Introduction

It seems to me that (i) many Singaporeans are forking out significant amounts of money because their children need to study overseas, and (ii) their children are not inherently stupid or undeserving of a university place... I do not know the costs of, say, a Singaporean studying in Australia, UK or the US today, but I imagine that SGD $150,000-$300,000 is a fair estimate for the costs over 3 or 4 years of undergrad studies. That is a large sum

- Mr Wang says so

This article is related to Hui-Chieh's piece "The Impact of International Students in NUS/NTU/SMU" and the many comments that article generated. This issue never fails to stir emotions, especially among many Singaporean who fail to secure places in local universities and have to go overseas. It seems clearly unfair that they are denied the same subsidy that local undergraduates enjoy.

Let me examine this issue from the economic perspective. While Hui-Chieh prefers to use data extensively, this article is more theoretical in its methodology as I am not really an empirical kind of person [editor's note: to be honest, I'm a 'theoretical kind of person' myself, but empirical matters call for an empirical approach]. Most of the terms and arguments used are what JC economic students are taught from their first year, so as to facilitate comprehension.

In this article, I will be addressing the following questions:

1. Why is the government subsidizing university education?
2. What is the current method of subsidy used?
3. What problems does this method cause?
4. Would alternative methods be better?

Absent any form of government intervention, the economic agent would consume education to the point where the marginal benefit of an additional year of education is equal to its marginal cost or the price.

The standard reason why government subsidize education is that, often, the individual fails to take into account that society also benefits from her being educated, and in a manner that is not reflected in her wages, especially if she is educated "in the right sector" such as the current flavor of the month, the life sciences.

This is the externality argument, which is the main reason why government often subsidize science and engineering education in NUS, to the point where the fees that undergraduates pay is the same whether you enroll in those faculties or in the Arts and Social Sciences. This is also the reason why many prestigious scholarships are usually restricted only to those who wish to study PPE (Politics, Philosophy and Economics) or the life sciences.

For the record, let me state that I am very skeptical about all these externality arguments for subsidizing university education, especially when the government is the one choosing the sectors for Singaporeans to enter.

To me, the only justification for the fairly extensive sort of central planning that we see here is due to the merit good justification, where the government deemed particular sectors as desirable for Singaporeans to go into, regardless of whether there are really external benefits. However, as the central thesis of this article concerns how we might subsidize university education rather than why we should subsidize, and since economists are mainly concerned more with positive rather than normative issues, these issues are peripheral; so I will not discuss them further here, interested readers could email me for more discussion or add their comments on this issue below.

What is the current method of subsidy used?

In the three local universities, NUS/NTU/SMU, the general subsidy method is what economists would call a fixed quantity subsidy. A full understanding of this concept requires knowledge of the indifference curve analysis which is unfortunately no longer part of the GCE 'A'-level syllabus.

To put it in plain English, you are given the subsidy if and only if you enroll in any of these three universities. The moment you choose to enroll in foreign universities, whether those in Singapore or those outside, you have to confront the full cost of university education.

What problems does this method cause?

Like all forms of subsidies, a fixed quantity subsidy will cause consumption of university education to increase. If it is indeed true that university education has positive externalities, this is the result that we want.

However, this subsidy method distorts efficiency in two ways: at the consumer level and at the provider level.

All subsidies distort consumer preferences. More specifically, this method of subsidy raises the opportunity cost of overseas education since you lose much more in terms of other goods if you either ignore or fail to get the subsidy and choose to pay for your education abroad. The presence of the subsidy means that, to a large extent, most Singaporeans will not consider overseas education, or even foreign universities with a Singapore campus such as the James Cook University or University of New South Wales, unless they have a very strong preference for it. The opportunity cost, like what Mr Wang said above, can be a total of more than S$150,000, and almost S$500,000 for a 4 year US degree (thanks to a referee for pointing this out).

Thus, subsidies create a form of captive market for local universities. As a result, these universities may run into X-inefficiency problems [editor's note: the wikipedia entry on this concept is here]. If you accept this conclusion, you now have an economic argument on why local universities often do not provide good customer service. There were many horror stories when I was studying in NUS years ago about undergraduates being treated rudely or sent on a merry-go-round by the admin staff whenever something goes wrong in their module allocation or other issues.

Maybe times have changed now since SMU's entrance into the market. However, it is not too clear whether SMU's entrance into the market did much to improve X-efficiency since they do not offer exactly the same courses as those from NUS and NTU. Thus, the undergraduate might again find himself in a situation where there is little competition among local universities.

Would alternative methods be better? Enter the tertiary education voucher

The criteria "better" needs to be clearly defined, better for whom? If we are concerned for the welfare of the student, a better subsidy would take the form of an educational voucher.

Instead of giving the university a subsidy based on how many Singaporeans it admits, we now give the subsidy to the student for her to claim it when she first enrolls in tertiary education.

How it works is as follows: If university education costs a total of S$100,000 for 4 years and, for whatever reason, we want to subsidize 75% of the cost, we give $75,000 to every Singaporean 16 year-old student as a voucher. This voucher can only be redeemed if she enrolls in tertiary education and cannot be exchanged for cash.

This 16 year-old student, at the end of secondary 4, now has a decision to make. If she intends to end up with a degree, should she take the JC path or the polytechnic path?

If she goes by the "JC route", her voucher does not decrease in value since JC is still considered as secondary education. She will still pay the same subsidized fees as the current system when she enrolls in NUS, for example.

If she takes the polytechnic path, her voucher value will decrease by the amount that all polytechnic students currently pay. This is to reflect that polytechnic education is considered tertiary education and hence, by opting to go to a university through the polytechnic, she will have to pay more when he finally enrolls in NUS.

But here is the important feature: both types of students can use the same voucher for overseas university. This means that if a JC student chooses to enroll in University of Queensland instead of NUS, she would enjoy the equivalent subsidy that she would have gotten if she enrolls in NUS!

Evaluation: Advantages

This policy has several advantages. From the equity perspective, it will make it explicitly clear to polytechnic students that polytechnic education is very different from a JC education. If they want two bites at tertiary education, one at the polytechnic and another at the university, they will have to pay more.

From the efficiency perspective, the local universities (NUS/NTU/SMU) will face even greater competition for students, now that students can enjoy the subsidy when they are overseas. This will reduce x-inefficiency problems, or, in plain English, result in better customer service and other benefits of competition.

Finally--and this part can only be shown through indifference curve analysis--all consumers are better off under this type of subsidy compared to the present fixed-quantity subsidy. The intuition is that consumers can now choose which university to enroll in based on their educational preferences so we do not distort those preferences as much as before.

Evaluation: Disadvantages

Firstly, some people might argue that the cost would be prohibitive to taxpayers as more students would qualify for the subsidy under the voucher scheme. That is certainly true but the essential equity question is why are we making parents of children who wish to go overseas for a university education foot the entire cost of an overseas education. This is despite the fact that the subsidy local university students enjoy currently are from the taxes that these parents pay too.

A second concern would be the problem of quality control. Well, it would be easy to start off the voucher scheme with a list of maybe 20-30 overseas universities with reputable quality, such as Yale, U Cambridge, U Queensland, etc, and a student would need to produce an acceptance letter from them to MOE in order to qualify for the subsidy. Another similar concern is that we might get too many lawyers, doctors, etc. if we move to a voucher scheme. Well, you can always allocate education vouchers in a way that limits the number of each profession according to our manpower needs, in the same way as NUS is currently doing with regards to places in medical or law school.

A third concern is that overseas universities would be benefiting from taxpayer's money through the voucher scheme. They might even set higher fees if they realize that Singaporeans are under the voucher scheme. Well I think the effects would be minor. The cost of an overseas education is not just the direct tuition cost. Besides, any overseas university attempting to raise their fees without any quality improvement would run the risk of a Singaporean choosing another university, which might be NUS. The basic philosophy behind the voucher scheme is that every student who qualify for a tertiary education be given the same subsidy. It is then up to him to decide where to seek an education that best suits his needs. We should trust that individual's decision making abilities and not think that, by restricting him in some ways, we can make him better off.

A final and, in my opinion, perhaps the most important concern to the government is that, more Singaporeans will go overseas and not come back. Currently, many Singaporeans who are overseas are there because they are under scholarships which bond them to return to Singapore. Consequently, some people may even argue that scholarships will lose their prestige, given the voucher scheme.

These questions seem to be beyond the scope of economics, but I would make a few comments. We have already learnt that many organizations are cutting back on scholarships. If this is true, the "prestige" reason for scholarships may no longer be a significant issue. Furthermore it is also debatable whether Singapore benefits, in the long run, in denying Singaporeans like Hector Yee, who was in the center of the bond-breaking controversy many years ago, the opportunity to participate in the global labor force.
References

Note: The two economists who are experts in this field are Milton Friedman and Caroline Hoxby. You could google for their names or used these two links:

http://www.friedmanfoundation.org/index.html

http://www.educationforum.org.nz/documents/mediareleases/Hoxby_report.htm