T Manuel: Institute of International Finance Anniversary meeting

21 October 2007

In our pursuit of better understanding and co-ordination of macro-economic
and financial management internationally – and your conference program has
included a formidable array of speakers on these issues – there is some risk, I
think, of losing sight of the human purpose of our shared institutional
arrangements. Human development – building human capabilities, constructing
opportunities for people to lead better lives, sharing knowledge and building
interconnected institutions – if we don't achieve these things then our
financial intelligence and macro-economic structures have little meaning.

So I hope you will allow me to deviate somewhat from the mainstream of
Washington discourse. I'd like to raise some concerns about global
co-ordination in the arena of skills, careers, human capital formation and how
these issues impact on development prospects of poor countries.

Global inequality of wealth and opportunity is clearly bound up with global
inequality of human capital, the distribution of knowledge, skills and
institutional capacity. While knowledge is to some extent a shared public good
and skills are comparatively mobile, there are clearly quite powerful dynamics
that work to reinforce, perhaps even widen human capital inequalities, both
within and between nations. Investment in people is a proportionately larger
industry in developed countries - richer nations can invest more in their
education and training systems and, of course higher income families can
concentrate more resources on cultivating and branding their progeny. There are
no doubt diminishing returns here, which is partly why it is a sensible public
policy to aim for equal access to good quality schooling. But the equalising
dynamics don't operate very rapidly and the human capital gap remains very wide
and tends to persist across generations, even in societies with a long history
of redistributive social policies.

The practical implications for developing countries can be deeply
debilitating. National leaders look in despair at the outflow of their talented
and educated people to opportunities in other countries – this is all
too-easily a self-reinforcing deteriorating spiral: people leave because the
outlook for their own countries looks unfavourable, and the outflow itself
reduces the prospects for growth and development. The mobility of skilled
people means that the widening earnings gap in the United States of America and
other developed countries over the past two decades has contributed to even
more extreme remuneration gaps in developing countries. Some countries have
tried to intervene in the movement of people, and of course international donor
programs include substantial technical assistance and capacity building
efforts, but these bring their own problems as well.

I don't need to belabour these points – we could all add our own
illustrative experience and examples. And of course high and rapidly rising
remuneration has been a particular feature of the banking and financial sector,
and so one does have to ask whether the status of finance as a well-paid career
is perhaps disproportionate by comparison with, say, engineering or teaching or
health services. There are market incentives at work here, of course, but let's
not forget that professional qualifications, training and accreditation systems
and many categories of professional remuneration are regulated or administered
in specific ways, with considerable variation between countries, so it is
possible that incentives work, in practice, in perverse ways. Education and
training are about long-term capabilities, and perhaps our problems are partly
about both developed and developing countries under-investing in expensive
categories of professional competence. There is the additional victim of
short-term approaches to training that has been highlighted in so many failures
– from banks to engineering – and that is the underinvestment in the values
that should guide the choices of professionals.

Shortages of skills are in part the result of past spending and
institutional decisions, such shortages can become binding constraints on
growth, and lead to rising inequality in income. Such things can all too easily
be blamed on globalisation and finance capital, where in fact there are deeper
distortions or policy failures at work that may go back many decades.

Globalisation and growth have accentuated shortages of skills for engineers,
doctors, nurses, plumbers and other artisans, in both the developed and
developing worlds. But these shortages are not due to globalisation itself, but
to past fiscal and market failures. From the perspective of the South it seems
that developed Western countries, who in their quest to save and minimise costs
and maximise returns, are producing too few engineers, doctors and nurses to
even meet their own demands. And so the developed world plunders developing
countries for the skills that they have failed to create, and makes it more
difficult or impossible for developing countries to reduce poverty and attain
their development goals.

According to the United Nations, about 90 percent of highly skilled migrants
live in a member state of the Organisation for Economic Co-operation and
Development (OECD). Until the 1960s, Western Europe was the biggest supplier of
qualified professionals to the United States. Now the developing countries have
emerged in recent years as the biggest suppliers of qualified professionals to
the advanced countries as a whole. During the mid-1990s, there were more than a
million and a half skilled expatriates from the developing countries in Western
Europe, the US, Japan and Canada. These migrant professionals, strongly needed
in developing countries, contribute to larger disparities between rich and poor
countries.

Africa, with its serious shortages of manpower, was the biggest loser,
having lost 60 000 professionals (doctors, university lecturers, engineers,
surveyors, etc) between 1985 and 1990 and an average of 20 000 annually until
the mid-1990s. On average, 10,4 percent of skilled migration is from Africa.
Asia also experienced an increase in outflows of skilled professionals to the
US, Canada, Australia and the United Kingdom during the 1990s, partly due to
the strong demand in OECD countries for Information Technology and other skills
in science and technology, as well as selective immigration policies that
favour skilled workers.

Migration from developing countries has enormous implications for them, as
their growth potential and service delivery suffer enormously as a result,
leading to more poverty and unemployment. Whilst there are many complex reasons
for such migration, both of an economic and political nature, there can be
little doubt that for many professions, it is the higher remuneration prospects
(in a hard currency) that drives such migration of skilled professionals. And
whilst there are benefits in terms of remittances which have increased
significantly, and which does help to reduce poverty as a result, it does not
however really improve the growth potential of such developing countries. Let's
take the health sector as an example:

The migration of African health-care workers to advanced economies has led
to an estimated shortage of around 820 000 doctors, nurses and other health
workers on the African continent. A shortage of doctors and nurses in Africa
has been identified as one of the biggest obstacles to providing life-saving
drugs to AIDS patients.

In South Africa we have 393 nurses and 74 doctors per 100 000 people,
compared with the 901 nurses and 247 doctors per 100 000 people in the United
States (US). Moreover, a high percentage of South African nurses and doctors
leave the public sector for the private sector, and shortages are especially
acute in rural areas. Now whilst we can look at how to make conditions in our
public health sector more attractive, to prevent the loss of health
professionals to the more lucrative private sector, there is not much we can
really do to stop them from leaving South Africa for jobs in developed
countries like the UK, USA, Canada, Australia and New Zealand. So South Africa
has become a training ground for developed countries, meeting all the costs of
doing so with not a penny in contribution from developed countries.

The main problem here is that developed countries are not producing
sufficient doctors and other health professionals for their own needs. In the
United Kingdom (UK), even though the National Health System (NHS) launched a
plan to attract 2 000 new general practitioners (GPs) by March 2004, there were
not enough senior doctors or GPs coming through the ranks or staying in the
profession, forcing it to recruit qualified professionals from overseas.

Even in the US, American Medical Association (AMA) has reversed its initial
view and now projects a shortage of doctors as 79 million baby boomers reach
retirement age, resulting in a greater demand for more medical care. The US
needs to train an estimated 10 000 more doctors a year, in addition to the
current 25 000 to meet these growing medical needs.

A similar story can be told about engineering and technical skills. It is
estimated by the South African Institute of Civil Engineering that South Africa
needs an additional 6 000 engineers to cover short-term needs, now that the
momentum of economic growth has increased. In the UK, skills shortage in
engineering has been identified as a business critical issue for various
industries. It has also been noted that the supply shortages of engineers was
being off-set in the short-term by workers coming in from Eastern Europe and
South Africa, where recruits tend to be academically very strong and
experienced. For the larger UK organisations, as business becomes increasingly
international it also makes business sense to employ a more culturally diverse
workforce with strong language skills.

Europe produces roughly three times as many engineering graduates as the US
each year. Asia produces almost five times as many. Yet the same source
indicates that five years after graduation, 80 percent of engineering graduates
in the USA are working in non-engineering fields. There are fears in the US
that it could lose its technological leadership position and competitiveness in
the global economy due to shortages of engineering capacity in an increasingly
high-tech dominated world.

Even India, which is well known worldwide for its software engineers,
experiences shortages of these professionals. According to Nasscom, which
represents India's software companies, there could be a shortfall of 500 000 IT
professionals by 2010. These shortages have driven up the annual remuneration
of even junior software engineers to US$45,000.

So there are challenges for national education and training systems, and it
seems clear that better international co-ordination is needed in this arena.
This is not just about planning and financing investment in skills, it is
surely also about curricula and learning technologies and what goes on in the
classroom. We know that in South Africa, for example, we are not making
sufficient progress in maths and science in our schools, and we need to find
ways of using technology and better teaching methods if we are going to meet
this critical need effectively.

I would emphasise that globalisation has accelerated, but not created these
difficulties. There can be little doubt that mismatches between the supply and
demand for skills contributes to widening earnings differentials, but it is
surely not enough to rely on this as the incentive and signalling mechanism
that will correct these imbalances automatically.

Education and training are investments for the long term, and their returns
are not easily measured or securitised; it is no surprise that the associated
financing arrangements are comparatively primitive. Alongside the enormous
efforts that go into structuring financial arrangements for business investment
and capital projects, perhaps it is time for more concerted efforts – across
countries and involving private and public sector stakeholders – to put the
financing of education and training on a better footing. This is partly about
more resources, channelled in the right ways. It is also about recognising that
we have a shared interest not just in the quantum of educational output but
also in its distribution – we have a shared interest in ensuring that education
and training opportunities become more equitably distributed across the world,
and that the mobilisation of skilled capacity is more fairly distributed
between nations. I am happy to accept that mobilising finance for education and
training is also about financial innovation although I am of course wary of
arrangements that might appear to bring greater resources to public service
delivery but, in reality, pass on the costs to future generations or other
parts of the fiscal envelope.

Education and training are kinds of investment that are also bound up not so
much with the impersonal economic arithmetic of yields and dividends and hurdle
return rates, but with the determination of earnings – and the unavoidably
political character of the resulting distribution of wealth and privilege.
Earnings differentials are signals that feed back into shaping learning
decisions and skills acquisition, but earnings patterns are also outcomes of
power relations, wealth and social values. We need a more careful and
considered understanding of the connections between values and earnings,
knowledge and power, education and privilege, training and access to
opportunity.

Professional skills are globally mobile, and there are obvious limitations
on the scope for individual country attempts to control remuneration trends
rigidly or interfere in the movement across borders of skilled people. But
there are also limitations on the scope for addressing skills shortages by
paying higher salaries or deliberate training interventions. These are issues
that are talked about far too cautiously, and addressed through effective
cross-border partnerships far too seldom. So let me invite your reflections on
this interconnected human and financial challenge, not just as another issue on
the global development agenda but as a core problem of shared values and our
commitment to a shared future.

Thank you.

Issued by: National Treasury
21 October 2007