Edunomix

Disconnected or idle youth as measured by NEET rates (defined as 18-24 year olds neither in employment nor education or training) can be a major determinant of economic stagnation, social unrest and investment risk.  Unsurprisingly, the worst performers (based on OECD data) are often those with low educational attainment and a high degree of gender inequality, in both educational and labor force access. Some unlucky countries are failing both male and female youth.

Consider that the OECD average NEET rate is roughly 14% and 17% for men and women, respectively, and that several countries are deviate significantly.

For example (in the chart below):

• Turkey, Mexico, Columbia and Costa Rica have by far the most idle young women.
• Nearly half (47%) of young women in Turkey are idle, compared to 20% for men.
• Parts of Southern Europe lag the OECD averages:  Italy has low gender disparity but both young men and women are idle (27-29%), so at least the market doesn’t discriminate.  Greece and Spain also fail both young men and women, averaging NEET rates of between 22-24% and far above OECD averages.

Why should we care?  The impact of these clusters of disconnected youth may translate into lower lifetime earnings for those effected, more stagnant economic growth, and social unrest.  And these figures are only within OECD countries.  NEET figures for selected EMs, such as Pakistan and parts of Africa, can be far worse.  There is much work to do.

US labor productivity is growing at its lowest rate, over an extended period, since 1948.  In the face of this multifaceted decline, the Trump Administration’s “New Foundationfor American Greatness” has explicitly targeted GDP growth rates of 3% by 2021 based on a raft of trade, budgetary and investment measures.  It has also championed an attempt to “Buy American, Hire American.” Yet any sustained and material increase in US growth rates will need to come from having either more people in the US or greater output per worker, and with promises of tightening both illegal and legal immigration, as well as international foreign student enrollments, accelerated population growth of skilled labor isn’t likely to happen.

That leaves productivity.  But as Figure 1 indicates, productivity has been particularly weak post-2007, where it has averaged around 1.2% for almost a decade and well below the average cycle 2.3% rate.

Figure 1: Annual Growth Rates – Productivity, Output and Hours, 1948 to 2016

Moreover, future challenges to sustain high-growth in the US are set to accelerate. As Figure 2 illustrates, annual changes in the resident US population have just begun their decreasing growth trajectory through 2050, when the population will increase by less than 0.5% per year. So unless American resident families suddenly begin to show higher fertility rates and super-size their households, this demographic is locked in. Either immigration is going to fill the gap with more people, or the ability for the US economy to grow will have to depend on currently undiscovered sources of productivity.

Figure 2: Percentage change in US resident population

Compounding this problem is that the US population is aging and estimated to experience declining employment participation rates for both men and women from now through 2060–and will dip below 60% as early as 2030 as the Boomer and X Generations retire in droves.  Driving this change will be declining levels of non-hispanic workers in the US economy since the hispanic population proportion of working age in the US actually rises through 2060 owing to its younger demographic profile.

US Employment Participation Rates, Projected through 2060

To say the least, this puts America in a dilemma with respect to immigration and skills. And “Hire American” is not the answer. Some may think that foreign workers are taking American jobs, and that is true and must be addressed in certain pockets of the economy. But the aggregate math is indisputable: we will need foreign workers to occupy, drive and create more jobs, as well as boost US competitiveness in the years ahead.

What kind of high-skilled foreign workers do we need and where do we find them? Part of the answer is staring us in the face: the pool of roughly 1.04 million students currently studying in the US, and future generations who will follow.

A Modest Proposal

What would be the impact on US economic productivity if every foreign student with a Bachelor’s and advanced degree were handed a green card after graduation to either work for a US employer or start a company?  And if all the OPT (Optional Practical Training) workers working toward or having US degrees (F1 visa holders) who are contributing to the economy on short-term visas were allowed to convert to permanent work status?

Here are a few things to consider.

First, the size and quality of the foreign student talent pool is non-trivial. In 2016, there were 1.04 million foreign students in the US (5.2% of total enrollments), of which 427,313 are undergraduate and 383,935 are postgraduate. Within the OPT category (eg. foreign students with more the 9 months of college and working in an training or internship structure) there are another 147,498 students.  Clearly not all foreign students are stellar academics but many come with superb qualifications which are at least on par with if not exceeding American applicants.

For the sake of argument, let’s assume that 75% of foreign students can add meaningful value to the American economy after graduation and don’t wish to return home.  If 300,00 foreign students matriculate every year and we add the 147,000 OPT class workers, this amounts to a mere 372,000 new workers per year to a total US workforce of 89.2 million (defined as workers over 25 years of age).  How difficult will this cohort be to absorb? Not very. Moreover many of these workers will be working in start-ups or SMEs, and some creating their own companies and future jobs for others , as had been typical in Silicon Valley and many other cities around the country.

Second, a heavy concentration of STEM majors among foreign students can help narrow high-end skills gaps in the sciences, from industry to applied research, without outsourcing. American industry constantly fumes about the lack of STEM skills, particularly at advanced levels and compared to global competitors.  If indeed there is a STEM skills gap–and this is not a settled issue across all industries–tapping foreign students for permanent work could yield immediate and direct results.  More pointedly, employing foreign graduates obviates the need to outsource such labor overseas in the first place and retains local economic benefits.

Consider that in 2016 over 20.5% of all foreign students were studying engineering and computer science, and 13.6% studied math, exceeding US student rates. If there is a rational argument that supports sending these foreign students home to work and for the US to give up their first-rate, American-trained skills–those we claim are in shortage and which would benefit the US economy and future productivity–I have yet to read it.

Third, naturalizing foreign graduates to work for US entities would immediately deepen linkages to emerging market consumers which enhance America’s global competitiveness. I’ve written in the past about America’s foreign language crisis across industry and government, and have seen these limitations first hand in many developing countries. American business is global by nature but often lacks the local acumen, networks and language capabilities to penetrate emerging markets across Asia, Latin America and Africa.  In this sense, foreign students can provide the “source code” for enhancing US competitiveness in these regions and open new markets.  They can also jump-start the application of technologies overseas, particularly within start-ups and early stage companies which often lack global resources.

Fourth, a study-to-immigration program could replace the need for H1Bs over the long-term and create a more stable labor market with predictable pathways. It is axiomatic that short-term, unpredictable talent acquisition is bad for both companies and countries. Establishing pathways to work for highly skilled foreign students would be (a) a fillip for US higher education which could then offer both a world-class education and a pathway to immediate economic participation (and perhaps citizenship); and (b) create opportunities for US companies to plan ahead and reduce their need of H1Bs applications year after year.  Why use H1Bs if there is the ability for all foreign students to obtain permanent work visas?

In today’s environment, many would like to take a pitchfork to immigration (but fewer for highly skilled immigration) and legitimate fears exist among workers being replaced by robots, competitors, technologies and foreigners.  But at an estimated 0.4% of the US adult labor force, and with 6 million people quitting their jobs every month in the US, a foreign student graduating class integrated immediately into the US labor market would hardly be a negative displacement factor.  On the contrary, their quality, background, and skills can enhance US economic and productivity growth with a positive impact on workers across the US. One thing is clear: “Hiring American” will restrict this talent pool and in the maw of US demographic, skills, competitive and productivity pressures, will not at all help the US economy reach its growth aspirations.

Investors and entrepreneurs are usually exuberant about the 1.65 billion strong global student market until they hear the bad news: the majority can’t afford anything beyond basic education. This, of course, doesn’t include the 122 million illiterate youth in the world today or the legions of non-formal and professional learners who may want to improve their skills but have little financial support.  But what if they did?  Enter Fintech. 

In the US, a deep pool of $1.3 trillion in student debt, persistent resource inequality in schools and outright administrative waste have served as a catalyst for Fintech companies to provide solutions from alternative loan payback schemes to teacher-centric apps that help school budgeting decisions.  This is to be commended. Yet as difficult as domestic problems may appear in the US, they are only a sideshow compared to the immense problems bubbling up in emerging markets, from constrained government and personal financial resources to a future with near Malthusian population growth, poor education performance but high expectations for a better life.

Tackling affordability challenges, at home and abroad, often happens in two ways.  Companies can bend the cost curve by creating markets that didn’t exist previously or which circumvent and disrupt traditional institutions that stifle change. Or they can try to create easier and more effective ways for consumers to actually pay for these products and services.  Within the education sector, I have chronicled numerous examples of edtech ventures that have successfully lowered the cost of access to hundreds of millions of students, from “schools in the box” across Africa to adaptive and  e-learning concepts in Asia to alternative financial solutions for low income populations. Yet the vast majority of emerging market students remain severely underserved despite a massive opening for financial innovation.

So what might prompt the globalization of Fintech?

Geo-locating problems.

I would start with identifying areas of education finance that seem ripe for positive disruption around the world, such as creating alternative student finance and loan access; improving the procurement, management and use of resources in schools; making international study abroad more affordable and less cash-based; and increasing financial literacy.

Next, I would view these areas of potential business through the lens of developing economies. Figure 1 provides some basic perspectives:

• In the US, college is comparatively expensive (measured in both absolute tuition levels and median income as % annual college cost, or 52% in the US) but local students generally have access to federal and other forms of financial aid.  In many emerging markets this is flipped: students across Asia, Latin America and Africa enjoy government subsidized tuition at leading state universities but the seats are limited.  For those less gifted students, alternative options do exit through private institutions but often at a significantly cost premium and with little or no government financial support.

• Larger emerging markets such as India, Pakistan and Nigeria have a basic lack of school and teacher capacity at all levels, leaving millions of children on the proverbial street. Moreover, given the widespread household demand for basic education outside public systems, the need for fintech solutions at the K12 level–primarily funding both households and schools–is immense.

• Financial literacy, from managing loans to understanding how to save and invest, is a universal challenge.  But it runs deeper in countries without sophisticated banking systems. An increasingly tech-savvy generation in search of alternative apps and tools, such as in Africa with mobile banking, provides a the perfect market opportunity for financial training.

• Administrative waste and inefficiency is practically synonymous with large, complex systems, including America. I have no idea and could not find data which measures “administrative waste” in school systems for large countries such as China, India, Nigeria and Brazil. But know first-hand that these countries are not paragons of efficiency.

Figure 1. Comparative Opportunities for Fintech in Education, US v Emerging Markets (EMs) 

Developing a playbook

To develop some ideas further, globally ambitious Fintech competitors might take a look who has been doing what, and where around the world.  Here are some challenges to consider:

1. Providing more alternative finance sources in far away markets for students pursuing higher education, lifelong learning and workforce training. Many readers are already familiar with non-traditional student loan platforms such as Commonbond, Sofi, Credible and Earnest which provide a combination of student loan access, refinancing and consolidation using non-traditional sources such as outside pools of investors and venture capital.  This is now expanding to other stakeholders as well.  A recent article by the CEO of Sofi discusses 2017 student loan changes which may include income base repayment that places colleges with “skin in the game” and some responsibility for loan repayment, and the role of employers in how they manage employees with massive student deb. Internationally, a 2014 study by EY and IFC paper cited such examples Brazil and Africa (Eduloan (South Africa), IdealInvest (Brazil), Duco UC (Chile) and innovative loan repayment and financial support methods for higher education and professional training that included crowdfunding, social impact bonds and income-based repayment loan schemes.  But the amount of students serviced is a fraction of those in need, and it is largely local companies who are filling the breach.  Consider that China’s peer-to-peer lending market is far less regulated than US counterparts but has grown rapidly to over US$71 billion in online loans. Led by companies such as China Rapid Finance, Jimubox and Rong360, alternative lending has long been useful to individuals and families who require debt to fund tutoring and study abroad. New entrants such as e-commerce giant Alibaba, via MyBank, can now obtain loans of up to $805,000 based on a risk-adjusted online shopping history.  Chinese fintech firms are only one example, and far more sophisticated than many EM competitors.

2. Creating vehicles to fund international study abroad with the ability to track students into the workforce after graduation. The majority of the estimated 4.5 million students studying outside their home country do not rely on scholarships but pay in cash to universities and training institutes. As such, study abroad often resembles a luxury product which limits potential demand. Yet given the caliber and earning capacity of many international students, there should be more creative solutions available and some firms are responding.  Early entrants such as Flywire have flattened international payments networks for cross-border education tuition by providing peer-to-peer participation.  With a presence in 150 countries, Flywire is now collaborating with banks to achieve further scale and sophistication. Prodigy Finance in the UK focuses on funding foreign students who have been accepted at university but unable to get loans. Prodigy has been particularly successful–lending out $200m to 4,500 students since its launch in 2008–by using a model is that estimates potential earnings of graduates and use them for a proxy credit score that carries astonishing repayment rates of 99%.  It should come as no surprise that several large banks (Credit Suisse, Deutsche Bank) have signed up on this platform, which will significantly expand the amount of available capital to students worldwide.

3. Deploying student and school-centric financial tools that are localized to specific countries and regions. Student and school-centric financial tools are at the core of the US FinEdTech sector and have clear applications abroad. Firms such as Allovue provide solutions around school district budgeting that brings collaboration between teachers, principals and other administrators. ClassWallet is streamlining and localizing the management and procurement process for schools through an education funds tracking system. In the US context, Allovue’s  2017 predictions for EdFinTech suggest that the need to conform with new ESSA (Every Student Succeeds Act) regulations will necessitate greater autonomy and transparency at the local level, presumably where more efficient allocation of resources can occur.   In essence, the aim is to benignly decapitate the centralized bureaucracy and place financial choice and ultimate responsibility at the local classroom level, funded by teachers, for the direct needs of students.  This is something that all countries need, but have yet to successfully address.

4. Harnessing Edtech solutions to enhance general financial literacy and entrepreneurial finance in youth populations.  There are many cases to consider here and the international market is wide open.  For example, improving student loan management and budgeting is served by companies such as Student Loan Hero. In  Singapore, one of Asia’s leading financial centers, companies such as Knowlscape are providing immersive and gamified learning focused on financial concepts as well as digital curriculum for financial sector use in Asia and the Middle East.  Playmoolah is providing gamified financial education for kids. In Africa, a severe lack of financial literacy is being met locally through competitors such as Khonology, fintech incubators such as Village Capital, and start-ups MyBucks and Branch. Finally, India fintech companies such as BankBazaar and Capital Float are setting up education platforms to drive long-term customer acquisition strategy.  This list goes on.

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In sum, both Western and emerging market fintech firms are racing to grab market share within a global education sector that is rapidly accelerating in the face of weak affordability and financial inefficiencies.  And as we have seen in many new industries, from social media to e-commerce platforms, building early and deep networks of users in these countries can be critical to future success.  With education demand rocketing in the developing world, today’s US and European fintech firms have a unique opportunity to extend their competitive presence to education consumers globally.  But the clock is ticking.

In 2016, the United States hosted over 1 million foreign students at an estimated $32.8 billion economic impact and over 400,000 jobs, a level that could easily exceed $45 billion by 2025. Under the outgoing Obama Administration, international student enrollments grew five-fold from 200,460 international students in 2009 and left the US as the top destination for international study.  Moreover, education was a key policy platform.  Obama’s 100,000 Strong in the Americas initiative encouraged US
students to study in Latin America and his 1 Million Strong initiative was designed to expand Mandarin Chinese language study as much as five-fold by 2020.  Even Michelle Obama’s Letting Girls Learn initiative became a touchstone for finding long-term solutions for gender participation in economic growth, particularly in the more unstable regions of South Asia, the Middle East and in African countries such as Nigeria.

President Trump’s America First policy begins with a more divisive rhetorical message to the rest of the world. But it is the potential policy changes–in trade, economics, immigration, security, and targeting countries such as China–that may directly impact international study in the US and the projection of American higher education leadership abroad.  This much is known: shortly after President Trump’s inauguration, the White House posted some of its key policy priorities including an America First Foreign Policy, broad commitments to pursuing or renegotiating “trade deals that work for all Americans” and issues related to curbing illegal immigration. How might Trump’s policies impact international education and US higher education?

I’m watching four specific areas that can have a material impact on international education activities.

Immigration and Visa Issues

Former New York Mayor Michael Bloomberg once suggested stapling a green card to every foreign student’s college diploma.  Good luck with that under a Trump Administration.  In fact, if more xenophobic tendencies become policy it will more difficult for foreign students study in the US, find work-study internships or so-called Optional Practical Training (OPT) in the STEM fields, and to find employment after graduation.  In practical terms, approval of F1 and M1 visas for students in full time and vocational study are under the management of the Department of Homeland Security. There are a number of circumstances under which the department could take a harder line on certain regions such as South Asia, Middle Eastern countries such as Saudi Arabia (the leading source country for students studying English in the US) and students from Mexico.

Equally important, there is the impact on student decision-making psychology and whether they feel welcome in the country. Past history has shown that even the perception of anti-foreign attitudes–and possible incidents related to such a tense environment–can impact enrollments, sometimes seriously.  We saw this happen during the anti-Indian measures and violence in Australia in 2009 and, more recently, a clear trend of weakening UK enrollments following imposed limits on foreign visas and work-study programs. This last effect has been to stifle growth in the one of the world’s most popular study destinations, a trend that may be reinforced in the wake of Brexit preparations.

China.

The new administration’s trade czar, Peter Navarro, has well-known hardline views on China. His documentary, Death by China (which has a lead endorsement by then-businessman Donald J. Trump) focuses squarely on China as the villain of America’s manufacturing decline. His 2006 book, The Coming China Wars, was among the first to take aim at China’s rapid industrialization and the potential negative impact it has on the US and the world.  At the very minimum, we should expect a more confrontational Sino-US trade relationship.

How might trade friction and retaliatory policies might impact education dealing with China?  First, if even a portion of Chinese students vote with their feet and go elsewhere there will be a magnified impact. China accounted for over 378,000 students in the US in 2016, equivalent to one-third of all international student enrollments.  While it is doubtful that a Trump Administration will tamper with Chinese student visas, the more likely scenario could be a psychological change in the event Chinese students begin to feel less comfortable.

A second impact could potentially be on US educational institutions operating in or hoping to enter China.  US universities operate hundreds of academic programs, research centers and a number of high profile branch campuses in China, from NYU Shanghai to Duke, with many more in line for approval by China’s Ministry of Education.  China could retaliate by not approving US academic programs pending at the MOE, increasing the regulatory scrutiny or even shuttering existing programs. In fact, any increased bilateral tension would come in the context of Chinese President Xi Jinping’s recent moves to limit Western education and thought and give a pretext to such moves, thus increasingly the probability.

Expansionary Fiscal Policy and the US Dollar viz. EM Currencies

Trump is targeting a $1 trillion infrastructure spending plan with an ambitious goal of creating 25 million new jobs.  To what extent this stimulus will be cut down by deficit hawks in Congress is unclear, but at least directionally it points to a relatively higher inflationary environment, rising interest rates and a stronger dollar.  As I have written previously, the strength of the US dollar adversely impacts international student enrollments from emerging markets, the leading source for internationally mobile students. In the latest round beginning roughly in 2014, countries such as Mexico, Malaysia, Nigeria, and South Africa have been hit hardest while India and China only moderately. A further strengthening of the dollar by 15-20%  against selected currencies could have a wider and deeper impact on students and their family budgets precisely at a time when university admissions officers in the US are attempting to diversify enrollments away from China and into new markets.

Renegotiating Trade  

TPP is dead. America will now shift toward bilateral trade negotiations.  In my view, China’s trade relationship could hark back to the volatile and persistent Most Favored Nation (MFN) debates in the 1990s which pitted China against the US worker. If so, there the possibility of serious trade tensions that promise to derail parts of the bilateral relationship and invite tit-for-tat economic retaliation.  China’s neighbors, Korea and Japan, may also be in the crosshairs as both are serious global competitors in manufacturing and high-tech industries–precisely where Trump has pledged to rebuild America.  In Latin America, a pending renegotiation NAFTA could re-scramble trade relations that have been largely sedentary for decades with increased pressure on Mexico.

Why does this matter?  Apart from the fact the international education itself is a tradable service (referred to in the US as a “deemed export”), a country’s trade with the rest of the world is often correlated with international study activities.  Limiting trade flows impacts economic, human and technology exchange which logically feeds into international educational exchanges.  In more practical terms, trade deals relating to IP protection and knowledge industries–such as the TPP–were designed to form greater protections that include the ability for American universities to conduct research and development on a global basis. In this sense any future trade tensions may also impact America’s education presence abroad.

Final Reckoning?

It is too early to handicap how deep and fast such changes can impact America’s international education activities, and there are counter arguments to consider.  I remain cautiously optimistic that Trump will see the light on international education. This is because Trump’s changes to trade agreements and the international order may be more symbolic than substantive, and the time it takes to effect such change can be measured in years or decades rather than months.  Moreover, a stronger and more entrepreneurial US economy sits well with potential students around the world and could also reinforce the overall attraction of US study, despite the proclaimed focus on domestic revival.  Finally, the alternatives for international students looking for liberal, English speaking study destinations are limited:  consider that the UK post-Brexit is moving toward their own stricter immigration laws while Australia, a prime potential beneficiary from Asian students, has only one-fifth the level of foreign students compared to the US and a lot less infrastructure to sustain student growth. Canada, despite its attractions, represents an even smaller higher education market.

In the end, President Trump could also recognize that what makes America great is its universities and schools, at home and abroad, which play a critical role in creating knowledge, technology, scientific discovery, and of course, direct and indirectly–stable jobs and badly needed exports.