In addition to taking the tests, students also answer questions about themselves, their study habits and their family background. Schools also provide information about the kinds of resources they have and what kind of curriculum structure they use, there is an awful lot of background information about each student who takes the test, and that permits some pretty interesting and detailed cross-national examination in the determinants of this cognitive ability.  And from this kind of analysis, the good folks at OECD have determined that government policy is best focused in four areas.

But heck, nobody wants to hear about that; what everybody wants to know is “where did we rank”?  And the answer is: pretty high.  The short version is here and the long version here, but here are the headlines: Out of the 72 countries where students took the test, Canada came 2nd in Reading, 7th in Science and 10th in Math.  If you break things down to the sub-jurisdictional level (Canada vastly oversamples compared to other countries so that it can get results at a provincial level), BC comes first in the world for reading (Singapore second, Alberta third, Quebec fourth and Ontario fifth).  In Science, Alberta and British Columbia come second and third in the world (behind only Singapore which as a country came top in every category).  In Math, the story is not quite as good, but Quebec still cracks the top three.

CMEC also has a publication out which goes into more depth at the provincial level (available here).  The short story is our four big provinces do well across the board but the little ones less so (in some cases much less so).  Worth a glance if comparing provinces rather than countries is your thing.

One final little nugget from the report: the survey taken by students asks if the students see themselves heading towards a Science-based career in the future.  In Canada, 34% said yes, the second highest of any country in the survey (after the US).  I’d like to think this will put to rest all the snarky remarks about how kids aren’t sufficiently STEM-geared these days (<cough> Ken Coates <cough>), but I’m not holding my breath.

Statscan Report on Youth Employment

Statistics Canada’s put out some interesting data youth employment by Rene Morisette on Monday.  It’s one of those half-full/half-empty stories: the youth unemployment rate is back down to 13% where it was in 1976 (and hence lower than it has been for most of the intervening 40 years), but the percentage of youth working full-time has dropped.  The tricky part of this analysis – not really covered by the paper – is that the comparison in both time periods excludes students.  That makes for a tricky comparison because there are proportionately about 3 times as many students as there were 40 years ago.  To put that another way, there are a lot fewer bright kids – that is, the kind likely to get and keep jobs – not in school now than in 1976.  So it’s not quite an apples-to-apples comparison and it’s hard to know what having more young people in school actually does to the employment rate.

Aside from data on employment rates, the report (actually a condensation of some speaking notes and graphs from a presentation made earlier this year) also includes a mishmash of other related data, from differing recent youth employment trends in oil provinces vs. non-oil provinces (short version: they’re really different) to gender differences in graduate wage premiums (bigger for women than men, which may explain participation rate differences), to trends in overall graduate wage premiums.  Intriguingly, these rose through the 80s and 90s but are now declining back to 1980 levels, though whether that is due to an increase in the supply of educated labour or reflects broader changes in the labour market such as the “Great Reversal” in the demand for cognitive skills that UBC’s David Green and others have described is a bit of a mystery.

But don’t take my word for it: have a skim through the report (available here).  Well worth a few minutes of your time.

December 06

Alarm Bells in China

So, in the midst of all the handwringing about the world’s major higher education student destinations all losing their damn minds (Trump, Brexit) and the implications this has for higher education internationalization, I think we’re in serious danger of missing a much bigger story going on in China.

Don’t get me wrong.  Trump and Brexit are big stories, but on a global scale what they are going to do is shift mobility patterns a bit.  The precise English language destination countries will change (Canada, Australia, New Zealand and possibly Ireland) but neither event actually changes the underlying demand for quality English-language education.  And as long as demand holds up, internationalization across the globe as a whole will continue on.

But what happens if demand doesn’t hold up?

Now, we’re not at that stage yet.  Among middle class parents in China, there is still a lot of interest in international education, even if everyone’s first choice remains Peking or Tsinghua.  But the government, for a variety of reasons, has been making study overseas harder.  Last year, they have cracked down on the creation of new 2+2 or 3+1 programs, largely to keep corruption at bay (there were several institutions where found to be embezzling money associated with those programs).  In 2014, the government stopped approving new international programs at public high schools.  Last month, a new law banned for-profit schools from using international curriculum until grade 10.  The Minister of Education has called for a ban on “textbooks promoting Western values.”  (see this Economist story for more).  In short, the Chinese government is making it increasingly hard for Chinese parents to prepare their kids for study in foreign universities.

There is a balancing act going on here.  On the one hand, the Communist regime wants to limit potential sources of ideological contamination.  On the other hand, for many Chinese parents – perhaps especially Communist Party members, sending child abroad to study is still part of the “Chinese dream” (Xi’s daughter, for instance, studied at Harvard).  Moving too far, too fast in this direction could set off a lot of urban discontent, which the regime would prefer to avoid if possible.  But at the same time, the direction is unmistakable and we do not know how far the government intends to go.  If western values in textbooks are undesirable, at what point do individuals educated in the west at institutions steeped in western values also become undesirable?  If it becomes unpatriotic to hire foreign graduates – what then?

Now, I’m not even sure something of that magnitude would shut off the taps: lord knows there are a lot of people in China (again, including Communist Party members) who view having a child studying or working overseas as a pretty good insurance policy if things start to go sour in China.  So you could still imagine a big Chinese market for international education-cum-immigration.  But it might be more difficult to get those kids up to speed to get into a western university.

In that eventuality – and it’s one I definitely think all universities should be prepared for – attracting Chinese students is going require one to mean pursuing one of both of the following strategies.  First: attracting students at an earlier age (perhaps 14 or 15) and putting them through local Canadian high schools.  For wealthier families that means bringing mothers over as well; for everyone else, it would be interesting to for universities and school boards to jointly create some communal living arrangements (including student life personnel) to help Chinese students succeed.  Second: for students who stay in China through to the gaokao (i.e. age 18) and then decided that they wish to try study abroad, there is going to be an increase need for pathways providers to help students get through what will amount to a bridge year.  I suspect my colleagues at IDP and Navitas will be busy over the next few years.

In short: yes, Trump and Brexit represent big short-term opportunities for countries like Canada, Australia and New Zealand because they divert demand.  But there remains a long-term threat to internationalization in that the Chinese Communist Party may move to actively suppress demand.  Keep your eye on the ball.

 

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