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Human Capital and Growth

Summary: During the course of history, we have seen how human capital could make a substantial difference to the economy. For example, the rise of East Asian countries between the 1960s and 1990s is largely made possible by the role of policies that focus on developing the human capability. Still, many countries, especially developing ones, continue not to appreciate this issue in the right manner. This article will present the importance of human capital to the economic development of the country and how international organizations are helping countries to achieve growth through building human capital.

World Bank suggested that the developing countries were severely lacking behind developed countries in terms of human capital investment. 70% percent of the economic growth of developed countries is attributed to the investment in human, while only less than a half (40%) of the economic growth of the developing country is through human capital investment channels. The consensus among economists (and policy-makers as well) is that investing in people strengthens economies, but the implementation of the relevant policy has been extremely overlooked in some countries, especially developing ones. Human capital cannot be underestimated, as we try to understand why we should not remain inactive on the problem.

Human capital

Human capital can be shortly defined as the skills and attributes of an individual, or a collective group of individuals, that, through performing its function as the labor in the economy, is possible to create economic value. The concept was first termed by Nobel Laureate Gary Becker and it has been frequently mentioned since. Following the objectives of poverty reduction of the past three decades, this might turn out to be one of the most important economic issues moving forward.

Usually, when we discuss human capital, the most relevant aspect is education, as it is the primary means to translate skills and attributes to productivity and output. However, there are also other indirect factors of human capital that are highly relevant to economic growth, for instance, health, social policies and population.

In this issue, we will look at the two main components of the many that form the structure of human capital: education and health.

Firstly, the goal of education has been long considered as the strong foundation of building a sustainable human capital basis. Research has shown that educational attainment, measured by years of schooling (and enrolment rates in other designs), is strongly correlated with economic growth across countries around the world. However, while the number of schooling years is measurable, it is difficult to imagine that a school year in the Netherlands can be considered as equal to a school year in a sub-Saharan country in terms of quality and the knowledge gained. In order to address this problem, the World Bank introduces the learning-adjusted school year in order to make education in each country more comparable. The readjustment of the variable makes the correlation between educational attainment and economic growth even stronger, suggesting that human capital is as important as ever in our contemporary times.

In their findings, between the top quartile and bottom quartile country in terms of wealth, there is a difference of 1.25 percent of GDP that is attributed to the role of human capital in the last 25 years. To put it in perspective, the global economic growth in the last 25 years has been around 2 to 3 percent; so the difference of growth that is attributed to the role of human capital is indeed very significant. In fact, in an era where technology and innovation are the motivators of growth, investment in human capital is the right direction for many (developing) countries if they want to remain competitive with countries around the world.

The second aspect that I want to focus on is the importance of improving individual health to human capital. Ensuring good health throughout the entirety of a person’s childhood is essential to the attainment of education at the early age in which knowledge can be easily absorbed. In this case, public organizations have long addressed the eradication of stunting and infectious diseases in many underdeveloped and developing countries where people lack primitive access to healthcare.

In terms of household investment, families could buy protectionary measures to minimize the chance of their children getting caught by a disease. As a result, healthier children would be more engaged in learning activities and have fewer absent days, which effectively raises the level of individual human capital. If more families are engaged into preventive measures, all children can be the beneficiaries since the transmission of diseases is lowered across all households, so all children would go to school more often in a way such that it increases the social human capital. Also, by making sure that an individual is healthy, that can be translated to more productive capacity in the latter stage of their career.

For developed countries, where malnutrition or diseases are less of a problem, then the necessity to create equal opportunities for people is more prioritized. With regards to disabled people, they usually could not earn the same privilege as their other counterparts, since they usually are seen as inferior, even in some cases, they struggle to even live on their own. In some countries, public educational programs on helping the disabled to live independently and training in specialized skills have had some tremendous achievements. Employment across disabled people increases dramatically when they are trained to prepare to participate in the workforce.

Measurement of human capital

In order to quantify human capital, one of the newest entries to the World Bank database that is going to assist is the Human Capital Index, which is still due to be published later in the year. Because of its first publication, there is going to be much controversy surrounding the myriads of aspects of the data: the construction of the model, the measurement and the results themselves. Since countries are being put in comparison to one another, not many government officials would not be too e happy seeing the results. However, the key takeaway of this research (or at least the goal of its first publication) is that whether administration of a certain country looks their results (in comparison to others) is they should make some positive and urgent changes to their policy so as to develop or strengthen its domestic human capital capacity

Investment in human capital.

Human Capital indicator might need some refinement in the future, but as long as the data are quantifiable, reliable and accurate enough, it would be able to attract more investment. The investment would not only come from the public sector (which only have limited income through taxes), but it can attract private sector which has more resources as well. Usually, the private sector decides to stay away from human capital investment because investment in human capital is considered a long-term investment that would not able to yield immediate returns. While there are many private enterprises and foundations that possess forward-looking perspective and have been actively engaged for a number of years, there are yet still many firms that have the capability to support and finance such projects. Providing in-house training programs in terms of specialized skills can be one of the many projects that could yield possible returns only within a couple of years.

While this issue of the investment into human capital cannot be resolved within the length of a magazine article hope our audience can understand the overview of the issue. As the World Bank begins its project on building human capital and projects a clearer build path, they hope developing countries would start to follow suit.


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