The Bangladesh government decided to impose a value-added tax (VAT) on all fees paid to private universities. This will push up the price of getting a degree by ~7% for most students. What will this do to the demand for education from private universities? Thinking of only that much is a red herring really.

The real question is what effect will the tax have on the market participants and the good or service being traded. I’ll try and lay out my logic in a concise manner.

Most people would begin their analysis by looking at the market for education itself. Although I feel it is almost always better to begin by analyzing the conditions that set up the market first. In the case of tertiary education, there are two tracks that can be followed by the holder of such a degree: a research track and professional track. In Bangladesh, the overwhelming demand is for holders of such degrees who will go on to enter the job market and not be involved in academics. This is in line with the demand for such graduates. So most people go to college/university to get a job.

Overview of the private university student population

• A sizable chunk of the college/university students, in Bangladesh, end up in private universities because the public tertiary education system is unable to meet their needs (in other words, the government operated system is ill-equipped to meet market demand for education).
• A large percentage of the students are from working class families who are actually not very wealthy.
• A small part of the students (around 20-25% at best) are from middle class families.
• A rather small minority are from well-to-do families, i.e. the top 10% of the economic class of Bangladesh.

Almost all the students then graduate aiming to do “better in life” than what their parents could achieve, in other words, land a stable job and build a career. Obviously they will look to do it as cheaply as possible, hence the expected demand for the top tier private universities in Bangladesh will take a hit as they charge up to three or four times what a middle tier private university charges (in tuition). So enrollment in the middle tier universities will see a likely growth.

Overview of the demand for graduates

Employers look for graduates who can best solve the tasks assigned to them in that particular position. It is no secret that graduates of the best private universities have, on average, proven themselves more capable and daring and are preferred over graduates of the middle tier universities. What do they do when they encounter a large number of graduates from the middle tier universities? They could be more picky in who they employ (structural unemployment of graduates could see a slight uptick) or they could hire whatever is offered (not the most ideal situation for the employer).

Overall effect on the market for education

The private universities are divided into tiers based on the opportunities they allow their students to access for the price the students pay. Hence a place like BRAC University gives greater exposure to the students to compete in different national, regional, and international events than a place like University of Asia Pacific while charging a much higher price. There are moves by the lower ranked universities to improve their academic offerings, the attempts are moving rather slowly as the lower ranked universities are having to battle “preconceived notions” about lower ranked universities as well.

This means that attempts by the lower ranked universities to improve the academic experience they offer, hence the quality of their graduates, is going to proceed slowly.

Connecting the Dots

The top universities will be seeing a drop in demand for their services in the short term, and the lower ranked ones will be seeing a slight spurt for their degree.
The education quality offered by the top universities will be of a higher standard but the incentive to further improve will be lowered as there are fewer students. On the other side the lower ranked universities will be encountering not only the people’s opinions but will also find their product in greater demand. Result, lower incentive to improve their product. Overall effect on the market, the improvement of the quality of education will see a lower growth trajectory in the medium term.

Conclusion

The government of Bangladesh was likely expecting increased tax revenue but that tax revenue might come at the cost of innovations and improvements in the tertiary education sector, effects that will be felt almost half a decade later by the employers if things are left as they are.

Addendum: I realized why economics is called “the dismal science”. Half baked policies force economists to make gloomy predictions and the field takes the flak…solution is to stop doing things without thinking and not to demonize the study -_-