Liberate trade and education to increase economic growth

There are two items in Finance Minister Trevor Manuel’s medium-term budget policy statement that deserve special mention. He spoke about “lowering the costs of doing business, stepping up our efforts in skills development, increasing trade competitiveness and investing in infrastructure that will support economic expansion” all of which are important but the two toughest issues, trade and education, are arguably the most important.

Trade competitiveness requires low or no barriers to imports. Manuel is reported to have proposed that SA should consider reducing tariffs unilaterally and not wait for multilateral or bilateral agreements to be concluded. If his proposals are accepted, SA consumers will enjoy substantial net gains. It is at the cost of SA consumers that firms sheltered by tariffs are protected from foreign competition.

If tariffs were removed SA producers would concentrate on producing goods and services in the production of which they have a comparative advantage over producers in other countries. SA- produced goods and services would then either be competitively exportable or would have no problem competing with foreign goods and services on the local market.

In tourism, for instance, SA has certain unique products that compete effectively with tourist destinations elsewhere in the world. In natural resources SA also has advantages. However, in manufactured goods, producers have to be highly efficient or find niche markets in order to compete globally unless cost of transport provides natural protection as in the case of heavy and bulky goods such as steel and cement.

World Bank studies have shown that the abolition or reduction of tariffs tends to increase overall prosperity. Understandably, the owners and employees of firms that lose their tariff protection suffer hardship, and, not surprisingly, the affected parties exercise whatever political power they have to prevent its removal by arguing for a continuation, generally on the grounds of job creation or prevention of job losses, an argument that does not hold up to close scrutiny.

Tariff-protected goods cost more. If consumers are not compelled to pay these higher costs, they will have more money to spend on other things, and, in the process support the creation and retention of jobs elsewhere in the economy. In a tariff-free environment consumers can buy more with their money and more people have jobs because competitively produced goods are saleable worldwide.

The SA government has had mixed success in moving the country from a tariff-protected to a tariff-free environment, a process that is necessary to increase the demand for labour, reduce unemployment and poverty and ensure long-term economic success. Britain in the nineteenth and South Korea and Chile in the twentieth century, reduced tariffs unilaterally and prospered as a result. However, Minister Manuel is well aware that the process is politically difficult and if it is to succeed, the interests of the nation have to be placed above the interests of the currently protected parties.

Solving SA’s education and training problems would require the adoption of policies even more dramatic and far-reaching than unilateral tariff reductions. There is a skills shortage worldwide. The Minister mentioned that the EU intends to recruit 20 million skilled foreigners over the next twenty years, and 600 chief executives of multinational companies complained of a shortage of qualified staff in Asia.

The root cause of the mismatch between skills development and skills requirements is that all countries are locked into an archaic system of educating and training young people. Everywhere, schooling has turned into a nightmare for students, parents, teachers, administrators and governments. If governments let go and allow private providers to take over so that competing entrepreneurs can offer a wide range of learning options to students, education and training problems will melt away.

In the absence of statutory constraints, a private market in education and skills transfers has the potential to transform the education and skills development of young people into a giant worldwide competitive entrepreneurial industry. Firms would vie for the business of young customers and their parents and utilise the remarkable technical aids and materials that are available and will become available in a liberated education market in providing students with the kind of knowledge and skills that are in demand.

If governments limited educational prescription to basic numeracy and literacy and purchased education and training for the poor in a competitive private market rather than attempt to provide it, they would achieve a great deal more for young people. Such changes would entice highly talented and skilled people who are currently doing other things to become involved in the education of the young, the production of educational materials, and the devising of improved methods of instruction.

Educators would develop the inherent skills, talents and interests of the individual instead of the current practice of attempting to compel the child to fit into a pre-determined, standardised and very limited schooling mode, in which the potentially most talented and promising become misfits requiring special counselling. They would cater for the true requirements of their customers, children and their parents, resulting in a vast array of choices of learning experiences.

In a functioning market for knowledge and skills, the requirements of employers would have a considerable influence on the nature of the education and training provided to young people. In deciding what to study and what careers to follow, students and their parents would be guided by assessments of the inherent talents of the student combined with information on how to develop those talents and potential job opportunities where they could be put to best use.

SA can simultaneously solve its skills shortage problems and lead the world in the education and training of young people. All that politicians need to do, as in the tariff issue, is deal with the vested interests. But who said that politicians that have the interests of the nation at heart should have an easy life?

Author: Eustace Davie is a director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.

FMF Feature Article/ 30 October 2007