Transcript Presentation-27-March

The Recession and Business Schools
ANZAM Institutional Members’ Meeting
March 27th, 2009
Professor Nigel Healey
University of Canterbury
Overview

The financial crisis

The impact on the real
economy

Potential implications for
Australasian business schools
The financial crisis
Initial Trigger
Pre-Conditions
US housing
downturn
Sub-prime
mortgage losses
Booming credit markets
New structured credit
products
Uncertainty about extent and location of risk
Impacts
De-leveraging
Movement to safe liquid
assets
Effects of the financial crisis…
 On the financial sector:
 Massive losses/write-downs
 Risk aversion and liquidity preference
 Global de-leveraging
 Large asset price falls
 Credit expensive and scarce – “tax the living to bury
the dead”
Effects of the financial crisis
 On the real economy:
 Erosion of business and consumer confidence
 Reduced investment spending (credit, confidence, risk
appetite)
 Reduced consumer spending (negative wealth effects,
confidence, fear of unemployment)
 Reduced global demand and commodity prices
Countries impacted in different ways
Factors impacting
economies
USA
UK
Euro
Japan
Asia ex
Japan
Bank losses
Crisis a product of credit boom and financial engineering
Credit restrictions
Export demand
Commodity prices
Aust / NZ
…and growth outlook deteriorating
everywhere
Consensus
forecasts
2009 GDP growth forecasts (percent)
At Dec 08
At Feb 09
Change
Australia
1.6
0.4
-1.2
Asia x Japan
3.9
0.9
-3.0
USA
-0.7
-2.1
-1.4
Japan
-0.2
-3.8
-3.6
Eurozone
-0.5
-2.0
-1.5
UK
-1.3
-2.6
-1.3
NZ
0.2
-0.9
-1.1
Potential implications for Australasian
business schools
 Endowment income – b-schools as a cash cow
 Executive education
 International enrolments
 Public funding
 Faculty recruitment and retention
 Societal attitudes to business schools
Potential implications for Australasian
business schools (1)
ASX All Ordinaries
 Loss of endowment income
 Stock market prices - down
50%
 Interest rates down from
8% to 3%
 Alumni giving
 B-schools as the cash cows
– envy over salary loadings
Potential implications for Australasian
business schools (2)
 Executive education
 Short courses –open vs in-company
 Executive (company-sponsored) MBAs
 Consulting
 High-margin, but pro-cyclical
Potential implications for Australasian
business schools (3)
 International enrolments depend upon:
 Availability of university places at home
 If demand exceeds supply, some of the excess
spills over
 Cost of study abroad
 Ability and willingness to pay for tuition and living
costs
 From savings
 By borrowing
 By students working in host country
Availability of university places at
home: the potential demand
Tertiary school-age population
China
India
Nigeria
140,000,000
120,000,000
100,000,000
80,000,000
60,000,000
40,000,000
20,000,000
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: UNESCO; Economist Intelligence Unit
Availability of university places at
home: the spillover effect
Total international students China
Total international students India
Total international students Nigeria
350,000
325,000
300,000
275,000
250,000
225,000
200,000
Estimated number of international students enrolling
in undergraduate and postgraduate study in
Australia, Canada, France, Germany, Japan, New
Zealand, United States, United Kingdom
175,000
150,000
125,000
100,000
75,000
50,000
25,000
0
1999
2000
2001
Source: Economist Intelligence Unit; National Statistical Offices
2002
2003
2004
2005
2006
Availability of university places at
home: the expanding supply
Chinese enrolment rates (%)
120
100
80
Primary
Junior Secondary
60
Senior Secondary
40
Tertiary
20
0
1990
1995
2000
2005
2006
Cost of study abroad: exchange rates
depreciations in Australia, NZ and UK
A$
NZ$
GBP
Ability to pay from savings: the Hang
Seng Index
Hang Seng Index
Nikkei Index
Ability to pay by borrowing: risk
aversion and the credit squeeze
400
US Congress
passes TARP
package
350
US 5-year CDS index
300
Lehman Brothers
files for bankruptcy
Source: RBNZ
250
Bear Stearns
aquired by JP
Morgan with Fed
assistance
200
150
100
BNP Paribas subprime
funds frozen; German lender
SachsenLB requires credit
line
US Treasury bails-out
Freddie Mac and Fannie Mae;
Emergency loan from the
Federal Reserve to insurer AIG
50
0
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Ability to pay by borrowing: Asian
banking system solvent
US$ billion
US$ billion
1200
1200
Losses, Asia
Losses, Europe
1000
1000
Losses, Americas
Total new capital raised
Source: RBNZ
800
800
600
600
400
400
200
200
0
0
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09 (to date)
Willingness to pay: deteriorating
growth and employment outlook in Asia
 Falling exports to US, Europe
 Slowing economic growth (China), recession
(Japan)
 Rising unemployment
 Growing fear of unemployment
 Reports of international students failing to
return due to economic hardship in the family
Ability and willingness to pay: fewer
jobs while studying and on graduation
 Many international students have:
 Part-time jobs in term-time
 Full-time jobs in the holidays
 Right to full-time work in host country on graduation
 In-country employment covers part of
living/tuition costs
 Employment prospects in host countries
deteriorating quickly, international students
disproportionately affected
 Employment prospects in home country also
worsening, return on investment reduced
Factors influencing international
student demand: summary
Availability of university places at home
Cost of study abroad
Ability to pay from savings
Ability to pay by borrowing
Willingness to pay – uncertainty
Ability to pay – jobs in host country
Willingness to pay – jobs on graduation
Potential implications for Australasian
business schools (4)
 Pubic funding
 Lessons from US state schools, with balanced budget
constitutions
 Pressure on government expenditure as deficits fuel
public debt, debt service costs
 Political inclination to see pain of recession shared –
caps on public subsidies for domestic tuition, moral
suasion in terms of pay settlements
Ita
ly
Fr
an
ce
G
er
m
an
y
Sp
ai
n
In
di
a
EU
Ca
na
da
Ja
pa
n
UK
Ch
in
Si
a
ng
ap
or
e
Ru
ss
Au ia
Ne stra
lia
w
Ze
al
an
So
d
ut
h
Af
ric
G
lo
a
ba
lt
ot
al
US
Source: RBNZ
The price of fiscal stimulus packages
Fiscal expansions post crisis (percent of GDP)
12
10
8
6
4
2
0
23
Potential implications for Australasian
business schools (5)
 Faculty recruitment and retention
 Demographic timebomb – baby-boomers (1945-60),
massification and Asia
 Competition from private sector and salary inversion
 Short-term:
 Shake-out in corporate sector
 Collapse in competition from US schools
 Offset by exchange rate depreciation
 Medium-term: increase in attractiveness of
academic careers (ICT post tech-boom, but
SUVs post-oil speculative bubble)
Potential implications for Australasian
business schools (6)
 Public attitudes to business schools
 Enron, WorldCom
 GFME, Corporate Social Responsibility
 Quants vs bankers
 Nerds vs Suits
 Student demand for vocational business
degrees rising, now 20-25% of UG – time for a
correction?
Conclusions
 Universities – and so business schools –
traditionally counter-cyclical
 Now many sources of revenue non-public and
cyclical:
 Endowment income, executive education,
international education…
 ….even possibly public funding
 Short-term gains in hiring
 Potential damage in terms of public attitudes