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Spotlight 9: Investing in our Human Capital is critical

Updated: Dec 11, 2018


1. Introduction


As part of its Human Capital Project, the World Bank recently released its first Human Capital Index to benchmark what share of their human capital potential populations of 157

countries around the world are meeting. The report provides some sobering yet useful

insights for South Africa. This paper outlines the findings of the report, and offers some

pointers for the way forward.


2. Why countries should invest in human capital


Governments are often unwilling to significantly increase investment in human capital,

through improved education and healthcare for example, because these investments tend

to yield returns only in the long-term. They therefore often favour spending money on

items that provide returns in the short-term, and which will help them gain re-election,

such as big infrastructure projects.


The authors of the Human Capital Index report point out that many countries, especially

developing countries, lack the necessary information to identify their human capital shortfalls.

For instance, only 71 countries have participated in the PISA (Programme for International

Student Assessment) study, the most useful tool to benchmark the quality of education

internationally (South Africa has not taken part).


However, investing in human capital has become even more important than in the past,

and will continue to do so due to the changing nature of work resulting from rapid technological advances. Due to the encroachment of technology on the workplace, employers are increasingly on the lookout for workers with higher levels of human capital, “especially [with] advanced cognitive and socio-behavioural skills”.


At the same time, the returns for investing in human capital are very high. The report’s

authors argue that between 10 and 30% of the differences in GDP per capita from country to country are attributable to cross-country differences in human capital. There are also

tremendous social returns, as better educated and healthier people contribute more to

society.


But it is important to note that it is not just the financial investment that will shape the

quality of a country’s human capital. This is illustrated clearly in South Africa, where government spend on basic education is relatively high, but does not yield the quality education available in some other countries that spend relatively less.


3. The Human Capital Index


The World Bank’s first Human Capital Index forms part of its Human Capital Project, which

comprises three pillars: the Human Capital Index; scaling up measurement and research to

adequately track human capital across countries; and World Bank engagement with countries to heighten meaningful investment in human capital. The index is an instructive tool that will inform both of the other objectives of the Human Capital Project.


The index takes a forward-looking approach, by using a set of indicators to measure the

human capital achievement of the next generation. It explores what degree of full human

capital potential a child born today will achieve when he or she reaches 18 given the health

and education conditions prevalent in the child’s country of birth.


To do this, the index relies on three components: survival, expected years of learning-adjusted schooling, and health. The survival component is based on the child mortality

rate, and is a measure of the chances that a child will survive to school age (age 5). The

learning-adjusted years of schooling measure is intended to capture both the duration

and quality of schooling a child is expected to receive in different countries. It is a combination of the total average years of schooling and the quality of schooling as measured by international student achievement tests such as the TIMSS (Trends in International Mathematics and Science Study). The final component, health, is derived from the adult survival rate (% of 15-year-olds who survive to age 60) and healthy growth among children under five (measured as the share of children not stunted).


The index then computes these scores into contributors to productivity relative to a benchmark of full productivity reached through complete education and full health. A number of research findings underpin this, for instance that an additional year of school raises earnings by roughly 8%, and that an improvement in health resulting in a 1cm increase in adult height is associated with a 3.4% increase in productivity.


The result is an index score of between 0 and 1 for each country, with 1 signifying full human capital potential. A score of 0.8 indicates that a child born today can expect to reach 80% of his or her full human capital potential.


Singapore, Korea Rep. and Japan occupy the highest spots on the Index rankings, with scores of 0.88 and 0.84 for Korea and Japan. These are all countries that began significant investments in their human capital some time ago, and have reaped the rewards of becoming knowledge economies. South Africa is ranked 126th of the 157 countries assessed.



4. South Africa's position


When exploring the component scores, it is clear that South Africa scores relatively well on

the probability of survival to age five (0.96), and indeed this is an area where the country

has experienced improvements over the last decade. However, it is in the education and

health indicators that our score pulls us down. The expected years of school for South

African children is just 9.3, far below the potential duration of schooling of 14 years used

as a benchmark measure by the index. Furthermore, when the test scores of children are

compared internationally, the country’s Harmonised Learning Outcome score is just 343 on

a scale of between 300 and 600, 600 being the best. When adjusted for the poor quality

of schooling, the learning-adjusted years of school (in other words the number of years of

good quality schooling a child can expect to obtain) drops to just 5.1.


Similarly, on the health indicators, the adult survival rate (to the age of 60) is, at 68%, low

given that it is on par with that of South Sudan, a country plagued by extreme poverty and

war in recent years. This is no doubt due to the still high prevalence of HIV/Aids in South

Africa.


The share of South Africa’s children who are not stunted is at first glance encouraging at

73%. But again, when comparisons are drawn to other countries that are poorer, less developed, and have long periods of war in their recent histories, as is the case with Sierra Leone (74%) and South Sudan (69%), South Africa’s figure is disappointing.



Human Capital Index component scores

5. Conclusions


The Human Capital Index report urges governments to consider the wide-reaching benefits

of increased investment in quality human capital development. Not only will individuals

be better equipped to meet their potential, thereby also having the opportunity of higher

earnings and escaping poverty, but these investments result in broader social impacts too.

Healthier, more educated people are better positioned and more likely to make positive

contributions to society.


At the same time, the authors indicate that the earlier investments into building human

capital take place, the better, as returns are higher. It is costlier to finance interventions in

primary or high school when children have already suffered cumulative setbacks of poor

health and education early in life. Furthermore, those who started on a firm foundation of

good health and early childhood development will benefit more from investments in their

further development.


At its core, developing our people to meet their full human capital potential will require

the commitment of government to implement sound policies and effective, high-quality

programmes to enhance health and education. If work is done in this area, we have the potential to improve the prospects of every South African child born today to function at more

than just 41% of his or her potential as an adult. Moreover, the multiplier effect of these

investments will boost not only our economic growth, but help to improve socio-economic

conditions for all South Africans. Though this is a goal that must be driven by government,

business must also play a role in advocating more actively for targeted investments in quality

human capital. This is both a pragmatic and a moral imperative.



The HR Think Tank works to improve South Africa’s talent competitiveness through targeted research and interventions in key areas. It aims to ultimately shift the country’s trajectory by pursuing the conditions for people to reach their potential in the world of work. Members help to shape and influence policy and the broader challenges facing HR and labour.


Member organisations include: AIIM, Anglo American, Auditor General SA, British American Tobacco South Africa, De Beers, Exxaro, Hyundai Automotive South Africa, Imperial Holdings, Institute for People Management, JvR, Liberty, Medshield Medical Scheme, MTN Group, Old Mutual Insure, Pearson, Pepsico, Pick n Pay, Sanlam, Sasol, SA Medical Research Council, St Peter's Schools, St Stithians College,Sun International, Tiger Brands, The Banking Association SA, University of Johannesburg, University of Stellenbosch, Unitrans, Woolworths Financial Services, Vaal University of Technology and more...


For more information on becoming a member click here.


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