Trade and education are an odd couple

Bangkok Post
January 18, 2017

On Monday, I attended a keynote speech by Eric Maskin, Nobel Laureate for economics in 2007, organised by Thammasat University and the International Peace Foundation.

He raised the question of how globalisation could (unintentionally) worsen inequality especially for emerging market economies.

The question is not novel, but it perks up my interest as we enter an era in which de-globalisation forces are gathering strength.

In the past few weeks, we have seen headlines about big American corporates cancelling plans to build factories abroad. Some are even considering pulling part of their operations back to the US. Responsible for this trend is the soon-to-be President Trump, whose victory does signal a critical turning point in globalisation.

Ever since the end of World War II, the ideology of the West which entails the liberalisation of trade trumped previous closed-country regimes. Proponents of free trade would argue that trade allows people in two countries to concentrate on producing what each does best. This leads to specialisation on the so-called "comparative advantage" model of a nation as proposed by David Ricardo in the early-19th century. Doing so prompts both countries to produce more overall and thus gain higher income.

And earn more income the globalised economy did. Most countries, many Asian economies and Thailand included, embraced the movement, and experienced an enormous rise in income as a result. Inequality across countries dropped as poorer countries began catching up with the West.

Yet, we witness that within-country, inequality has been on the rise in some places. Apparently, not all benefit from free trade. This is where Prof Maskin's theory offers an alternative.

His theory (in a paper co-written with Michael Kremer) points out how globalisation could hurt some groups of workers. His model shows that when the production process becomes globalised, workers start to match across borders to make the most of available resources in both countries. A highly skilled worker in a rich country could now oversee designing a product and hires another highly skilled one in a poor country to supervise the production process. With new industries formed, the economic structure in the poor country undergoes an enormous shift that supposedly brings in higher income for all.

Unlike the old Ricardian model of comparative advantage, the new model predicts that some get left behind in this process -- those without skills to match up in industries with high return in rich and poor countries alike. In this framework, the highly skilled get richer, while the lower skilled stay out of the loop. The widening income gap explains what we observe in a wide range of countries from China to France to the US.

Why is inequality a problem? Proving that inequality is bad for growth is difficult; empirical evidence has been at best ambiguous without any proof of causality. Some people even believe inequality is needed because it drives people to work hard to climb the income ladder. What we know for sure is that inequality does breed social discontent.

And, social discontent certainly did breed the rise of recent divisive politics and anti-establishment movements, as globalisation had helped precipitate income inequality. Frustration of those who did not benefit from open economies manifested itself in the victories of Trump and the Brexiteers. In fact, inequality has increased in places where populism has gathered momentum such as the US, France, Austria and Italy.

On the surface, Thailand seems like a winner in this globalisation process. As per calculations by the World Bank, the Gini index (which measures income inequality) has declined since the country integrated into the global supply chain.

However, a stark contrast between rural and urban income levels remains. And we too witnessed our fair share of an economically divisive society that led to political uncertainties, or worse, impasses in the past decade. Stronger anti-trade sentiment abroad could further fan the frustration of those already feeling marginalised.

Not only in the real world, but now confirmed in theory, free trade will create both winners and losers. Having said that, it would be a mistake to conclude that we should disengage from trade; that would mean an economic disaster for an exporting nation like Thailand.

How do we then make the transition for those left out less painful?

Appropriate education policies could help. Prof Maskin does point to upgrading skills of low-skilled workers. Helping workers to adjust could be best in the form of training and education policies that will have long-lasting effects.

The state of Thailand's education system hardly stands a chance against the forces of globalisation. Recent PISA results, a standardised test by the OECD designed to measure student achievements, showed Thai students ranked 55th out of 72 countries participating in the test. While some Thai schools did rank highly among others in the top-scoring countries, this reflects a failure of the Thai education system to ensure equal opportunities for the new generation -- the heart of our hopes and fears. Low-level cognitive skills, as indicated by the PISA score, will hinder growth and feed the vicious cycle of leaving some feeling marginalised by globalisation.

Rather than focusing on attainment, education policies should shift towards achieving better outcomes and ensuring better distribution of high-quality education. This requires investing in teacher training and periodic skill assessments, as well as re-aligning incentives for teachers in state schools to attract more highly skilled human capital. These types of policies will take time to bear fruit. Yet, it is rare to find such topics on news front pages; the lack of awareness and urgency is worrying. Soon, things will get more complicated. It is only a matter of time before robots (or artificial intelligence)-- highly skilled workers available in infinite numbers -- join this competitive labour market.

With resentment against trade rising, Thailand cannot afford to wait in resolving the conflict for those feeling left behind by globalisation and should put education top of every priority list.