Developing countries should go for regional trading agreements until they raise the overall skill levels of their populations.
Development economists agree on the role of education in promoting the progress of a nation. However, the level of education that should be promoted is still under debate. This is probably why some developing countries’ investment in education is biased towards higher education, rather than all education levels. In general, there is inadequate funding for primary education, and it is often only donor intervention that brings about any significant attention to education for all.
Promotion of higher education is pro-growth, whereas spending on lower levels of education is often merely a social obligation and not the highest priority. However, developing countries need to develop people’s skills in order to match the skill demand, especially when these countries wish to expand their international trade. It is easier, and cheaper, for the developing countries to transform a small but significant segment of the population into highly-skilled workers by providing them with higher education than to educate the masses in general. This highly educated segment then provides a pool for high-end technology jobs that enter the country from abroad. India and China are prime examples that have greatly benefited from such policies and achieved high growth rates. Although, India’s exports are technologically advanced and China’s exports include labour intensive manufacturers.
But, there is a catch. Although the focus on higher education has transformed a segment of the population into highly-skilled labour in developing countries, it has also increased the skilled-unskilled wage gap. This has led to low returns for unskilled labourers, and high inequalities in income. In short, inequalities, especially in the high-growth industrial sectors, have increased thereby creating distortions in the economies of developing nations. There is strong evidence that industrial wage inequality and overall inequality trends are on the rise in developing countries. There is ample literature available which suggests that rising inequalities are retarding growth.
The solution to this problem is relatively simple. Developing countries need to increase overall skill levels by investing more in education at all levels. Higher education should not be promoted at the cost of primary education. In developing countries where education levels are high, skill levels are more homogenously distributed. In addition, the people are less unequal in terms of wealth and income.
International trade, which has rapidly expanded in the last half century, has not brought higher wage inequality to the doorsteps of developing countries. Instead, these nations have grown significantly while retaining their social cohesion. South Korea is a good example where successive governments promoted education for all and transformed their society into a highly educated one where skills are now evenly distributed with low wage inequality.
The solution presented above sounds simple, but it is not an easy option for most developing countries. Improving the average years of schooling in any economy would take a decade or so even if huge investments are made for education for all today. Additionally, most developing countries are continuously facing macroeconomic crises and are unable to gather significant funds for education due to their low fiscal capacities (tax to national income ratios). That is the reason why low-income developing countries depend on donors to invest in primary education in the first place.
Considering such handicaps that most developing countries face, an unorthodox solution springs to mind – more regional trading agreements between developing countries. Until developing countries raise the overall levels of people’s skills, they should trade more with each other. More regional trade agreements may increase unskilled wage premiums, and wage inequality may decline. The reason that unskilled labour demand will increase under the agreements is due to the factor content of their trade, which will be intensive in unskilled labour. This is in contrast to the rise in demand for skilled labour that is observed when developed and developing countries trade.