We have the Euro. Now we need competing education and training systems to make it strong, a European capital market for investment in education to make Europe competitive and grow together

by Ulrich van Lith


The individual as owner of knowledge, skills and competencies

It is the individual person who invests in his or her education and training, it is he or she who decides to use or not to use the knowledge, skills and competencies acquired. He or she also decides when and how to use them. He/she gets the benefits of his/her education, but also has to bear the costs and to take the risks of false investment in time, effort and money spent on education. Since we have good reasons to believe that the individual knows best what he can, what his potentials are, what he/she should learn and how he/she can make the best use of the knowledge and skills acquired, he/she normally cannot be forced to be educated and trained in a special way or to be forced to make use of what he/she has learnt.

Difficulties individuals have to finance their education and training

For this reason, individuals (students, trainees) and their families who do not have the money to be educated or trained have difficulties to get this money from a private bank, with the exception, they can offer a collateral or a guarantee that someone else will pay the money back, if he or she is unable to do so. This is one of the main reasons why schools and universities in Europe are nowadays mainly financed by the state. Knowing about the importance of education and training and their growing importance in a globalising and rapidly changing economy, we do not want that individuals and young citizens are either unable to pay for their education or start their professional career with high individual amounts of debts. We do not want the first, because the individual would suffer a loss in welfare and personal fulfilment when he/she cannot make the best of his/her natural endowments and also, because other members of our society loose welfare, since the individual cannot offer his/her qualified services to them. Finally, we all, Europe as a whole, would loose if this would happen too often. We would loose our competitiveness and, after some time, even social cohesion and peace.

The consequences of institutional unity of finance, production and control of education

The problem, however, is that most of the systems of state financing of education in Europe have characteristics that generally increase the demand for (school-based) education and training above an efficient level and distort its structure, because the individual himself does neither know what the teaching and training services cost he receives nor does he have to bear these costs individually. The costs are not an item of his personal cost–benefit-estimate. His behaviour is more as if the only costs he has to bear are his personal effort and time spent on education or is the lost alternative use of both. The second point is, teachers and teachers unions are interested in increase of education supply and can more easily raise wages above those of competitive markets. The third point is, that financing of education and provision of education are mixed up. Mostly the national state itself provides education and finances it institutionally. In sum, this creates problems of monopoly power, deficiencies in incentives to detect the natural gifts and potentials of individuals, to identify the changing as well as the relative stable demands for special and basic skills and competencies and to match both cost-effectively by screening and educational programmes and training. It strengthens teachers’ union power and forms state and teachers into one institution which finances, produces and controls education and is highly efficient in protecting itself against competition from outside, whether private or international. Co-determination of parents and students is for several reasons not effective to destroy this monopoly. Thus, the production of information about gifted individuals, required basic attitudes and key qualifications, about expert knowledge and skills needed, about cost-minimising solutions in the production process of multiple educational goods is reduced, the flexibility and innovational power of the education system and its parts lowered.

The potential role of the European Union

This is the point where the European Union, the Commission could come in to find its productive and value adding role: not to harmonise, of course, not to reduce the competency of national governments or to distribute still more money through education programmes or a European Educational Opportunity Bank, though the latter might produce additional value to the Community as a whole and to its members when it is an independent body. No, the main point is to show what national governments and their citizens and taxpayers will gain, if they allow their education systems and the parts of them (educational tracks, schools and universities, training companies) to compete freely for individual European citizens what ever their nationality may be. The political philosophy, the guideline must be to put them into competition for the best of those who want to learn, to be educated, trained and retrained.

To demonstrate the social costs of educational protectionism

Practically speaking, the first step is, the European Union, the Commission, has to show what governments, taxpayers and, last but not least, the individual will gain through open competing education systems. It has to demonstrate what the gains are through productivity increases and reduction of costs, through better education decision-relevant (ex ante) information available to parents, students, trainees, employers, schools and universities, through increased flexibility and innovation and, finally, through a better matching of produced competencies and their demand on labour markets.

To demonstrate the gains of an open education and training market

It must be shown that a European Education Market does not only give a chance to those who can pay for their education and training abroad – in addition to taxes at home -, and reduce the others to the chance of the very limited number of students and trainees who are ‘exchanged’ across national borders as goods are exchanged when there is no money. It means to enable them to choose their high school, their university, their training institution inside and outside national borders and pay for it. There is no need any more to balance incoming and outgoing numbers of students, to have special programmes for exchange. The market and the interested individual schools and faculties would do it.

National education systems and their parts would be put under a sound pressure to act and to react, to be student- and trainee-oriented, to look more precisely at what the labour market, what employers need, what position the individual can attain. It allows them to compete for students from all parts of Europe and to be rewarded by funds that come with the student or trainee. Why should English and French universities not take German students just after they have completed their 12th grade, not waiting until they have passed their Abitur. Why should they not set up subsidiaries to recruit students beyond national borders, why not take advantage of a beautiful landscape and healthy climate to attract students from less favourable regions? Should this be restricted to those who can pay both, taxes at home and fees abroad? Why should the others be compelled to attend their school or university at home where costs may be higher? Why should schools and universities not reduce their costs by recruiting cheaper but equally or even better qualified teachers from ‘abroad’, to teach English or French, German, Italian, etc. as a foreign language, e. g., to promote the understanding of different cultures and ways in which people think and live in various European regions?

Why don’t we take this secular chance to respond to the global challenge by turning our national monopolies into competing systems for the best of our young generation, a generation which has to cope with enormous structural and technical change under conditions that make new scientific knowledge available at nearly any location on earth, under conditions that no longer protect it from competition from emerging countries, countries that have set up their own education and research systems and which have highly motivated young people. We owe our young generation increased competence and quality orientation in our schools and universities instead of distributing rents to the established parties within the existing national systems. We have to take van de Miert as an example, fight against monopolistic power, tear down protectionist walls.

To initiate a shift to demand-side finance of education and training

The efficient way to do it is (1) to switch the system of education finance to a demand-side financed system, (2) to distinguish between financing education (i. e. to solve the problem of so-called capital market deficiencies in financing investment in education) and state subsidies to education. The latter reduce deficiencies of the education market, i. e. deficiencies in the provision of special, time and location determined socially desirable educational goods the production of which is for what reason so ever too low. The guideline here is: Governments should be more interested in the best education of their citizens than in running their education systems themselves. It means to set up the rules, supervise competition, to be on the side of parents, students and trainees to protect them against false information and fraud.

What are practical steps to do this?

A potential starting point: facilitate the use of the capital market for investment in education

A potential point of departure could be what we observe in certain countries within the European Union: Companies not only train and retrain their employees at their costs but also pre-finance these costs when training costs exceed benefits (returns from productive work) during training or contract period. They do this because they expect pre-financed costs including calculated interests to be covered and exceeded by future (hard and soft) benefits they gain from their skilled and qualified labour. In other words, firms are willing to pre-finance training, to give unqualified ‘hidden’ loans to their trainees. No bank would do this, give loans to trainees to be trained. Firms do it, because they know more about the personal characteristics of the trainee, they know what skills and competencies they need to be successful on the product market, they can judge whether the trainee will fit into the company or not, whether he will be able and willing to acquire the skills and competencies and to use them. This is why firms are willing to play the role of banks to trainees. And this is why banks and other suppliers on capital markets do not go into this business. Firms use their informational advantage to take over this original banking function. Sometimes firms even go on the capital market to borrow money for human capital investment or they increase their equity to invest in high skilled labour, which is more and more important in times of rapidly growing technological and structural change.

In Germany, e. g., the volume of pre-financed costs or ‘hidden loans’ of companies to their trainees (apprentices only) is estimated to average at about DM 8 100 per year and trainee, i. e. DM 12.9 billion for the economy as a whole (1995 estimate).

It is said that this informational advantage used for steering and controlling investment in vocational education and training is what Germany makes so successful in training and qualifying its labour force - take aside the disadvantages is has through its highly state-regulated dual vocational training system making it difficult or nearly impossible to be flexible enough for rapidly altering demands of skills and changes in required competencies.

The measures the European Union has to take is to give guarantees if individuals want to move from one company to another across EU-internal borders and to do this in co-operation with national and international institutions that are or might be interested to be part of a European wide guarantee system, like public and private banks and insurance companies. And, what schools and universities is concerned, to agree that those who want to attend a school or an institution of higher education abroad are able to transfer by their choice the average costs per capita to the school or university of their choice through a voucher or payments which are fully deductible of their tax bill or even reimbursed if this amount is higher than their income tax to be paid.


Personal Reminiscence

"Außer seiner hervorragenden fachlichen Kapazität und wissenschaftlich anregenden Art hat mich seine Geradsinnigkeit, seine moralische Integrität und Bescheidenheit besonders beeindruckt und ihn mir so sympathisch gemacht"

"Beyond his professional excellency and his intellectually inspiring manner it is his straightforwardness, his moral integrity and modesty that deeply impressed me and made him so sympathetic to me."