Human Capital Index

Weekender
ECONOMICS

Measuring productivity of next generation of workers
BY PANDITHA BANDARA
THE term human capital is used to describe the stock of skills, knowledge, experience, attitudes, and aptitudes of the human inputs into production.
Human capital can be traced back to 18th century economist Adam Smith who is commonly known as “father of economics”. In his book Wealth of Nations – which was published in 1776, he noted four types of fixed capital including the acquired and useful abilities of all the inhabitants or members of the society. Subsequently, this idea has been developed and expanded by various economists.
However, it was not until recently measuring of human capital across the world has begun. In 2012 World Economic Forum initiated to publish Global Human Capital Index for 130 countries. On Oct 11, 2018, the World Bank Group released its inaugural Human Capital Index (HCI), in Indonesia during its annual meeting covering the status of human capital for 157 countries including Papua New Guinea. HCI is an outcome of Human Capital Project( HCP) undertaken by the Bank.
This article is based on the literature published by the World Bank and scholars on this subject.
The HCI will provide a bird’s-eye view of each country’s level of human capital. It quantifies the contribution of health and education to the productivity of the next generation of workers. It consists of the knowledge, skills and health that people accumulate throughout their lives enabling them to realise their potential as productive members of society. The index is designed to capture the amount of human capital a child born today could expect to attain by age 18 in view of the risks of poor health and poor education currently prevailing in the country where that child lives.

Three components
The HCI has three components: survival, expected years of learning-adjusted school and health. The first component reflects the fact that children born today need to survive until the process of human capital accumulation though formal education can begin. This is measured using the under-5 mortality rate. The second component is measured on the quantity of education a child can expect to obtain by age 18 is combined with measure of quality: how much is learnt in school based on countries’ relative performance on international student achievement tests. Heath is measured using two indicators for a country’s overall health environment: (a) the rate of stunting of children under age 5; and (b) the adult survival rate, defined as the proportion of 15-year-olds who will survive until age 60.

Interpretation
The health and education components of the index are combined in a way that reflects their contribution to worker productivity, based on evidence from rigorous micro-econometric empirical studies. The resulting index ranges between 0 and 1. A country in which a child born today can expect to achieve both full health (no stunting and 100 per cent adult survival) and full education potential (14 years of high-quality school by age 18) will score a value of 1 on the index.
Lower and upper bands indicate the range of uncertainty around the value of the HCI for each economy. The HCI database provides data at the country level for each of the components of the index as well as for the overall index, disaggregated by gender.
The Human Capital Project (HCP) includes an international metric to benchmark the key components of human capital across countries. A score of 0.70, signals that the productivity as a future worker for a child born today is 30 percent below what could have been achieved with complete education and full health. If a country has a score of 0.50, then the gross domestic product (GDP) per worker could be twice as high if the country reached the benchmark of complete education and full health.

Benefits
The HCI is designed to highlight how improvements in current health and education outcomes shape the productivity of the next generation of workers, assuming that children born today experience over the next 18 years the educational opportunities and health risks that children in this age range currently face. The HCI also measures how well governments enable their people to reach their full potential. It is also good eye-opener for individual countries to assess their performance and stratergise their spending towards quality education and health. The HCP has also launched a medium-term programme of data and analytical work to improve measurement of a wide range of human capital outcomes, better understand how human capital is accumulated, and identify the country policies that can promote it.
Health is an important component of human capital. People are more productive when they are healthier. In Nigeria, a program providing malaria increased workers’ earnings by 10 per cent in just a few weeks. A study in Kenya showed that deworming in childhood reduced school absence while increasing wage in adulthood by as much as 20 per cent, this is due to a pill that cost 25 cents to produce and deliver.
Investment in human capital brings returns to individuals and economy as a whole. Healthy and educated individuals earn more. It is a personal benefit. Similarly, healthy and educated workforce raises the productivity of economic activities. This leads to economic growth. Further, human capital complements physical capital in the production process. It is an important input to technological innovation and long – run growth.
Individuals and families often cannot afford the costs of acquiring human capital. Many disadvantaged families want to invest in better health and education for their children but cannot afford to do so. The analysis of HCI scores reveals that developing countries overwhelmingly occupy the lowest positions on the index. A World Bank communiqué states that a country can end extreme poverty and create more inclusive societies by developing human capital. This requires investing in people through nutrition, health care, quality education, jobs and skills.

Government intervention needed
In the poorest countries in the world, there is a significant risk that the child does not even survive to her fifth birthday. Even if child does reach school age, there is a further risk that he or she does not start school, let alone complete the full cycle of 14 years of school from pre-school to Grade 12 that is the norm in rich countries. The time child does spend in school may translate unevenly into learning, depending on the quality of teachers and schools him or her experiences. When child reaches age 18, he or she carries with his or her lasting effects of poor health and nutrition in childhood that limits him or her physical and cognitive abilities as an adult. Therefore, government intervention is very important. The World Bank is already working with nearly 30 countries to help to identify the areas in most need of attention and to find the best path to overcoming barriers to better results in respect of human capital development.

Analysis
The highest and lowest index reported is 0.88 and 0.29 respectively. Singapore is ranked 1 in the index scoring highest score of 0.88. The first top 10 and lowest 10 countries according to the ranking are given in Table 1 and 2 respectively. PNG occupies 137th place in the ranking list with the score of 0.38. Burundi, Ethiopia, Sudan and Uganda also scored 0.38. United Kingdom is in 16th place with score of 0.78 and the USA is in 27th place with score of 0.76.

Criticisms
Some counties criticise the ranking saying that the index does not reflect the actual effort taking those countries to improve human capital. India for instance, rejects the ranking. India ranked 115th out of 157. India scored 0.44, lower than the average of 0.56, suggesting a child born in the country today will only be 44 per cent as productive as she could be if she had complete health and education. The country brief indicates that India’s score is lower than the average for its region and income group.
In a statement, the Indian finance ministry said the HCI has “major methodological weaknesses, besides substantial data gaps” and declared it would “ignore” the ranking. But experts called on the government to acknowledge its failures and take steps to improve health and education outcomes. The WB admits that there are shortcomings due non availability of complete data set for some countries.
However, the HCI will be updated periodically to monitor progress, and it will be expanded and refined as data improve. In this context WB says it is already working with nearly 30 countries seeking development priorities for human capital development. This is to identify the areas in most need of attention, and to find the best path to overcoming barriers to better results. The Bank expects to expand this project as more countries participate and pursue more and better investments in human capital Strategic support through the project is available to all WB client countries.

Status of PNG
Despite progress in some indicators, PNG’s ranking of 0.38 on the WB’s HCI is below the EAP regional average (0.62) with large variations in human capital outcomes across the country. In response to identifying tractable constraints that are common across most service delivery sectors, the WB’s Systematic Country Diagnostic for PNG, recommended an overarching approach, including: (i) increasing the quantity and quality of spending; (ii) mitigating capacity constraints; (iii) improving planning, monitoring, and evaluation; and (iv) improving the functioning of the decentralized institutional service delivery mechanism in order to more effectively access remote or vulnerable areas.
The recent assessment report of International Finance Corporation (IFC) analysing the HCI states that a child born in PNG today can expect to be 38 per cent as productive when she grows up as she could be if she enjoyed a complete education and full health, as estimated by the World Bank’s Human Capital Index (HCI).
Half of all children born in PNG are stunted and are therefore at risk of cognitive and physical limitations that can last a lifetime.
A child who starts school at age four can expect to complete 8.2 years of schooling by the age of 18, but this would be equivalent to only 4.7 years in terms of actual learning. Only 78 per cent of 15-year-olds will survive until age 60. These poor health and education outcomes are evident despite considerable GoPNG investments into education and health over time and are a consequence of inadequate levels of public spending, as well as poor quality of spending overlaid by structural service delivery challenges and exacerbated by outdated and limited data.
Given the critical role of human capital in accelerating its development aspirations, the GoPNG has agreed to be an early adopter under the WB’s Human Capital Project. This project represents a new effort to understand the link between investing in people and economic growth. It provides an opportunity for dialogue between the government and partners on strategies to improve indicators of human capital. The Country Partnership Programme will support these efforts to enhance human capital through cross sectoral engagements including in education, health, agriculture, and nutrition interventions.
In this regard, the WBG proposes to work with the PNG Government to help operationalise the human capital acceleration plan, which takes a whole-of-government approach to strengthening human capital investments.

  • The writer is a senior lecturer at the University of Papua New Guinea’s School of Business and Public Policy.

Leave a Reply