Chapter 10. What Happens When 700 Million Students Want Extra Help?

“If I am walking with two other men, each of them will serve as my teacher. I will pick out the good points of the one and imitate them, and the bad points of the other and correct them in myself.” Confucius spoke these words more than 2,000 years ago, yet their wisdom still holds true. Moreover, this sage advice captures the approach to globalization from the most successful emerging markets. Simply put, countries across Asia, along with a few in Latin America, have borrowed what works (open trade, freer markets, competition) from the wealthy nations and have discarded what has not worked (profligacy) from their own economic models. This approach has proven successful to date, because fewer emerging markets became ensnared by the consequences from the latest episode (there was the Asian Financial Crisis of the late 1990s though) of debt-riddled financial speculation that nearly dismantled their developed-market counterparts.

This method of learning by example may also prove successful in tackling the remaining problems that create medium-to-long-term obstacles in the continued progress of the emerging-market economies as they reach for higher standards of living. For starters, many of the key emerging markets are confronting the divide between the competitiveness of their higher-education system versus levels that were long ago achieved in the developed markets. To be sure, the global landscape for schooling and education has long been dominated by the higher-learning institutions of the West, including all the famous Ivy League schools of the United States. American colleges and universities have afforded the country a longstanding and nearly unparalleled competitive advantage relative to approximately 90% of the remaining world. This advantage has played a notable role in creating the economic miracle of the United States, and its high standard of living that evolved over the course of the twentieth century. In contrast, much of the developing world lacks this bedrock of higher education. For generations, these developing countries have sent their best and brightest to study in the United States. In this respect, for developing markets such as China, Brazil, and India to continue their forward march toward an increasing standard of living and higher levels of prosperity, they must find ways to narrow the gap between their workforces and those of the developed world. One mission-critical element of this strategy is strengthening the educational resources of their own nations. If this is not achieved, these markets will eventually encounter capacity constraints on the level of value-added components and processes that can be added to their economies. These constraints in turn could stall the countries’ ability to create greater per capita wealth and increase their future standards of living. Table 10.1 shows the divide that separates key emerging markets from the top decile of countries as they are ranked by their competitiveness in higher education.

Table 10.1. Higher Education Competitiveness Ranking

There is some good news for these nations. Thanks to a confluence of technology and globalization during the past ten years, these markets have a unique opportunity to close the gap at a faster pace than could have been imagined a few decades ago. The technology available today has provided a profound push that favors these markets. Rather than adding to physical infrastructure through costly investments, and undergoing years of construction to catch up with the developed markets, the emerging markets can connect their people and share valuable information at a fraction of the cost compared to a few decades ago. Through this evolution of rapid communication, it is unnecessary to construct bricks-and-mortar learning centers, or house students in a university, if the only goal is for them to learn and advance their minds and skill sets. In regards to education, many of these countries have made strides since the 1990s. They have been dedicated to improving educational resources well in advance of developments in technology that now make the process even cheaper and easier.

The simplest example comes from China, where the value of education is deeply embedded in the culture. This is true of many other Asian countries as well, thanks to the lasting and shared influence of Confucian doctrine that has spread across the region during the past 2,000 years. In the Confucian realm of influence, education is prized and translates prominently into various perceptions of success, self-worth, and achievement in society. In fact, from around the Sui dynasty of the seventh century through the Qing dynasty of the twentieth century, the only surefire way for the Chinese to advance in society was to take and pass an academic-based civil service examination called the Keju. Passing this test could elevate Chinese without any form of socioeconomic discrimination into the various ranks of the state bureaucracy. This was a surprisingly meritocratic practice in a time of human history dominated by kings, emperors, dynasties, and bloodlines. The exam had three levels: local, provincial, and palace. Passing these hierarchical exams could bring not only power through government appointments to rule, but also wealth, and titling that could be passed to offspring. As they say, membership has its privileges—and the privileges of achieving these ranks were material. Because of the high societal value given to individuals who passed the tests, the country in time became obsessed with studying for and hopefully passing the civil service exam. The exam was administered annually for 1,299 years. Suffice it to say that the concept of studying to get ahead is ingrained in Chinese culture. In the twentieth century, however, this system of studying to get ahead became sidetracked by foreign invasions as well as the social and political upheavals that resulted from the initial communist rule. China’s embrace of education was pried critically loose by the devastating effects of the Cultural Revolution during the late 1960s. This led to school closure and the persecution of intellectuals for several years. When Deng Xiaoping reinstitutionalized the Chinese obsession with education through a new set of college entrance exams in the late 1970s, the Chinese in particular had much catching up to do following the temporary dismantling of all formal education. From a broader perspective, since the 1990s, when China, India, Brazil, and many other emerging markets began initiating more open trade policies, these policy changes stimulated competition among the people in their economies. This led to accelerating enrollment in higher education, through attending college or other postsecondary institutions. The rise in enrollment in China has been particularly robust. The percentage of students enrolled jumped exponentially from 3% in the early 1990s to 23% by 2007, as shown in Table 10.2.

Table 10.2. Tertiary School Enrollment Rate as a Percentage of the Total

Spending on Education Takes Precedence in Many Emerging-Market Households

The strong growth in postsecondary school enrollment underscores a tangible desire in the emerging-market countries just mentioned to become more competitive in the global economy supported by the pursuit of learning and education. This phenomenon is also revealed in various other indicators, such as the amount of money spent on education taken as a proportion of household income. Specifically, Chinese parents spend a considerable amount of their household budget on the competitive positioning of their “Little Emperor,” as the only child in the family has come to be known. From the Chinese viewpoint there is no better way to ensure their child’s success than to focus on his or her education. Backed by thousands of years of practice in Confucian principles, it is not surprising to find that the Chinese spend more of their household income on education than their American counterparts (see Figure 10.1).

Figure 10.1. Education as a percentage of household consumption

Source: China Statistical Yearbook, United States Department of Labor

Figure 10.1 shows that as a percentage of the household budget, the Chinese have a remarkable dedication to spending on education. Even outside of China, though, basic household surveys among the people of developing nations across Asia reveal a shared, intense commitment to education. Based on the recently initiated Global Purchasing Priorities Survey by MasterCard, citizens of both China and India list spending on education as one of their top three priorities. For instance, in the survey for India, an overwhelming 86% of married people polled placed their children’s education as the number one purchasing priority. This priority ranked well ahead of buying, renovating, and upgrading their property. Back in China, this dedication to spending on education is yet another important driver behind the high personal savings rate found among the Chinese. While the U.S. lavishes more money on public education than any other country, about 6% of GDP, China’s public expenditure is actually much smaller, approximately 3% of GDP. This has important ramifications. For starters, because of the Chinese people’s cultural preference for education and the outsized demand borne from this preference, the public services provided by the state represent a supply deficit versus the level of demand in the market. The Chinese have a large and widely unmet appetite for educational resources, compared to what is available from public-funded schooling provided by the government. To bring this relationship into perspective, Figure 10.2 compares supply and demand for higher learning in China, as measured by the growth in the number of enrolled students relative to the growth in the number of higher-learning institutions. Furthermore, we can draw a comparison to the same relationship historically found in the United States.

Figure 10.2. Growth in enrollment and institutions of higher learning in China, 1978 to 2007 (left) and the U.S., 1975 to 2005 (right)

Source: China Statistical Yearbook, U.S. Census Bureau Statistical Abstracts, 2008, 1978

Without question, the growth in college enrollment is sharply outpacing the growth in the number of colleges in China during the past 30 years. Comparatively speaking, in the United States the number of institutions has largely kept pace with the growth in enrollment. The difference likely is because of expanding student bodies within the existing schools. In China, however, where the education market has not kept pace with demand, the number of students studying abroad has exploded. It has grown at a compounded rate of 19.3% during the comparable time periods described earlier. Because of this top-level shortfall of resources relative to other nations, and the intense competition for coveted educational institutions and services, the Chinese have been saving more of their income to dedicate spending to the hopeful success of their Little Emperors. In fact, the parents have a vested interest in seeing their children succeed, because it is also a Chinese custom for children to care for their parents as they age. With that said, these parents have incentives to see their children become financially successful, ranging from altruistic love to retirement planning. For many economists who puzzle over what may help unlock higher domestic spending in the future, the ensuing growth in the education sector and parents’ willingness to spend in this category may be one of the keys. Because of the intense competition in the system, the Chinese look for effective ways to distinguish their child in the race for excellence and standing in the classroom. This has led to a demand for goods and services that are not provided by the state, but instead have been provided by the private market or, as we mentioned earlier with the studying abroad, in markets outside China, depending on people’s age and circumstances. More important than the trend toward studying abroad has been the continuing advance of market-based solutions within China. Entrepreneurs have a significant opportunity to step into the supply void and create useful goods and services that aid these students’ success rates. The solutions that have come forth have not necessarily followed traditional models of education known and practiced for centuries in the West. Instead, technology has been embraced as an innovative solution that can also be proliferated with relative ease.

The Role of Technology and Innovation

The Chinese have been quick to use the Internet as a conduit for education. From 2004 to 2007 the number of students enrolled in Internet-based courses increased by 31%, from 2.4 million students to 3.1 million. The utilization of Internet-based education is in keeping with the broader surge in Internet usage across the country. China actually became the world’s largest country of Internet users in 2008 with 298 million users, a 42% jump from the 2007 level (see Figure 10.3).

Figure 10.3. Internet users in China (in hundreds of millions)

Source: CNNIC

Despite the impressive record of Internet usage growth in China, it is estimated that still only one out of every four Chinese has Internet access, leaving much room for future growth. The growth in Internet usage, combined with the intense competition for educational resources among Chinese students, has led to a vibrant market for online-based education. By some estimates, the market is expected to reach nearly $6 billion in U.S. dollars by 2011, from just $1.5 billion in 2004 (see Figure 10.4). The use of online education is a natural fit for the Chinese for a few different reasons. First, given the general paucity of physical school resources, capacity can be added to the learning system at a low cost, and with relatively instant lead times compared to adding capacity in the real estate format. Additionally, distance learning through television was already commonly practiced in China before the Cultural Revolution upended the entire educational system for several years, so this is not an unfamiliar format.

Figure 10.4. China’s market for online education (in billions of U.S. dollars)

Source: China Distance Education Holdings

10 Million Students Applying for 6 Million Spots in College—No Pressure

The growth in online education has been impressive and tends to capture the market for courses in a number of subjects, as well as the audience for tutoring and test preparation. The drive toward academic competitiveness begins at an early age in the Chinese system and often starts with learning English, which is seen as the language of business in China. Many parents believe that if their children learn English at an early age, they will gain a competitive edge and increase their future marketability as a student beyond the secondary level (see Figure 10.5).

Figure 10.5. China’s market for English language training (in billions of U.S. dollars)

Source: China Education and Training Industry Report

In addition to English classes, the market for tutoring is important as parents attempt to bolster their children’s classroom performance. Tutoring is seen as advantageous because the curriculum in the public school system is highly regimented and rigidly prescribed. On the other hand, tutoring in the private market can be highly customized to the student’s skill level and learning style. Because of these advantages, the market for tutoring services in China has also grown at an accelerated pace, as shown in Figure 10.6.

Figure 10.6. China’s market for tutoring (in billions of U.S. dollars)

Source: Morgan Stanley

After the parents have invested in English classes and after-school tutoring, hopefully the child is in a solid position to enter an institution of higher learning. Even if that is the case, the student must pass the hand-wringing, nine-hour-long sole determinant of his or her college acceptance, the Gaokao test. Although somewhat similar in concept to the SAT in the United States, this one test is for all the marbles, rather than another factor to be weighed alongside GPA. This three-day-long annual exam tests an average of 10 million students for approximately 6 million spots in college. Not surprisingly, the Gaokao seems like a modern reenactment of the Keju, and its importance cannot be overstated. This test can reasonably be seen as a cause of collective nationwide anxiety, and sleeplessness among the participating students and their parents. Preparation for this test is paramount to any prior effort in the classroom and can incorporate some relatively expensive measures, according to a June 2009 article in the New York Times, “China’s College Entry Test Is an Obsession.”¹ Parents have gone so far as to pay to have their children study in hospitals while hooked up to oxygen machines in the hopes of improving their memory retention. One unfortunate child profiled in the article failed the exam. “My mother was very angry. She said, ‘All these years of raising you and washing your clothes and cooking for you, and you earn such a bad score.’ I cried for half a month.” Given the pressure to succeed on this exam, it is no wonder that the market for Gaokao preparation has been thriving. Figure 10.7 shows the steady growth in the market for Gaokao retakers—students who use test preparation services before their next sitting for the exam.

Figure 10.7. China’s market for Gaokao retakers (in billions of U.S. dollars)

Source: New Oriental Education

Continuing Education

For students who are fortunate enough to advance past the Gaokao exam and attend college, the bar has been increasingly raised toward obtaining degrees beyond the undergraduate level. This pressure to advance is heavily stimulated by the empirical translation of higher education into higher salaries (see Figure 10.8).

Figure 10.8. Pretax income by degree in renminbi (RMB 000)

Source: ChinaHR

Recognition of this market driver has helped propel a spike in the number of enrollments for both master’s degrees and doctorates, as shown in Figure 10.9. Obviously, obtaining these degrees requires more study, outside-of-the-classroom preparation, and test taking. In other words, advanced degrees provide yet another market opportunity for private study guide providers and tutoring services.

Figure 10.9. Enrollment for doctorates (left) and master’s degrees (right)

Source: China Statistical Yearbook 2008

In addition to the sharp rise in enrollments for these degrees, the steady growth in undergraduate enrollment over the past several years bodes well for future demand for advanced degrees. However compelling the market for degree-based educational services may be, we should also appreciate the scope for continuing education in the job market as it relates to vocational skills. In keeping with the trend, a large and growing market related to professional licensing and certification also is riding this secular wave of self-improvement. The market for professional certifications and licenses, ranging from CPAs to healthcare professionals, is large and rapidly expanding, as shown in Figure 10.10.

Figure 10.10. China’s market for professional education and test preparation (in billions of U.S. dollars)

Source: China Distance Education Holdings

The growth in professional testing and, for that matter, the number of professionals in a developing economy may be one of the clearest indicators of a progressing society. The number of lawyers and accountants in China is set to continue rising as the economy marches toward higher standards of property rights and universal accounting standards. Remarkably, in 1985 there were only 5,000 lawyers in China to service a population of over 1 billion. As pleasant as this sounds, it was actually endemic to a society where few property rights were conveyed to individuals. Since the market has adjusted to allow greater protection of property, the number of lawyers has risen to 150,000. Likewise, in the accounting profession it is expected that by 2013 about 90% of the world’s GDP will have adopted the International Financial Reporting Standard (IFRS). This will create a greater need for uniformly trained CPAs, who naturally must go about passing their host of exams. Effectively, as China and other key emerging markets continue to globalize, the composition of their workforce will require more professionals, who in turn take their fair share of tests.

The demand for professional education and advanced degrees is also creating stronger local markets for MBAs and other business curricula. This development will also play a critical role in the creation of domestic economies in the emerging markets as workers with increasingly sophisticated skill sets integrate into the economy. Within China, we can already see signs of progress on this front. In a recent global ranking of MBA programs by the Financial Times, a business school in Shanghai, China Europe International Business School (CEIBS), cracked the top 10 of programs worldwide for 2009, as shown in Table 10.3.

Table 10.3. FT.com Global MBA Rankings, 2009

Financial Crisis Portends Continued Growth in the Emerging-Market Education Services

In the coming years, we can expect to see an even greater representation of Chinese and emerging-market business schools joining what had otherwise been an elite club of schools reserved for Western institutions. To be sure, however, Wharton will be Wharton, and Harvard will be Harvard, and attending schools of this caliber will remain in high demand for the foreseeable future. If we take a comprehensive view of the global higher education market, though, it is easy to see that the underlying fundamentals portend high growth rates for years to come in the consumption of advanced degrees among emerging-market students. Where they obtain those degrees, however, may be changing for a number of reasons. In the past, high demand fed a constant pipeline of bright students from the emerging markets into Western institutions. In the present day, however, with the growing presence of outstanding institutions in their home markets, some demand from the emerging markets for higher education may stay home. To begin, these students already face the inertia of obtaining visas, and now borrowing from reluctant lenders post-financial crisis creates yet another obstacle toward attending these big-sticker-price schools. In any event, the Western schools would have a hard time matching the capacity growth of their emerging-market counterparts. The reason for this is simple. In no uncertain terms, the Western schools from top to bottom took it on the chin from the financial crisis and are actually contracting their resources. This creates an additional market opportunity for the local providers in the emerging market to expand their operations alongside the rising demand.

The easiest way to describe the current turmoil in the Western institutions is to start with their endowments. During the 2000s, many college endowments entered a phase of annualized returns that in retrospect was euphoric. These returns were courtesy of broader financial markets such as the stock market and the fixed-income market and its derivatives, as well as gains derived from hedge funds and private equity funds. The returns obtained during this stretch were a heady departure from the 6% to 9% annualized returns that most institutions had sought in prior decades. In January 2008 an article in USA Today titled “College Wealth Soaring”² captured the height of this feel-good era by reporting that the average college endowment earned 17.2% in the prior year. As if the stellar investment returns were not enough to fuel feel-good vibes among university administrators, they also had routine tuition increases, which most estimate at around 7% annualized. As much as Western students and their parents bemoaned this steady tuition inflation, they had easy access to credit, which so defined the first decade of the twenty-first century. It is estimated that about 50% of all U.S. students in institutions of higher learning fund their enrollment through borrowed money. They are no more immune to this steady inflow of tuition and endowment returns than their counterparts in the consumer realm. A wealth effect set into the university system that began to influence spending behavior. Universities expanded their current curricula or added new ones on the basis of this increasing wealth. These capacity additions in many cases added fixed costs to the school’s budgets. But the run of double-digit endowment returns and any spending excesses they may have caused relative to periods of more normal investment returns would not last. Only one year after the USA Today article, in January 2009 the Wall Street Journal ran an article titled “College Endowments Plunge”³ that described the relative carnage that the financial crisis had unleashed on these portfolios. The article illustrates the fallout of the financial crisis and shows how, in less than six months, the fortunes of these institutions were drastically altered. From July 1, 2008 through November 31 of the same year, college endowments across the board lost well over 20% of their nest eggs, as shown in Figure 10.11.

Figure 10.11. Average endowment investment returns, July 1 through November 30, 2008

Source: Wall Street Journal, National Association of College and University Business Offices, Common Fund, TIAA-CREF

The effects of this almost overnight decline in the worth of these institutions cannot be understated. For instance, as much as 40% to 50% of the annual budget can come from the endowment at universities such as Harvard and Princeton. An article titled “Cutbacks on Campus”⁴ published by Kaplan College Guide in August 2009 revealed that many of these schools had to quickly shift their budgets and planned capital expenditures. Harvard reacted quickly by canceling the planned construction of a $1 billion science complex. It also has cut the number of entering doctoral students, eliminated hot breakfasts from weekday menus, and curtailed student bus schedules. Princeton cut 5% of its head count and enacted caps on salaries above $75,000. Yale mandated a 7.5% salary cut and is also suspending construction on dormitories. The losses felt among schools have been compounded by at least a temporary absence from their big donors. In the past these people were looser with their own coffers, but now they have clammed up a bit after absorbing their own losses in the markets. As it turns out, the managers of these endowments committed the same errors as the mortgage borrowers and investment banks. They tied up too much wealth in illiquid assets while having short-term obligations, like keeping the school running. Even a year after the crisis, the Wall Street Journal continues to report on university endowments trying to unwind illiquid stakes in various financial instruments.

The situation is really no better on the public side of the college endowment spectrum. Not only did these schools get hammered in their endowments, but in many cases they are also being penalized by the weak finances prevalent among the state governments from which they also receive funding. One example comes from Florida State University. In Florida an estimated $5.7 billion budget deficit has prompted the university to propose cutting 21 degree programs, as well as closing campuses and laying off faculty. Not surprisingly, the situation is at least as bad in California, the poster child of weak government finances, where student enrollment for freshmen has been capped.

The discussion thus far has ignored yet another critical source of funding that is under stress—the financial state of the student population. Students are grappling with diminished access to funding tuition through borrowing, not to mention the generally high outlays for college education present under any funding scenario. In short, college is expensive, and borrowing the money for it has become more difficult. The borrowing behavior of students who attend U.S. colleges has mirrored the broader phenomenon of the credit cycle during the past decade or so. In 1993, only about 32% of students borrowed money to attend their university, compared to roughly 50% in 2008. The balance sheet weakness and consequential risk aversion among U.S. financial institutions has not spared this market for borrowers and reveals yet another unhealthy exposure of U.S. colleges to the financial crisis. Naturally, this says nothing of recent graduates. If they borrowed their tuition money, they are now saddled with, on average, $40,000 in debt while confronting a domestic job market that is not exactly teeming with opportunity. These most recent graduates quite possibly are facing the worst mismatch between their large investment and their probable payback period. The rate of tuition inflation has been 7%, while job market salaries and the general rate of inflation have been considerably lower. This combination has saddled these young adults with a disproportionate amount of fixed debt and interest payments relative to their near-to-medium-term earning power in the job market. The translation is that it may take recent graduates longer to pay down debt loads that are, on average, 70% higher than graduates accumulated in the early 1990s. So just as the U.S. consumer absorbed higher oil and gasoline prices through additional borrowing, college students offset rising tuition fees through borrowing.

The availability of funding to students as a variable in school selection should not be overlooked. In particular, this point might affect business schools in the U.S. that hope to continue attracting international students. Specifically, many U.S. financial institutions have backed away from lending programs that circumvent having an American cosigner on the loan. This would make it more difficult for international students to borrow for tuition. Regulation has also created impediments as the job market in the U.S. for these international students has been artificially shrunken by financial regulation connected to rescue funds. Financial institutions that have received bailout money and have laid off employees find it more difficult to hire H1B visa workers. This peculiar form of protectionism clearly limits the marketability of U.S. business schools to international candidates hoping to earn lucrative developed-market-level salaries in U.S. financial institutions. In sum, the strings attached to receiving bailout money have been bad news for universities that promote themselves to international students on the basis of their high-profile finance-related job placement for alumni.

So for many of the reasons just described, we can expect that the international markets creating the largest growth in demand for higher education are accelerating the process of developing their own resources to a level where they can attract their best and brightest to stay at home for their education. Over the longer term, as these schools attract increasing amounts of homegrown talent who in turn become successful in the global market, these same alumni will eventually endow their alma maters to levels more competitive with the developed markets. In other words, once this growth process takes hold in these local institutions, it becomes a self-reinforcing phenomenon. Finally, the point is that the market for education in emerging markets is entering an exciting growth phase. This will create a wide array of opportunities, including private-market solutions extending to students, societies, and investors alike. The competition for students in this growth phase will always include the premier Western schools. But in the absence of major expansion, the largest benefits should accrue to the local institutions and the service providers that surround them in the private market.

Education Plays and Their Fundamental Dynamics

As we turn to the actual market for securities in the education sector, we should highlight a few different attributes. First and foremost, the market for stocks in the education services industry can command higher valuation multiples than the broader market. The reasons for this phenomenon vary, but one of the clear advantages that these business models possess relative to the broader economy is their countercyclical nature. When this aspect is combined with a growing market, investors take notice and become more comfortable holding the names, and occasionally even bidding up their valuations in the market. Despite this backdrop, this phenomenon is not bulletproof. Investors in the market still routinely sell stocks for shortsighted reasons, no matter the group, and this group of stocks is no different. As a matter of background, historically postsecondary education receives a boost in revenue and enrollment during recessionary periods. Many unemployed individuals seek to improve their skill set and marketability or simply wait out a weak job market by attending school. Investors in the stock market have come to recognize the defensive attributes to the business model and often reward these stocks with higher valuation multiples.

The other attributes that help support steady valuations in the stock market lie in the high earning power of these businesses. This attribute can be clearly seen in the conventional methods of measurement, including operating margins and returns on capital. We can look at Standard and Poor’s 1500 Education Services Subgroup Index as an example. If we compare it to the S&P 500, the profitable nature of these education services companies versus the broader market is easily identifiable (see Table 10.4).

Table 10.4. Profitability Comparison Between Educational Services and the Broader Economy

In light of these characteristics, investors should take an opportunistic approach to purchasing shares in the education services stocks. On occasion these stocks become depressed from their historical valuations due to broader market declines, or possibly even sector rotation by some investors who are seeking to shift capital into pro-cyclical names as they attempt to time a turn in the economy. Whatever the reason, an opportunity can present itself when least expected. Because of these dynamics, education stocks are prime candidates for a purchasing technique utilized by Sir John Templeton. His idea was to create and maintain a wish list of stocks in his desk drawer that he turned to during periods of market corrections or turmoil. The benefit of this approach to purchasing education stocks—in particular, names from the emerging markets across Asia—is that they are backed by a long-term secular growth trend that should remain in place for many years. Up to this point we have highlighted the strong growth and relative underpenetration of the emerging economies into education. But we have not estimated how long this demand could persist. Figure 10.12 illustrates the backlog for demand in these emerging economies. We can see in data compiled by the UN that nearly 40% of the world’s population between the ages of 5 and 25 lives in China and India. In other words, there will be heavy demand for these educational services for years to come.

Figure 10.12. Global distribution of public expenditures on education, GDP, and population aged 5 to 25, by region and for selected countries, 2004

Reprinted with permission from UNESCO Institute for Statistics (UIS), Global Education Digest 2007

Identifying the scale of this fundamental growth backdrop is important because it gives investors confidence that, in the future, when the market and economy appear shaky, they can rely on the steady presence of a long-term secular growth trend in the for-profit education market that resists cyclical pressure. Fortunately, the stock market is considerably more volatile than this growth trend and should present opportunities over time. Additionally, because this area is poised for substantial growth over the coming years, we can expect more names to be added to the stock market over time. Table 10.5 lists companies that operate in the educational services space in the emerging markets, as well as other Asian markets.

Table 10.5. Emerging-Market and Asian Educational Services Companies

Endnotes

¹ Sharon LaFranier. “China’s College Entry Test Is an Obsession.” New York Times, June 12, 2009.

² Mary Beth Marklein. “College Wealth Soaring.” USA Today, January 24, 2008.

³ John Hechinger. “College Endowments Plunge.” Wall Street Journal, January 27, 2009.

⁴ Matthew Phillips. “Cutbacks on Campus.” Kaplan College Guide, August 12, 2009.