Adiyen, a fellow writer at CRI, has recorded his misgivings about the idea of foreign universities setting up campuses in India. Adiyen’s apprehensions on the entry of foreign universities into the Indian market look to me to be unnecessary on various counts, which I would like to elaborate on. Here I attempt to Adiyen’s apprehensions on foreign universities entering India, starting with the first one:

if we are going to pull a private university into India it can’t be but a knockoff of the real thing.  This is not to say that private universities aren’t setting up off-site campuses.  But they are meant more to tap into alumni networks

Does it really matter if top universities decide to enter India only to tap into their alumni networks? Even assuming that there would be absolutely no other positive effects when foreign universities enter India, is that actually an argument to stop the universities and alumni from benefiting from a mutually-agreed exchange?

a high cost foreign university would cost way too much. ….. What snob value is a private US university campus in India going to provide its students, when they embark on a job search in India?

Who should decide which university Indian students enroll in? Should it be the students who have definite goals to achieve, or should it be ivory-tower policy-makers? Moreover, even if it is agreed that policy-makers are much more efficient in picking which institutions students should study in, there is no reason to exclude all foreign universities as unworthy. The conclusion does not logically follow from the assumed premises.

why do we need foreign universities to create a culture of learning and enquiry?  Why can’t we reform our universities, ourselves?

If Indian universities can actually reinvent themselves to become better institutions, why would the entry of foreign universities affect such a change anyway? In fact, wouldn’t the entry of foreign universities actually widen the market for education in India, and thus lead to better products for Indian students?

Free trade and Open markets

It actually makes sense to understand the economic rationale behind the support for free entry of universities into India. While most policy analysts want to study the issue as a complex one that ought to be studied from different perspectives, I reckon the issue boils down essentially to the principle of free trade: the benefit of free exchange between individuals.

The most obvious case of free trade benefiting individuals is when individuals possess absolute advantage in different tasks. A good example would be the exchange between a doctor and a farmer (neither of them have any reasonable knowledge of the tasks of each other). But free trade isn’t essentially restricted to cases of individuals who have absolute advantage over each other in the performance of difference tasks. Welcome to David Ricardo’s account of the benefit of free trade: the law of comparative advantage.

The law of comparative advantage, also known as the law of association, can be explained with a very simple example: consider two individuals who can produce two goods named x and y. While the first individual can produce 4x or 9y in a given amount of time, the second individual can produce 2x or 3y in the same amount of time. By the law of comparative advantage, the first individual would take up to producing y and the second individual would take up to producing x. The rationale behind this choice is that although the first individual is more efficient than the second individual in producing both x and y in a given amount of time, his advantage over the second individual is much higher in the production of y (3 times) than x (2 times). The total production (combining the labour of both individuals for a given day) of y would increase three times, although the production of x would be only half of what it would have been had the first individual taken over its production. But note we assume that the increase in the production of y (a three-fold increase) compared to what it would have been otherwise trumps the minor slump in the production of x (a half-fold decrease).

To be more precise, what the example clearly shows is that when individuals are left to trade freely with each other, they benefit from a reallocation of their labor efforts towards the most important ends of both, thereby increasing the total subjective utility gained through the produced goods. Note that both the first and the second individual would not have been able to satisfy their increased need for commodity y (at a lower trade-off to commodity x) without engaging in a mutual division of labor.

The argument in favor of free trade between individuals beyond the boundaries of individual households also applies to trade when it happens beyond the boundaries of countries, for the benefits of trade don’t depend on borders of any kind. It is this very reasoning that applies to the case of any product, including education: an open market leads to new opportunities for free exchange of goods (education, in this case) leading to mutual benefits to both parties.

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Prashanth Perumal

Prashanth has been writing for CRI as a Student Intern since July 2012 concentrating mainly on economic issues. He obtained his BA in History in 2011, before moving on to graduate from the London School of Economics majoring in Economic History. Apart from being an avid autodidact and a follower of the Austrian School of Economics, he has also penned his own book: "The Political Economy of Spontaneous Order". His other interests include the study of Investing and Philosophy.

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