Indonesia’s tertiary education services: Relaxing trade policy barriers for better performance POLICY BRIEF Presisi Indonesia, University of Adelaide and The World Bank The President of Indonesia has asked the community to welcome the arrival of Industry 4.0. But he has also observed that success will require significant change and substantial innovation. He expects the education system to provide support for this change. In this note, we benchmark the tertiary education system against others in ASEAN. We examine how trade policies affect the development of the higher education sectors in Indonesia. These are not the only policies that matter, but international experience shows that increased openness to foreign service providers can help upgrade the domestic tertiary education sector. Indonesia has a less open and more restrictive policies relative to Malaysia, Singapore and Thailand. Access of foreign providers, both institutions and skilled practitioners, is constrained as indicated by Figure 1 which ranks Indonesia against regional comparators on the basis of the Services Trade Restrictiveness Index (STRI).1 Figure 1: Indonesia has more restrictive trade policies in education services than its regional comparators (Service Trade restrictiveness index along 5 policy dimensions; higher value = more restrictive) Restrictions on foreign entry 0,80 0,60 0,40 Restrictions to Regulatory transparency 0,20 movement of people 0,00 Other discriminatory Barriers to competition measures Indonesia Malaysia Singapore Thailand Source: Author’s calculations based on STRI method 1This index is compiled according to different policy dimensions according to methodologies developed in an OECD project on the STRI. Higher values of the index indicate higher levels of restrictiveness. 1 Openness and higher education quality Openness can improve the capacity of the sector to generate the necessary high-quality skills for attracting and maintaining investments within the increasingly competitive international higher education environment.2 This is especially important for Indonesia whose firms find it difficult to find employees with adequate skills at the high end of the skill spectrum (Figure 2). In addition openness can enhance co-production between the local and foreign education institutions. Through the mixing of experiences and ideas in the teaching and research arenas, local ideas become more productive and imported ideas can be better adapted and made more relevant to the new environment. Figure 2: High-skilled employees are hard to find in Indonesia (Share of firms that cite inadequate skills in trying to hire each type of worker) Source: Authors’ elaboration on the basis of World Bank Enterprise Survey These positive impacts of openness on domestic tertiary education systems are consistent with the experience of Singapore, where the low barriers to foreign investments and academics along with the pro-active policies to attract them have gone hand-in-hand with the development of a world class higher education system. As a result a quarter of higher education students in Singapore are foreigners, one of the highest shares in the world, and the two main Singaporean universities are in the top 60 in the world. 2 Points in this paragraph are based on the following: Jibeen T and MS Khan (2015), Internationalization of Higher Education: Potential Benefits and Costs, International Journal of Evaluation and Research in Education, Vol. 4, No. 4, p.p. 196-199: Bashir S, (2007), Trends in International Trade in Higher Education: Implications and Options for Developing Countries, Education Working Paper Series, No. 6, The World Bank, Washington DC, pp.1- 96; Rhoads, RA and K Sjelenyi, (2011), Global Citizenship and the University: Advancing social life and relations in an interdependent world, Stanford University Press, Stanford, CA; Knight, J. (2011). Education Hubs: A Fad, a Brand, an Innovation?. Journal of Studies in International Education Vol. 15(3):221-240. Sage Publications. 2 High restrictions to the establishment of foreign education institutions and to the entry of foreign academics are associated with lower performance of the Indonesian higher education system relative to Singapore, Malaysia and Thailand. In fact the relative order of restrictiveness is a good predictor of relative performance, with Singapore having the least restrictions and the highest quality system, whether measured in terms of net inbound students or academic citations per 1000 student (Figure 3), followed by Malaysia, Thailand and Indonesia. This relative ranking is confirmed also in terms of creativity and innovation (Figure 4), where again Indonesia shows the poorest performance among regional comparators. Figure 3: Education Services Trade Restrictiveness Index and performance Higher Restrictions are associated with Higher restriction are associated with lower net inbound students movement lower number of citations Singapore 40000 200 Singapore 180 30000 CItations per 1000 students 160 Net Student Inbound 20000 Malaysia 140 10000 120 Thailand 100 0 Indonesia 80 0,00 0,20 0,40 0,60 0,80 -10000 60 Indonesia 40 -20000 20 Thailand -30000 0 0,00 0,20 0,40 0,60 0,80 -40000 Services Trade Restrictiveness Index Services Trade Restrictiveness Index Source: Net student inbound estimates are from the UNESCO Institute for Statistics (UIS). Citation per 1000 students is based on authors’ calculations from Scimago Journal. Figure 4: Education Services Trade Restrictiveness Index and creativity and innovation Higher restriction are associated with Higher restrictictions are associated with lower values of the creativity index lower values of the innovation index 1,00 Singapore 70 Singapore 0,90 60 Malaysia Global Innovation Index Global Creativity Index 0,80 50 Thailand 0,70 Indonesia 0,60 Malaysia 40 0,50 Thailand 30 0,40 Indonesia 0,30 20 0,20 10 0,10 0,00 0 0,00 0,20 0,40 0,60 0,80 0,00 0,20 0,40 0,60 0,80 Services Trade Restrictiveness Index Services Trade Restrictiveness Index 3 Source: STRI is based on Authors’ calculation. GCI from Martin Prosperity Institute, 2015 (http://martinprosperity.org/content/the-global-creativity-index-2015/), GII from Global Innovation Index, 2017 (https://www.globalinnovationindex.org/analysis-indicator) Proposed trade policy changes to improve higher education quality Our review suggests seven trade policy changes that Indonesia could undertake to improve the quality of its higher education system. These changes aim to remove restrictions that have not yielded any clear benefits to the domestic system while have hindered the exposure of Indonesia’s higher education to international practices and competition: 1. Remove requirement that foreign higher education institutions must have a different name from the education institution in the origin country Brand equity is a critical asset, especially in the services sector. In the education sector, the name of the institution helps secure its long-term sustainability, particularly to attract students. Students are the main consumers for universities and their decision to select a university is highly influenced by brand awareness. Many high-rank universities have been investing a lot of resources to develop brand awareness. Thus, the regulation makes it more difficult for foreign higher education institutions to enter the Indonesian market because they cannot capture the value their well-developed brand. In contrast, should the regulation be amended, foreign providers can offer services with their own brand, which would also ensure that quality of provision would be commensurate to their international standards. 2. Remove the need of recommendation letter from regional higher education agency to obtain the license for new higher education institutions Education sector development is part of a national strategy program to improve human capital and eventually economic development. The regulation adds complexities for foreign higher education institutions to enter the domestic market. The potential foreign providers have to complete administrative procedures at various levels; at the national level: Indonesia Investment Coordinating Board (BKPM), Ministry of Research, Technology, and Higher Education; at the regional level: Regional Higher Education Agency (which provides the recommendation letter). The existing regulation creates additional stages of administrative burden for foreign providers who wish to apply for a new license. Given that the education sector is a national priority, the recommendation letter should be given at the national level to accelerate the process. Moreover, it is possible that the requirement for a recommendation letter from the regional level may trigger additional restrictions due to lack of transparency, as it requires the regional agency to conduct an analysis of the regional market situation and the foreign providers’ operational sustainability. 4 3. Review requirements for foreign lecturers, who currently must have a prior academic position with a minimum level of associate professor and must have published a minimum of three internationally recognized academic journals. The regulation limits the entry of young foreign lecturers with doctoral degrees. Right after being awarded a doctoral degree is the career stage with the highest potential for flexibility and international mobility, combined with the lowest salary cost. In contrast, the requirement stipulated in the regulation would imply higher costs for the foreign providers, as the foreign lecturers at that level will demand higher incentive packages. Should the restrictions for foreign lecturers be liberalized, there would be at least two advantages. Firstly, an increased number of foreign lecturers would improve work quality among lecturers in the institution due to better collaboration between foreign and local lecturers. Secondly, foreign lecturers may bring knowledge in terms of new technological development, especially if the lecturers come from a developed country. 4. Scrap the need for the submission of a Foreign Workers Utilization Plan (RPTKA) to get work permits (IMTA) for foreign academics In addition to the more liberal requirement of foreign lecturers as suggested above, the government should streamline and make the procedures to gain working permits more transparent and measurable. A service level agreement for the related agencies that would give a clear guideline to potential foreign higher education institutions could be added. Other policy changes include longer-term revisions of existing laws. 5. Allow the corporatization of higher education institutions The establishment of new education institutions requires a large investment to develop new infrastructures, education facilities, and information technology systems. Those elements are important since the education institutions aim to meet students’ needs and eventually to offer high quality education. Hence, the regulation should allow corporatized foreign higher education institutions to operate, with an orientation to profitable operations, so that they have more options to be financially independent, apart from funding support from its headquarters in the origin country. 6. Remove requirement to have majority local worker’s employment Foreign higher education institutions should have a specific standard quality for their lecturers or management staff to maintain their high reputation. Given the standard quality, the regulation would limit the foreign provider’s investment plan to conduct their services if they must employ local workers. If the foreign providers are not able to find local workers that follow their standard quality, it may jeopardize their potential investments. Hence, it is important to remove this requirement, so that the foreign provider would have further discretion to manage their employment structure. A transition to follow up this policy recommendation may also to set a ratio of foreign professional to total staffs in a university as implemented in other countries. Complementary action is to commit to add to the skills of local staff. 5 7. Increase the freedom of choosing the region, education type, and faculty for foreign institutions The current licensing application procedures lack transparent, as a government agency at the national level makes the decision on which scope of services are allowed for the foreign provider. There should be a clear definition of scope of services that are opened up for foreign providers. This change would give more certainty to foreign investors and hence increase the appetite and willingness of foreign providers to engage and eventually invest. While the focus here is on trade policies, many other changes may be needed to reform the higher education system in Indonesia. The experience of other ASEAN countries, including Singapore and Malaysia, could be of help in this undertaking beyond trade policies. 6