Liberalization of trade in educational service and its impact on the right to education

Table of contents

I Introduction

II Institutional Frameworks and Contexts
2.1 Norms and standards of Human Rights most relevant to Liberalization of Trade in Educational Services
2.2 Liberalization of Trade in Educational Services
2.2.1 Trade in Services and Trade in Educational Services in Particular
2.2.2 The framework of GATS in WTO regime
Background, Objective, scopes
Coverage, Exemption and Modes of Supply
Structure, Core Components and Key Features

III Theoretical Framework
3.1 Trade and Welfare
3.1.1 Gains of Free Trade
3.1.2 Distributional Effect and Overall Welfare
3.1.3 Protection and Loss of Welfare
3.2 Market Failure and Government Intervention
3.2.1 Market Failure Argument
3.2.2 Theory of the Second Best and Principle of Targeting
3.3 Public Goods, Externalities and Education
3.3.1 Definition and Characteristics of Public Goods
3.3.2 Is Education a Public Good?
3.3.3 Financing and Provision of Public Goods: the Case of Education
3.4 A Summary of the Theory Section 28

IV Does Liberalization of Trade in Educational Services Promote or Threaten the Right to Education?
4.1.1 About the availability and accessibility
4.1.2 About State Accountability
4.1.3 About the Equity
4.1.4 About the Quality
4.1.5 About Long-term Economic, Social and Cultural Impacts
4.2 Country Case study: Examining the Impact of Liberalization in Trade of Educational Service on the Right to Education in China
4.2.1 China’s Education System and Problems
Basic facts about China's education system
Key Problems impeding the Right to Education: Financial Obstacle and Regional
Imbalance
The Growth of Private Provision
4.2.2 International Trade in Educational Service in China
International Trade Related Regulatory Environment and China's GATS Commitments
Current Trade in Educational Services
Market Demand and Consumer Psychology: A Nation-wide Survey (National Bureau of Statistics of China, 2002)
4.2.3 Challenges and Opportunities
Access and Equity
Quality Issue
Brain Drain

V Summary and Conclusion
BIBLIOGRAPHY

ANNEX

Annex 1 ICESCR Article 13 and 14

Annex 2 CRC Article 28 and 29

Annex 3 World Declaration on Education for All, Jomtien (1990) (Part)

Annex 4 Dakar Framework For Action (2000) (Part)

Annex 5 Export of Educational Services of Some OECD Countries

Annex 6 Top 15 Leading exporters of education services (consumption abroad) at tertiary level

Annex 7 Country Share of total foreign students 2002/2003

Annex 8 : Share of Foreign Students in World Total, OECD 2002/2003

Annex 9 Number of Foreign Students from 6 Continents in Major Exporter/International Providers of Education (2002/2003)

Annex 10 Students Number from the major importer/receivers in 2002/2003

Annex 11 Relative proportions of public and private expenditure on educational institutions, for tertiary education (1995, 2002)

Annex 12 Percentage of temporary residents receiving PhDs in Science and Engineering in the United States in 1996 who were in the United States, 1997-2001

Annex 13 Relative proportions of public and private expenditure on educational institutions (1999)

Annex 14 China Educational Laws and Regulations to Relevant International Trade in Educational Services

Annex 15 Regulations of the People's Republic of China on Chinese-Foreign Cooperation in Running Schools

Annex 16 China’s GATS Commitment Relevant to Educational Service Sector

ACRONYM

Abbildung in dieser Leseprobe nicht enthalten

I Introduction

Education is in itself a fundamental human right. As an important determinant of economic growth and human development, education also constitutes an indispensable means of realizing other human rights, particularly rights associated with employment and social security. With the unleashed force of globalization sweeping all aspects of social and economic life, national governments throughout the world increasingly understand the strategic importance of education in enhancing and maintaining international competitiveness, and its crucial role in developing economic and social viability on the long run. On the other hand, the convergent impacts of globalization also bring new impetus for cross-boarder education, and affect the shape and mode of the operation of national education systems more influentially than ever. Over the last two decades trade in cross-border education has been increasing steadily in all forms: not only the numbers of students enrolled in educational institutions outside their home country has been rapidly increasing, but also more and more education providers operate abroad, providing their educational services to foreign students who remain at home. Accelerated development of the new information and communication technologies also facilitate cross-border education and encourage new forms of educational internationalization. According to the statistics from the Organisation for Economic Co­operation and Development (OECD), export revenue related to international student mobility amounted to an estimated minimum of US$30 billion in 1998, or 3% of global services exports (OECD, 2004a).

With the rapid growth of trade in education, a number of bilateral, regional and multilateral trade agreements and regulations have incorporated provisions on trade and investment in educational services, which all together make up the legal and institutional framework shaping and regulating the liberalization of trade in educational services. Among all the relevant agreements and regulations driving the liberalization process, the General Agreement on Trade in Services (GATS) under the World Trade Organization (WTO) regime provides the first multilateral framework for international trade and investment in services, including educational services.

These significant new trends of education in the global environment pose both challenges and opportunities to most developing countries, which would have to tackle many difficult issues in a more profound surrounding: the need to expand education in a sustainable way, inequalities of access, problems of education quality, and rigid governance structures and management practices (World Bank, 2002). It has entered hot academic and political debates and remains a controversial question whether the economically underprivileged developing countries, who are usually educational services importers in international trade, would also benefit from liberalizing trade in educational services; whether liberalization could indeed lead to a diverse, efficient and responsive education system to the knowledge economy with much broader and more equal access to education; or whether it would rather impair the states’ obligation to realize and promote the right to education.

As stressed at the very beginning, education should not be considered as a mere instrument to maintain an appropriate level of human capital for increasing labour productivity in the heated global economic competition, but first of all as a fundamental human right, which should be directed to the full development of the human personality and the sense of its dignity (CESCR, 1966), to the enhancement of human lives and freedoms. Human beings are not only the most important means of social or economic achievement; they are also its most profound end (Sen, 1998).

Such a human right perspective is, unfortunately, not always to be observed in literature by many neoliberal writers on the liberalization topic and its impact on education. On the other side, numerous articles within the general background of the global anti-free trade and anti- WTO movement could be found, holding an absolute view that trade liberalization will put the global public education in danger. Most of such articles are, however, rather based on ideological sentiments than on sound theoretical or empirical evidence. In a word, in the debate on liberalization of trade in educational services, two extreme views tend to be taken on. The liberalization proponents usually emphasize the dynamic efficiency of market but ignore the market failures, whereas the opponents attempt to prove the negative consequences for national sovereignty and social equity caused by liberalization, but often grounded on a biased interpretation of liberalization. My belief is that trade liberalization presents both challenges and opportunities, and its impact on the realization of the right to education could be rather manifold and complex. I do not take on the presumption at the first stage that the relation between the right to education and economic liberalization is conflicting and irreconcilable in the nature. To the contrary, economic development and the enforcement of human rights are not two successive processes of development, but can only be successful if regarded as interrelated tasks to be tackled simultaneously. The artificial division of human rights objectives on one hand and trade liberalization on the other should be broken down (Paech, 2003). Hence, the purpose of my thesis is not to demonstrate how liberalization of trade in educational services could potentially and realistically hinder the right of education, but to seek the coherence between the trade service liberalization and the promotion of the right to education.

Nevertheless, it is important to note the standpoint and starting point of this thesis. I agree to the recognition of the primacy of human rights over the economic objectives as the key principle of tackling the relation between trade liberalization and human rights in general. As emphasized in the recommendation placed by the UN Committee on Economic, Social and Cultural Rights, it should be made clear that 'trade liberalization must be understood as a means, not an end. The end which trade liberalization should serve is the objective of well­being to which the international human rights instruments give legal expression.' (CESCR, 1999).

However, this paper is not intended to go deep into the juristic argumentation whether human rights law or trade law should take precedence in case of overlapping or confrontation, since it should always be examined and addressed in concrete cases. In this paper I will endeavor to have an interdisciplinary examination on whether education is a public good, whether it should be kept strictly under the government authority and whether liberalization of trade in educational service would lead to equal and broad access to quality education for all. Though the analysis of this paper would mainly be based on economic theories, chiefly, the theory of international trade and public goods, a human rights approach will be employed throughout the paper.

The following Part II will give an overview of legal and institutional contexts both of trade in educational services and the right to education. Norms and standards of right to education elaborated in a number of international covenants, conventions, and so on, will be introduced. The GATS of the WTO and other regional or bilateral trade agreements containing relevant provision will be illustrated as the framework regulating the liberalization process. Part III will demonstrate a series of interrelated theories as the basis for analysis: theory of international trade, the market failure argument, the theory of the second best and the principle of targeting, and the public goods theory. The theoretical analysis will focus on examining whether free trade is also a desirable policy in educational service; what role should national government play in education sector; and what is the appropriate balance between market and state. In Part IV, the ongoing heated debates will be introduced. Argumentations and counterargumentations from both liberalization opponents and proponents will be presented,

and my personal views and judgments will be explained as well. Then follows a case study of China. Based on an introduction of Chinese educational system and its distinct difficulties and problems, I will assess the realistic and potential impact of liberalization. To examine some consequences which might be resulted from liberalization, scenarios are assumed since a liberalized educational market does not yet exist in China. However, some available exemplary experiences and relevant policies will be illustrated too. Part V is to summarize the core content of the paper and policy issues on how national states and relevant international organizations should formulate their trade policy.

II Institutional Frameworks and Contexts

Today most of the nations in the world are covered by international economic and trade laws and agreements, while obligated to concurrent human rights commitments under international laws: 119 nations out of 149 members of WTO have ratified at least one of the two UN covenants^[1], 116 have ratified the International Covenant on Economic, Social and Cultural Rights (ICESCR) and all but one^[2] have ratified the Convention on the Rights of the Child (CRC) (COH, 2002)^[3]. Even states who have so far refused to become a party to the system are not outside the scope of this body of law, but are similarly bound on the basis of customary law due to the universal nature of the key principles concerned (Paech, 2003).

2.1 Norms and standards of Human Rights most relevant to Liberalization of Trade in Educational Services

The right to education is recognized and guaranteed in several international human rights law instruments, including the United Declaration of Human Rights of 1948 (UDHR), article 26; the ICESCR of 1967, articles 13 and 14; and articles 28 and 29 in the CRC.

First of all, UDHR Article 26 enunciated the right to education in three respects:

‘(1) Everyone has the right to education. Education shall be free, at least in the elementary and fundamental stages. Elementary education shall be compulsory. Technical and professional education shall be made generally available and higher education shall be equally accessible to all on the basis of merit.
(2) Education shall be directed to the full development of the human personality and to the strengthening of respect for human rights and fundamental freedoms. It shall promote understanding, tolerance and friendship among all nations, racial or religious groups, and shall further the activities of the United Nations for the maintenance of peace.
(3) Parents have a prior right to choose the kind of education that shall be given to their children.’ (UN General Assembly, 1948)

Two wide-ranging and comprehensive articles on the right to education, Article 13 and 14, were incorporated in ICESCR (See Annex 1), which not only reaffirmed education as a fundamental human right, but also translated this right from non-committal programmatic statement into binding treaty law, generating binding obligation on any state that ratified the ICESCR, as well as on international organizations such as WTO, World Bank and IMF, which were founded by those states (Paech, 2003).

With a view to achieving the full realization of the right to education, Article 13 (2) of the ICESCR further sets some essential features for education at all forms and at all levels for precise and appropriate application that each state should decide according to particular condition. These governmental legal obligations can be summarized as four-fold schema: to make education available, accessible, acceptable and adaptable (CESCR, 1999a; COH, 2002; Tomasevski, 2004).

(a) Availability - the State must ensure that functioning educational institutions and programmes are available in sufficient quantity. The requirement that educational institutions function depends on numerous factors, including the development context in which they operate;

(b) Accessibility - the State must ensure that educational institutions and programmes are accessible to everyone without discrimination. Accessibility includes physical and economic accessibility. In particular, education must be affordable to all: primary education shall be available free to all, and free secondary and higher education should be introduced progressively on an equal basis. To ensure non-discrimination and equal treatment in education, the CESCR has stated that States must closely monitor education - including all relevant policies, institutions, programmes, spending patterns and other practices - so as to identify and take measures to redress any de facto discrimination (CESCR, 1999a);

(c) Acceptability - the State has the responsibility to ensure the form and substance of education, including curricula and teaching methods, is acceptable to students and their parents;

(d) Adaptability - the State must ensure that education is flexible so it can adapt to the needs of changing societies and communities and respond to the needs of students.

In the context of liberalization of trade in educational service, it is especially noteworthy that the CESCR explicitly identifies ‘the prohibition of private educational institutions’ as a violation of the right to education, since progressive realization of free education at all levels is envisaged by the right to education (Ibid.).

While the CESCR has set out the basic content of the right in its general comment on the right to education, some other international instruments have further elaborated the objectives to which education should be directed. The Committee on the Rights of the Child has interpreted upon the aims of education in the Convention on the Rights of the Child (See Annex 2) and its general comment (OHCHR, 1990; OHCHR 2001). In 1990, the World Declaration on Education was promulgated by delegates from 155 countries and representatives from some 150 organizations in the World Conference on Education for All in Jomtien (See Annex 3), Thailand, forging a set of global commitments to universalize primary education and massively reduce illiteracy (UNESCO, 1990). The World Education Forum held in Dakar (See Annex 4), Senegal in April 2000 adopted the Dakar Framework for Action, reaffirming the international commitment to Education for All by 2015 (UNESCO, 2000). However, the language elaborated at Jomtien and Dakar was different from the language of international human rights law (Tomasevski, 2004).

2.2 Liberalization of Trade in Educational Services

2.2.1 Trade in Services and Trade in Educational Services in Particular

The last two decades have witnessed explosive growth in trade of services, ranging from traditional areas such as tourism or transport, to new domains such as education, public health, legal services and information services, which have been conventionally organized under state control. In 1997, service sector output was valued at $6.6 trillion, which represented about 60 per cent of global output of goods and services in that year. In industrial countries the service sector accounts for more than 70 per cent of production and employment (Chanda, 2002). Developed countries have dominated the global trade and investment in services, accounting for three-quarters of world services output (Ibid.). Meanwhile the significance of the service sector in economic terms and its strategic role in the development process is also increasing for developing and transitional economies. Between 1980 and 1998, the services share in world GDP rose by 5 per cent while the increase for low- and middle- income countries has been estimated at 9 per cent. In 1998 services accounted for 65 per cent of GDP in high-income countries, 56 per cent in middle-income countries and 38 per cent in low-income countries (COH, 2002).

Based on the increasing output of services, global trade and investment in service sector has been expanded accordingly. World exports of services are substantial at an estimated $1.4 trillion in 2000, or about one-quarter of global merchandise exports (Chanda, 2002). From 1990-2000 world exports of commercial services kept pace with the growth in merchandise exports, at an average rate of 6 per cent per year (Ibid.). Again, the developed countries accounts for the bulk of trade in services although developing countries are also increasing their share in global service market. Over the past two decades, the gap between OECD industrial countries and developing countries’ share of services market has been narrowing (OECD, 2001).

Though it is still under academic and political debates whether educational service, which has been traditionally within the domain of public responsibility in most countries, is in its essence tradable at all, and whether it should be included in the GATS negotiation, the virtual growth of trade in educational service seems to be independent of the development of institutional or legal framework of liberalization. Indeed, the educational world has hardly been standing still. For some industrial countries, trade in international educational service represents an important source of export revenue. In Australia and New Zealand, educational services rank respectively, third and fourth in terms of service exports, and fourteenth and fifteenth in terms of exports as a whole (OECD, 2004a; also see Annex 5). Approximate 1.98 million foreign students in tertiary education were studying in OECD countries in 2003, increasing 148.9% compared to 1.33 million in the year 1998 (OECD, 2005). Thanks to the enhanced information and communication technologies, cross-border e-learning is likely growing even faster than the number of students study abroad, though from a less significant basis (Larsen et al., 2002). Even only according to limited data, significant trade in educational service, particularly in higher education, is to observe. Some OECD countries have manifested their obvious comparative advantage in such services and rank the leading net educational services exporters. If only the mode of consumption abroad^[4] is taken into consideration, the United States is the leading exporter of educational services, followed by the United Kingdom, Germany, France and Australia (See Annex 6,7 and 8). Major export markets are in Asia, including China, India, South Korea and Japan, followed by countries in Europe and Latin America (See Annex 9 and 10).

The International Standard Classification of Education (ISCED), adopted by the UNESCO in 1976, provides a basic conceptual framework for statistics on education at the international level. In scheduling GATS commitments for education, most WTO Members have used the United Nations Provisional Central Product Classification (CPC) categories and codes, which divides educational services into five categories based on the traditional structure of the sector (WTO, 1998; Cohen, 2000): Primary education, secondary education, higher/tertiary education, adult education and other educational services.

2.2.2 The framework of GATS in WTO regime

Background, Objective, scopes

The issue of trade liberalization in educational service has been included in the negotiation under the GATS in the WTO. As a result of the Uruguay Round (1986-1994) the GATS came into force in January 1995, under the auspices of the WTO. The GATS is among the most important agreements of the WTO, serving as the first and the only multilateral agreement covering international trade in services. As stated clearly in the preface, the GATS is dedicated to achieve progressive liberalization of trade in services, to promote economic growth and the development of all trading parties, in particular of developing countries, to facilitate the participation of developing countries in trade in services through strengthening their domestic services capacity and its efficiency and competitiveness (WTO, 1995).

Coverage, Exemption and Modes of Supply

Basically the GATS covers trade in all service sectors with two exceptions carved out in

Article I.3 and in Annex on Air Transport Services: service supplied in the exercise of governmental authority, and in the air transport sector, traffic rights and all services directly related to the exercise of traffic rights (WTO, 1995; WTO 2001a). The GATS further explains that the first exemption refers to services neither supplied on ‘a commercial basis nor in competition with other service suppliers’ (WTO, 1995). Lacking greater clarity, concerns and controversies have arisen that public educational services could also be included into the scope of the GATS (Larsen et al., 2002; Vanlathem, 2003; Sinclair and Grieshaber-Otto, 2002). In practice many governments levy a fee for the provision of compulsory education services, which calls into question if such education service may therefore be on a ‘commercial basis’. Furthermore, concerns have been expressed that the co-existence of public and private education provision would indicate public educational services are provided in competition with private sector, thus bringing government-supplied education to the purview of the GATS. Responding to these concerns, the communications and proposals under the GATS may indicate a mainstream interpretation and common understanding at the inter-government level, as it is explicitly recognized that education is to a large extent a government function, especially in primary and secondary education, stressing the GATS disciplines not restricting governments’ right to regulate the education sector in order to meet domestic policy objectives (Sauvé, 2002; WTO 2001b; WTO 2002).

The GATS also breaks down services in four different modes of supplying: cross-border trade, consumption abroad, commercial presence, and presence of natural persons (WTO, 1995; WTO 1998).

Cross-border supply is defined to cover services flowing from the territory of one member state into the territory of another member state. In the context of educational service, such a mode of supply includes any type of course that is provided through distance education or the Internet, any type of testing service, and educational materials which can cross national boundaries.

Consumption abroad refers to situations where a service consumer purchases services in another member's territory. As far as education concerned, it mainly involves the education of foreign students and is the most common form of trade in educational services.

Commercial presence refers to the actual presence of foreign investors in a host country to provide a service. This would include foreign universities setting up courses, programmes or entire institutions in another country.

Presence of natural persons consists of persons of one member state entering the territory of another member state to supply a service, for example, teachers, professors and other research personnel may move between countries and work abroad on a temporary basis to provide educational services.

Structure, Core Components and Key Features

The GATS mainly contains two core components. One component is the framework agreement that lays out the general rules and disciplines, among which the principle of transparency (Article III), most favoured nation treatment (MFN) (Article II), market access (Article XVI), and national treatment (Article XVII) are most important ones. Whereas MFN and transparency are general obligations that apply to all trade in services within the scope of GATS, regardless a country’s specific commitment to certain sectors, national treatment and market access principles are only subject to the limitations specified in the individual schedules of commitments by member countries.

The national ‘schedules’ is the other core component of the GATS, listing individual countries’ specific commitments on liberalization, where members can make individual commitments over 11 service sectors in relation to market access and national treatment, schedule and maintain limitations on non-discrimination basis.

GATS is described as a voluntary and the most flexible agreement, which is reflected in several development-friendly features, such as the notion of ‘progressive liberalization’, the ‘bottom-up’ feature that GATS rules only apply to sectors or sub-sectors where individual government makes commitments, the recognition of the role of subsidies in relation to the development programmes of developing members, and the provision on ‘appropriate flexibility’ for developing countries (WTO, 1995; WTO 2001a; Sauvé, 2002; Zutshi, 2000). On the other hand, ambiguity and uncertainty also characterize some GATS provisions, rising genuine concerns. Many GATS provisions are rather loosely defined and broad in terminology, thus, subjecting to discretionary interpretation (Chanda, 2002; Sinclair and Grieshaber-Otto, 2002), as for instance, the ambiguity about the exemption, which was noted earlier.

Education remains so far the least committed sector in the GATS negotiation. Since the commencement of the GATS negotiation on January 2000, only five communications on education services were submitted by Australia, Japan, New Zealand, the United States and Switzerland out of about 126 proposals. Nine members have made offers on educational services, seven of which are developing countries (Nielson, 2003).

There are also several regional and bilateral trade agreements incorporating provisions on service liberalization, e.g., the North America Free Trade Agreement (NAFTA), the Free Trade Area of the Americas (FTAA), the U.S.-Dominican Republic-Central American Free Trade Agreement (CAFTA) in America, and the Closer Economic Relations Trade Agreements (ANCERTA), the ASEAN Framework Agreement on Services (AFAS) in Asia and the Pacific. All together, these policies and agreements drive and shape the liberalization in trade services, setting a legal framework to the liberalization process. No doubt, the GATS under the auspices of WTO as the first multilateral agreement, enjoys far-reaching significance.

III Theoretical Framework

3.1 Trade and Welfare

3.1.1 Gains of Free Trade

Almost all the classical and neo-classical economists purported to show that free international trade is beneficial to all trading countries, even though there are disparities between countries in productivity or wages. The mutual benefits of free trade have been expressed from the simple and intuitive ‘absolute advantage’ presented by Adam Smith, to the explicit numerical examples of ‘comparative advantage’ illustrated by David Ricardo, till Heckscher-Ohlin’s multiple factors model. The Ricardian model, for example, based on the fundamental idea of comparative advantage, demonstrates that two countries can trade to their mutual benefit even when one of them is more efficient than the other at producing everything. It is not difficult to show that trade lifts both countries’ consumption possibilities frontier upwards, which lie outside the countries’ pre-trade production possibility frontiers, implying gains from trade. Free trade can enlarge the range of choice, and therefore it must make residents of each country better off (Krugman and Obstfeld, 2003).

3.1.2 Distributional Effect and Overall Welfare

Some more sophisticated arguments^[5] attempt to show that the gains from trade may not be evenly distributed within trading countries, but the distribution of the benefits depends on the uniformity of factor ownership, the individual’s taste and preference, etc (Krugman and Obstfeld, 2003; Hindley, 1974). Indeed, not every individual is made better off after the introduction of international trade, and there are winners and losers of trade. But since trade increases the sum of total welfare of an economy, it could potentially be a source of gain to everyone if the loser of trade could be compensated by the winner of trade within the country (Krugman and Obstfeld, 2003; Chacholiades, 1973). The fact that trade expands the economy’s choice determines that it is always possible to redistribute income in such a way that everyone gains from trade.

3.1.3 Protection and Loss of Welfare

Based on the above analysis, it is not difficult to reach the conclusion that trade protection is costly from a social point of view because it hurts national welfare as a whole. The concept of consumer and producer surplus is commonly used to measure the cost and benefits caused by protectionism. Consumer surplus measures the amount that a consumer gains from a purchase by the difference between the price he actually pays and the price he would have been willing to pay (Krugman and Obstfeld, 2003). Producer surplus is an analogous concept. Here I take the most popular form of protection, tariffs, to assess the welfare effects of protection for the importing country. Though most of barriers to trade in educational services rather take on non-tariff forms, e.g. state monopolies, restriction on recognition of qualifications of foreign institutions, etc. (WTO, 1998) In order to facilitate the graphic interpretation, here I simply assume that non-tariff trade barriers have the equivalent effects as tariff barriers so that the analysis of a tariff can be readily adapted to other trade policy measures.

Abbildung in dieser Leseprobe nicht enthalten

Source: Krugman and Obstfeld, 2003

In the case of a small country that cannot significantly affect world price, the tariff raises the domestic price from the world price Pw in the condition of free trade to Pt. We may summarize the welfare effects to consumers, producers and the government of the importing country:

Consumer Surplus: - (a+b+c+d)

Producer Surplus: +a Government Revenue Gain: +c National Welfare: -(b+d)

Thus, the aggregate national welfare (Consumer loss - producer gain - government revenue) will unambiguously reduced by area b and d. Triangle b presents a production distortion loss, resulting from the fact that the tariff leads domestic producer to produce too much of the goods. Triangle d is a domestic consumption distortion loss, resulting from the fact that a tariff leads consumers to consume too little of the good. These two areas together are described as an efficiency loss. Therefore, an import tariff results in a reduction in the consumer surplus, distorts the incentives of both producers and consumers^[6]. (Ibid)

3.2 Market Failure and Government Intervention

3.2.1 Market Failure Argument

Nevertheless, trade protection has been a popular practice overall, which may be justified by several theoretical cases, for example, for a large country who has substantial influence on world price, a tariff lowers the price of imports and thus generates terms of trade benefit (Ibid.); or when a particular industry is crucial for national security, it should be protected regardless of economic efficiency (Hindley, 1974). Another common justification is the market failure argument (Krugman and Obstfeld, 2003). Generally speaking, market failure occurs when resources are inefficiently allocated due to an imperfection of the market mechanism, namely, market outcomes do not reach the Paretian optimality1. There are many causes leading an economy to be at an inefficient equilibrium, such as imperfect information, inequality of income distribution (Musgrave and Musgrave, 1989), public good and its externality^{[7] [8] [9]} (Samuelson, 1954). In the presence of market failure, government intervention is considered desirable and protection can be an appropriate trade policy.

Suppose, for example, in some cases the production of some goods or services yields positive externality, then there is a marginal social benefit, which cannot be captured in the measure of consumer and producer surplus (Krugman and Obstfeld, 2003). In the case of education, a well-educated labour force can increase efficiency and produce other important social benefits.

Abbildung in dieser Leseprobe nicht enthalten

If the tariff is small enough, area e must always exceed the area b+d, so the tariff may yield a level of social welfare higher than that of free trade, despite the production and consumption distortion it causes (Ibid.).

3.2.2 Theory of the Second Best and Principle of Targeting

The market failure argument against free trade is a particular case of a more general concept known in economics as the theory of the second best (Ibid.). The laissez-faire policy is desirable in one market only if all the other markets are working properly. I they are not, a government intervention that appears to distort incentives in one market may actually increase welfare by offsetting the consequence of market failure elsewhere. Applying to the trade policy, economists argue that imperfections in the internal functioning of an economy may justify interfering in its external economic relations. Trade policy may provide at least a partial solution (Ibid.). The Theory of the Second Best may appear to undercut economic arguments for liberal trade and justify trade protection.

However, some economists question the convincingness of the market failure argument and the theory of the second best. Yet economists are broadly united to defend free trade and believe the society will still get better off under free trade despite the presence of market distortion. The principle of targeting is one of the theoretical grounds defending free trade. It states that the solution to distortions, or market failures, should be targeted as directly at the problem’s source as possible. Market distortions caused by externality are rather associated with production, not trade. Thus, if the same production increase were achieved via a production subsidy rather than a tariff, the price to consumers would not increase and the consumption loss b could be avoided.

Abbildung in dieser Leseprobe nicht enthalten

Source: Suranovic, 2004

In the above graphic, the domestic producer price rises by the subsidy value from Pw to Ps. Because free trade is maintained and the importing country is small, the domestic consumer price remains at Pw. The effect of the production subsidy raises domestic supply from Si to S2, while demand remains at Di. Thus, the effect of a subsidy on consumer surplus, producer surplus, government revenue and the overall national welfare can be summarized as follows:

Consumer Surplus: 0 Producer Surplus: +a Government Revenue: - (a+b)

National Welfare: -b

The Principal of Targeting assures us that the domestic policy, which is production subsidy in this case, is the correct instrument to use. If for some reason production subsidies are impossible, then trade restriction policy can be introduced, which results in higher welfare than free trade. However, protective trade policy is never the most efficient response to the market failure. As the second best instrument, it cannot lead to as high a level of welfare as would be obtained under the first best policy (Krugman and Obstfeld, 2003).

Similarly, market failures caused by imperfect information or unequal distributional effect are not rooted in any malfunction of trade. Therefore, trade barriers are not the optimal policy in these cases, too.

If the market failure argument provides the rationale for government intervention, the principle of targeting then illustrates a general principle on how and in what form the government intervention should be conducted when dealing with market failures.

3.3 Public Goods, Externalities and Education

3.3.1 Definition and Characteristics of Public Goods

Public goods are excluded from the standard assumptions of perfect competition. The idea that the marketplace cannot provide public goods and handle externalities underlies the argument of government intervention.

A pure public good is characterized by:

Non-excludability: It is impossible to exclude anybody from enjoying the benefits of a public good. Once a public good is produced or provided, no one in the community can be prevented from its benefits.

Non-rivalry: Consumption of a public good by one does not diminish the availability of the good to others, or in other words, public goods are accessible to growing numbers of people without any more marginal cost.

In the real world, it is hard to make a neat exogenous division between private and public goods. Public-private composition of goods and services are often to observe. The degree of publicness of a certain good or service may also vary across societies and nations.

3.3.2 Is Education a Public Good?

Opinions are divided on whether education is a public good in various articles and books. To a great extend the non-rivalry criterion is fulfilled as in the traditional form of education, the attendance of a student in a class usually doesn’t diminish other students learning. But in this case strict non-rivalry is not possible, because an overcrowded class may result in a decreasing learning effect. The modern IT-born education has obviously no such concern since it can be disseminated virtually to possible great number of consumers through Internet. Yet all forms of education are exclusionary. It is perfectly feasible to exclude students from access to schools by setting a high tuition in the conventional education form, or from access to online educational service with a password required. Thus, education is not strictly a public good, and should, at least partially, be interpreted as a private good.

However, though not truly a public good in this sense, education does possess some externalities, which are defined as activities on the part of one party that enters directly into another party's utility or production function (Buchanan and Stubblebine, 1962). Sufficient evidences prove that education, like many other public goods, can produce positive social, non-market, outcomes. Influences of education may be radiated to the whole society through the education receiver’s behaviour. Education is not only a strong impetus for economic growth by directly providing qualified human capital, but also a cultural and scientific asset for individuals and society. Initial level and changes of education are positively correlated with economic growth. For example, an empirical study in Ethiopia provided the observation that education encourages early adoption and diffusion of agricultural innovations, and consequently shift the production frontier outward (Weir and Knight, 2004). Education may also raise concerns and sensitiveness to environmental protection. There are surveys measuring the magnitude of positive environmental externality produced by schooling: one additional year schooling of indigenous people in America correlates with 13.2%-21.5% less annual area of old-growth forest cut by a household (Godoy and Contreras, 2001). Education also has positive correlation with public health. Behrman and Wolfe's study supports the proposition that women's schooling increases nutrient intakes and improves their health (Behrman and Wolfe, 1989). There is still a long list of education related social effects remaining unmentioned, as for example, increasing political stability, reinforcing democratization, lowering crime rates, etc. In fact, externalities of education are numerous, diversified and far-reaching.

These positive externalities are, however, not taken into account when the consumers make investments. As explained, education can be, at least partially, viewed as a private good. Education brings private benefits, especially pecuniary ones. Each additional year of schooling appears to raise earnings by about 10 percent in the United States, although the rate of private return to education varies over time as well as across countries (Krueger and Lindahl, 2001). In reality, we notice that people are willing to pay more for a private education of higher quality, or seeking overseas education which requiring considerable amount of tuition, even in cases where domestic public education is provided for free. In deed, many students and their parents consider education as a long-term lucrative investment strategy as the students capture the benefits of education in the form of personal development, additional life-time income and more promising career perspective. This phenomenon can be observed at all levels of education, though most noticeable in higher education and vocational training. The relative proportion of publicness and privateness of education varies with the level of education. The social gains are presumably greatest for the very lowest levels of education (Friedman, 1955). Primary and secondary education are considered widely as a public goods whereas higher education has much less public good elements. This also provides the economic reason for the high degree of government involvement in provision and/or financing of basic education across countries. In the GATS negotiation many members reserve responsibility on primary and secondary education to the state, and limit the negotiation only to higher education and vocational training.

Besides, the division between public and private goods, as mentioned before, is often exogenous and the degree of publicness/privateness of a certain good may vary across societies and history.^[10] In some countries, the public infrastructure for higher education is accessible to all, and private supply only plays a minor subordinate role, whereas in other countries private expenditure and provision dominate the higher education (Kanbur and Clark, 2002). Among OECD countries, the participation of private sources on tertiary educational institutions in the year 2002 varied from 0.4% in Greece to 85.1% in Korea (OECD, 2005; also see Annex 11).

3.3.3 Financing and Provision of Public Goods: the Case of Education

Similar to provision of private goods, the efficient provision of public goods should equate costs and benefits at the margins. But different than private goods, provision of public goods calls for their marginal rate of transformation in production to equal the sum of their marginal rates of substitution in consumption due to their nonexcludable benefits and nonrival consumption (Samuelson, 1954; Inge et al, 2003). Thus, it creates challenges to the market mechanism since the social marginal benefit is largely ignored by consumers, and only private benefits are taken into consideration. Therefore, if self-interested consumers have to finance a public good by themselves, there will not be enough demand, deviating from social optimal amount. Following Samuelson's celebrated formulation, for efficiency reasons public sector production is required for goods with such collective-consumption characteristic since markets fail to allocate resources Pareto-efficiently. In addition, a 'social planner' may also have the knowledge about consumer preferences for efficient production (Samuelson, 1954).

However, questions on who should produce and who should pay for public goods have been hotly debated, central to the question of the balance between states and markets. One logical problem, which has been criticized in Samuelson's argument, is that even if market production fails to reach Pareto efficiency, there is no guarantee that collective-governmental production and supply will be any more efficient than private or non-collective production and supply. Thus, results emerge from publicly organized supply must, in each case, be evaluated and compared with those that may be predicted to emerge from market supply. Similarly, how can the government expect to do better in revealing consumer preferences if the market fails to do it? (Buchanan, 1968 and 1975; Holcombe, 1997) When talking about market failure, it is too often assumed that the converse is necessarily a ‘government success’. In deed, there are often situations where government interventions, which are originally designed to correct market failures, lead to the reduction of allocative efficiency. These situations are generally defined as government failures. Relying on bureaucracy, governments often lack the incentives to serve consumers. Politicians may provide public goods for the interest of their own rather than for the public interest. In the case that government becomes the sole provider of a public good, social optimal amount may not be supplied and parts of the market may remain unserved. Some even argue, private productions of public goods in a competitive situation, when possible, are usually more efficient than governmental solutions. Competitive enterprise is likely to be far more efficient in meeting consumer demand than nationalized enterprises (Cowen, 1988; Taylor, 1999; Tooley and Stanfield, 2003; Friedman, 1955 ).

Nevertheless, the necessity of government intervention in the presence of market failures is still to be recognized, if not taking the form of direct production and provision. Recalling the theory of the second best and the principle of targeting, government may subsidize production or consumption to reverse a perceived market failure caused by positive social benefits. Accordingly, education should be subsidized by the states, but in an appropriate proportion to its externalities, and related to its composition structure of private/social benefits. At primary and secondary level of education, which are commonly recognized as public goods, states should remain the role as main financier, whereas students and their family should take on major finance responsibilities for higher education and particularly professional training, which only has a slight public goods nature, and from which private benefits greatly exceed non-private benefits. This funding strategy can not only help to relieve the already overburdened public expenditure in many countries, providing a solution to the problem of insufficient public finance, but also enable governments to concentrate limited finance resources on the educational segments of higher priority, and thus to better serve national education objectives and ensure the basic right to education for everybody. At the same time, government should develop other supplementary policy instruments to ensure that students and families have access to credit and mean-tested government grants in order to tackle the problem of distributional effect and ensure equality of opportunity (Taylor, 1999; Dur and Glazer, 2005).

It is also worthy mentioning that benefiting regions of some public goods may not coincide with or limited to political boundaries. Their externalities exceed national territories and extend globally, so they are considered as global public goods (Agerskov, 2005). The World Conference on Education in Jomtien (1999) and Dakar (2000) declared the global commitment to a common objective - 'Education for All'. It shows that education, at least basic education, has such a feature of global public goods. Therefore, arranging for the production and provision of education should be discussed in the global circumstances, requiring for global policy instruments, international cooperation and active involvement of relevant international organizations, donor governments and international communities. Theoretically, financial resources, particularly for developing countries, can also be raised from international donors, and on the other hand, government may also spend public funding for import of educational services, or subsidize foreign suppliers.

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^[1] These two UN covenants are: ‘the International Covenant on Economic, Social and Cultural Rights’ (CESCR) monitored by the Committee on Economic, Social and Cultural Rights, and ‘the International Covenant on Civil and Political Rights’ (CESCR) monitored by the Human Rights Committee.

^[2] This country is the United States of America.

^[3] This information was originally from a Report submitted to the Commission of Human Rights by the high commissioner of human rights, Mary Robinson, in September 2002 (COH, 2002), when there were 144 WTO members. Afterwards 5 more countries have joined the WTO: Armenia, Cambodia, Former Yugoslav Republic of Macedonia, Nepal, and Saudi Arabia (WTO Website). I checked the ratification status of the ICESCR and CRC in these countries (OHCHR, 2004), CRC has been ratified in all these countries, and except for Saudi Arabia, other four countries have also ratified ICESCR.

^[4] The GATS divides services into four modes: 1) cross-border supply, 2) consumption abroad, 3)commercial presence, and 4) presence of natural persons. These four modes will be explained in the next sub-chapter. Most available statistics are of mode 2.

^[5] The specific factor model developed by Paul Samuelson and Ronald Jones, or Heckscher-Ohlin factor proportions theory.

^[6] A large importing country may drive down the world price, raising the terms of trade gain, which may exceed the efficiency loss, and thus make the effect of tariff on the aggregate national welfare becomes uncertain. However, the production distortion loss and consumption distortion loss remain the same as in the case of small country.

⁷ 1 Pareto optimality refers to the situation when there can be no arrangement which will leave someone better off

⁸ without worsening the position of others.

^[9] Public good and its properties will be explained closely later.

^[10] Indeed, it is rather a political decision whether and to what degree a certain good, or in our case, a certain form of education, has social advantage, and how much of the limited public resources should be spent on it. The role of economists is not to make such decision, but to clarify the issues to be judged by the community in decision­making. (Friedman, 1955)