Trade and Education, an Odd Couple

Author: Sutapa Amornvivat, Ph.D.

Published in Bangkok Post newspaper / In Ponderland column 18 January 2017 

Last Monday, I attended a keynote speech by Eric Maskin, Nobel Laureate for economics in 2007, organized by Thammasat University and the International Peace Foundation. He raised a question of how globalization could (unintentionally) worsen inequality especially for emerging market economies.

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

In the past few weeks, we have seen headlines of big American corporates cancelling their plans to build factories abroad. Some even consider 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 of globalization.

Ever since the end of the World War II, the ideology of the West which entails liberalization 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 specialization on the so-called “comparative advantage” of the 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 earning more income the globalized 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 are catching up on the West.

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

Maskin’s theory (in a paper co-written with Michael Kremer) points out how globalization could hurt some groups of workers. His model shows that when the production process becomes globalized, workers start to match across borders to make the most out of available resources in both countries. A high-skilled worker in the rich country could now oversee designing a product and hires another high-skilled in the poor country to supervise a production process. With new industries formed, the economic structure in the poor country consequently 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 gets 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 high-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 globalization had helped precipitate income inequality. Frustration of those who did not benefit from open economies manifests itself in the victories of Trump and Brexiteers. In fact, inequality has increased in places where populism gathers momentum such as the US, France, Austria, and Italy.

On the surface, Thailand seems like a winner in this globalization process.  Per the calculation 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 had witnessed a fair share of economically divisive society that led to political uncertainties, or worse, gridlocks in the past decade. Stronger anti-trade sentiment abroad could further fan frustration of those already feeling marginalized.

Not only in real world, but now confirmed in theory, free trade will create both winners and losers.  Having that said, 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 having been left out less painful?

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

The state of Thailand’s education system today can hardly stand a chance against the force of globalization. Recent results of the PISA, a standardized test by the OECD designed to measure student achievements, showed that Thai students were ranked 55th out of 72 countries participating in the test. While some Thai schools did break into high ranks among the top-scored countries, this reflects failure of Thai education system to ensure equal opportunities for the new generation—the heart of our hope and fear. The low level of cognitive skills, as indicated by the PISA score, will hinder growth and feed into the vicious cycle of leaving some feeling marginalized by globalization.

Rather than focusing on attainment, for which Thailand already meets a high level of enrollment rate, education policies should shift towards achieving better outcome 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 public schools to attract more high-skilled human capital. This type of policies will take time to bear fruits. Yet, it is rare to find such topic on news front pages; the lack of awareness and urgency is worrying.

In the near future, things will get even more complicated. It is only a matter of time before robots (or artificial intelligence)—high-skilled workers available at infinite numbers—join this already competitive labor market. With increasing resentment against trade, Thailand cannot afford to wait in resolving the conflict for those feeling left behind by globalization and making education on the top of every priority list