Monday, July 25, 2011

Are sprawling IIM campuses justified?

The IIMs have campuses that sprawl across 100 acres of more or land. They produce less than 3000 MBAs put together, says Nirmalya Kumar in an article in ET. He believes this is inefficient use of a scarce resource, land. Is this true?

There are two components to this point. One, the IIMs don't need sprawling campuses in order to meet their educational objectives. Two, given that they have so much, the IIMs can produce more postgraduates or doctorates.

To take the first point, Kumar argues that London Business School operates on less than 5 acres and graduated 1000 students this year. Why can't the IIMs do likewise? Maybe they should sell off most of the land they are sitting on?

I am not sure this is a valid argument. Both faculty and students in London (and other western cities) can easily rent apartments over a wide range of rentals. In Indian cities, it is rather more difficult, so there is a case for a campus that will obviate the need for people to look around for a place. Public transport in many places is nowhere as good as in London and there can be difficulties in commuting to work as well. Many cities may not be as safe those in Europe or North America. So, for the smooth functioning of the school, a campus may be required.

Secondly, the IITs and IIMs are governed by the Pay Commission framework and are restricted in the pay they can offer faculty. Campus accommodation is a valuable perk and we know from experience that for NRI faculty wanting to relocate to India, it's a big attraction. One would, therefore, make out a case for a campus on grounds of promoting academic excellence.

Having said that, there remains the question of whether the IIMs are producing enough graduates to justify the land on which they are sitting. One reason often trotted out is that the IIMs are unable to attract quality faculty. I do not entirely buy this argument. As Kumar points out, it should be possible to bring in visiting faculty from overseas. This does not happen, nor is recruitment of faculty vigorous enough, because it suits the IIMs to limit the intake. This enhances the scarcity value of an IIM product and hence the value of the IIM brand itself, and it limits competition to existing faculty. I have made a reference to this issue in my recent book, Brick by Red Brick: Ravi Matthai and the Making of IIM Ahmedabad.

It does appear to me that the IIMs work backward from a high average salary in determining what should be the intake of students. Whereas the need of the country is for a large number of MBAs. In recent years, the IIMs have had to increase their capacity by 54% consequent to the introduction of OBC quotas- this is the most significant scaling up in the IIM system since they were set up! So they could do it when they were driven to by law. Why can't they scale up on their own as well- and provide better justification for the land they are using?

Thursday, July 21, 2011

How do we price higher education?

I continue with the theme of pricing of higher education on which I had a couple of posts earlier. We need to ask ourselves: why do fees in higher education keep rising at a rate ahead of inflation in many countries? In b-schools in India, for instance, fees have doubled or tripled since 2007.

It turns out that the explanation is a straightforward one: institutions of higher education keep raising their fees because there are enough people out there willing to pay these. There is a mismatch between supply and demand and supply is not easily created because it takes years for a new institution to establish its reputation. In these conditions, universities and colleges get away with anything - if they are free to do so- and have no incentives to reduce costs or improve efficiency.

That must also explain why the production technology has not changed one bit in higher education for several centuries now- it's still the teacher using chalk and blackboard or, at best, slides and power point presentations. Quality is seen as a function of keeping the student-teacher ratio as low as possible.

The only way in which fees will be contained is if institutions are run by the state and are duly subsidised. If we leave it to the private sector, we must expect fees to escalate. We have to choose between the US model where private institutions are entirely free to set fees and the German model where the accent is on modest fees or free tuition and universal access. I argue in my recent ET column, Soaring costs of higher education, that the latter would be preferable in Indian conditions.

Wednesday, July 13, 2011

Britain struggles to price education correctly

I wrote yesterday about the contrarian move in Germany to make university education free. The UK moved the other way in Tony Blair's time by opting for more market-driven fees. The new government opted to stay the course, last year allowing universities to raise the maximum fee from £ 3375 to£ 9000 with effect from September 12. To the dismay of the government, most universities have veered towards the maximum, according to the Economist.

How come? One would have thought fee would vary depending on quality. I suppose mediocre institutions get away with the same fee because of the scarcity value of higher education: there is isn't enough competition and entry and exit are not really free. We see in India as well. The moment the IIMs raised their fee, so did other b-schools including those that are not a patch on the top IIMs. They know that even at absurdly high fees, there will be enough takers in the Indian market.

Now, the British government wants to introduce differentiation in the market. It has come up with two ideas. One, higher quality institutions will be allowed to expand as much as they like (higher quality being defined by the number of applicants with a certain number of A grades). This, it is believed, will force mediocre institutions to drop their fees in order to attract clever students. Secondly, 5% of all places will be reserved for institutions that charge £ 7500 or less. This latter, of course, assumes that capacity is sufficiently elastic at the cheaper institutions.

Will these measures work? I doubt it. Leaving aside a handful of top institutions, quality for the rest is rather hard to define. Besides, students will opt for institutions that are closer to their place of residence, other things being broadly equal. In other words, the link between quality and fee will not be as strong as expected and the gap between supply and demand in higher education will remain acute given that more and more people aspire for university education.

Right now, it is the government that makes available loans to students, not banks. Higher university fees only spell higher bad debts for the government0- at the best of times, the government finds it difficult to collect repayments. In other ways, the government's subsidy burden will go up. Whether transferring more of the subsidy burden from the private sector to the government will improve quality is doubtful- quality is not a function of fees alone, it is a function of overall funding and the broad ecosystem as well.

Tuesday, July 12, 2011

Germany opts for free tuition

Continental Europe can often surprise us in a big way. Most countries are going the way of increasing fees for university students. The model is market-based fee financed by loans (which may or not be subsidised by the state). Not so in Germany, according to a report in the Economist.

Many German states are opting for free university education. Fees in Germany generate revenues of only € 1.2 bn compared to total expenditure of € 36 bn. Private sources account for only 15% of revenues in German universities compared to two-thirds in the US. It could well be that not getting students to pay may be affecting the quality of universities- it's difficult to finance research and other activities of top quality without better funding. But education is inclusive.

Which model is better - the American model which imposes an enormous loan burden students but can produce very high quality or the German model which results in universities of lower quality but provides the widest access? The German economy is doing fine. Even though research in Germany may not be cutting edge, German manufacturing is known for quality. I leave it to you to judge.

Wednesday, July 06, 2011

India's services-led growth

Two aspects of India's services-led growth are striking. One, modern services, comprising IT, financial services and communications have taken off at lower per capita levels than in the OECD economies. Two, there has been rapid growth in traditional services, most of which have been untouched by reforms.

Modern services in India should continue to grow thanks to tradability of these service: India's great good fortune that these services started developing in India precisely at a time when many of them became exportable. Traditional services, such as railways, hotels, trade too have plenty of potential. Hence, services can continue to be an engine of growth in India.

Can they absorb enough of India's labour force? Quite possibly, yes. When you say 'services', most people think IT and programming. They believe services require high levels of training. This is not entirely true. There are plenty of jobs opening up at call centres and data entry centres, jobs that don't require very high levels of training. Financial services and communications also are throwing up jobs in large numbers (on the sales side, for instance) where training required is not very high. So services-led growth can boost employment as well, although it cannot completely substitute jobs created by manufacturing.

More in my ET column, Can services-led growth continue?

Sunday, July 03, 2011

IIM Indore five year programme

IIM-I's five year programme in management has drawn a response from the AICTE. The regulator believes that IIM-I can't offer a degree at the end of the third year, as promised, because it does not have the power to grant degrees. IIM I has clarified that it will grant a diploma as all the IIMs do with their post-graduate programme. (The IIMs are not covered by any Act of parliament, unlike the IITs, and hence do not have the power to grant degrees).

IIM-I's 3+2 offering (undergrad courses plus MBA), after the 12th standard, will be watched with interest. It is the first ever attempt by an IIM to move into the undergrad space. It also offers students an entry into the MBA programme without facing the huge odds of CAT. The undergrad courses will cover, not just business management, but several elements of liberal arts, history, literature etc, as also IT.

There has long been talk, endorsed by the Yash Pal committee, of the IIMs becoming full-fledged universities. The issue has been one of scale as well as scope. If IIM-I can show that it can deliver quality in a broad-based undergrad programme, it will be a feather in its cap and it could be the forerunner of similar programmes from others, including the IIMs.