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.
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...
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