The Recession and Business Schools ANZAM Institutional Members’ Meeting March 27 th, 2009 Professor Nigel Healey University of Canterbury

Overview  The financial crisis  The impact on the real economy  Potential implications for Australasian business schools

New structured credit products Movement to safe liquid assets US housing downturn De-leveraging Initial Trigger Pre-Conditions Impacts Sub-prime mortgage losses Uncertainty about extent and location of risk Booming credit markets The financial crisis

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 USAUKEuroJapanAsia ex Japan Aust / NZ Bank losses Credit restrictions Export demand Commodity prices Crisis a product of credit boom and financial engineering

…and growth outlook deteriorating everywhere Consensus forecasts 2009 GDP growth forecasts (percent) At Dec 08At Feb 09Change Australia Asia x Japan USA Japan Eurozone UK NZ

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)  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 ASX All Ordinaries

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

Availability of university places at home: the spillover effect

Availability of university places at home: the expanding supply Chinese enrolment rates (%)

Cost of study abroad: exchange rates depreciations in Australia, NZ and UK NZ$ A$ 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 Source: RBNZ

Ability to pay by borrowing: Asian banking system solvent Source: RBNZ

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

23 The price of fiscal stimulus packages Source: RBNZ

Potential implications for Australasian business schools (5)  Faculty recruitment and retention  Demographic timebomb – baby-boomers ( ), 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