Lien Pham

International education was the first sector in Australia that felt the economic impacts of coronavirus. The problem related to Australia’s travel ban that have kept Chinese international students from coming to Australia. For days, the media headlined the crisis, emphasising the significance of international education as third largest export in Australia and revenue source for many Australian universities.

Contention in the media was generally about universities’ reliance on the Chinese market. The other issues related to universities’ seeking government support, or whether it is ethical for universities to encourage students stuck in China to go to another country to circumvent the 14-day period after leaving China.  

These contentions had one thing in common: underlying principle of international education as a commodity, therefore representing the livelihood of universities. Is this economic paradigm and its justification a truth or a myth?

Let’s look at some fundamentals of economic theory to answer this question.

Supply and demand

The law of supply and demand explains the interaction between the sellers of a product and the buyers for that product. In simple terms, it denotes the relationship between the availability of a particular product and the demand for that product through its price. The price of a product is determined by the equilibrium of its demand and supply.

In the case of international education market, universities (often those in Western advanced countries) are the sellers and international students (often those in non-Western developing countries) are the buyers.

In responding to the travel ban that lock Chinese students (or buyers) out of the market, universities seek to protect their revenue at the price which these students have agreed to pay but not yet purchased. In market terms, it is like universities and students have agreed on a futures contract but have not yet signed the contract to take out the futures. Universities want to hedge their loss because they are now exposed to the risk of the market.  They want to ensure that these students will take out their futures with them.

There are numerous examples of this hedging strategy by universities – what universities may call “keeping students engaged”, like online orientation, online teaching, or even assuring students they will not be awarded a “fail” if they enrol and subsequently find online learning too difficult. They even offer students cash compensation for flights or accommodation in the third party country on their way to Australia. The aim is to ensure Chinese students retaining demand for Australian university instead of switching to another institution in another country. They are prepared to bear some additional costs to protect their revenue. Universities do not lower their price or tuition fee because there is no elasticity of demand and supply which influence price. The law of demand and supply does not hold.  

Informed buyers and suppliers

For the law of demand and supply to hold, the assumption is that buyers and suppliers of the same product are independent and well-informed, and they are free to get in or out of the business. In reality, students do not really know which kind of teaching and learning they will get until they start their degrees. Teaching and learning could be widely different between subjects in one degree, between degrees depending on major and minor which many students do not have to decide until they are further into the degree, and between degrees and majors across universities. In other words, buyers’ demand is never based on teaching and learning at a particular institution for particular degree.

Students may consider university rankings, but rankings do not determine pricing of degrees. This is because rankings reflect universities’ research outputs not teaching quality. There are some rankings that are based on teaching aspects, but such information is not easily available or understood, least of all by those outside academia. There are also other factors like parents or having relatives in host countries that influence students’ choice. Furthermore, they could never know the outcome of their study, like the jobs they will get if any at all.

Students choose to take up higher education without knowing a whole lot about the degree they enrol in, what they do during the degree, and what they might gain from the degree when they finish. They may know something but certainly not in the way that the markets assume they do when they make the choice to buy. Students are largely uninformed buyers.

Universities, on the other hand, are informed sellers. They know exactly what they are offering including the price of other universities. But they do not know the buyers’ market, which is why there is an abundance of research on student or provider mobility compared with minimal studies on international student outcomes. Universities want to better understand their buyers or to get into the local markets where the buyers are.

In this way, international education is a market that favours the seller because they are informed actors in this market.

Rationality

Rational market is another economic theory that suggests the actual price of a product will be a good estimate of its intrinsic value. In reality, this hypothesis doesn’t stack up as international education fees are very similar across universities. Moreover, even if a university’s ranking – a crude measure of its intrinsic value – moves up and down, its tuition fee or price does not move accordingly. The reason is that rationality assumes independence of buyers and sellers. It also depends on informed buyers and sellers.

Some might argue that universities’ reaction to the travel ban locking their Chinese buyers out of the country is rational. If we are sympathetic to this view, then their rationality could be said to be due to their informed status. But if students are not informed buyers, can we really say that they act rationally? How might we explain their willingness to take up universities’ “keep them engaged” activities, and acceptance of unchanged tuition fee. One explanation is that the market of international education is one-sided favouring informed universities at the expense of uninformed international students.

Debunking the myths of the market

The truth is that international education, as with education broadly, by nature is not a product or service.

It is not delivered in environments that are conducive to the operation of markets.

It is not tradeable because it cannot be priced.

Its intrinsic value is derived from many contextual factors including academic performance and employment which there is no guarantee.

It is impossible for students to be informed buyers because it is not possible to grasp the plurality of intrinsic values.

The intrinsic value of international education therefore has no relationship with its price.

The market cannot be a rational market. There is simply no history of risk and reward that the students as buyers can know. When they exit universities, they simply do not return to that market. Is there anyone that undertakes the same degree in the same institution twice?

While the economic impacts of international education in Australia have been significant, it must not be confused with its commodification. The economy of international education rests on the myths of the market. Ignoring these myths leaves a gap in questioning universities’ economic gains and accountability for delivering quality teaching, diversity and inclusion that benefit international students.

In addition, treating international education as a marketised product – when it is not – lead to universities’ reliance on certain markets like the Chinese market because they have not exercised market prudence through demand and supply, and they could not have done so because it is not a market-based product. The growth of international education revenue for universities have been simply too easy. As the crisis of coronavirus threatens this revenue flow, many universities now face financial dilemma and even closure of courses because they have viewed international education as a product without understanding the myths of the market.

For those that still believe in rational markets, Eugen Fama, who won the Nobel prize for rationality in market in 2013, offers a theory on market efficiency. It has a simple logic: If people consistently buy assets for more than its fundamental value, they will lose money. In other words, if students consistently undertake higher education and pay more than their fundamental value, these students will lose money. We can draw on Fama’s idea to think about the plight of international students when they are left without any recourse during this terrible coronavirus because they cannot easily pull out of the degrees that they have committed to. This would be a lot more ethical than trying to entice them to serve universities’ economic interests.