Why is human capital important for development?

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    Why is human capital important for development?



    The confluence of rapid technical change, globalisation and economic liberalisation in recent years has prompted governments in developed and developing countries alike to prioritise skills development as a key strategy for economic competitiveness and growth.


    In developing countries, especially the poorest ones, the challenges are profound and complex. Policy makers acknowledge the critical role of a strong human resource base in complementing other investments and policies to boost productivity and economic progress. Yet while these countries report lower average levels of educational attainment than industrialised countries, in some countries significant numbers of those with high levels of formal qualifications end up unemployed, working in jobs that under-utilise their skills or emigrating to other countries. The result is a misallocation and waste of resources that these countries can ill-afford. Developing countries are therefore in urgent need of new strategies and approaches that focus more explicitly on the links and coherence between investments in skills development and employment and productivity.



    What are the opportunities that human capital provides?


    Skills affect people’s lives and economic and social development in many ways. Skills improve labour market outcomes both in terms of employment rates and earnings. But the positive role of skills extends beyond its impact on career prospects: adults with low levels of foundation skills have a higher likelihood of reporting poor health and participate much less in community groups and organisations; and adults with high levels of foundation skills are much more likely to feel that they have a voice that can make a difference in social and political life. These results are consistent across a wide range of countries, confirming that skills have a profound relationship with economic and social outcomes across a wide range of contexts and institutions. Skills are also key to tackling inequality and promoting social mobility. Investing in human capital is the single most effective way of not just promoting growth but also of distributing its benefits more fairly.


    Investing in skills is far less costly, in the long run, than paying the price of poorer health, lower incomes, unemployment and social exclusion – all of which are closely tied to lower skills.



    What are the challenges?


    Governments face a number of challenges to make the most of available skills. Getting the best returns on investment in skills requires the ability to assess the quality and quantity of the skills available in the population, determine and anticipate the skills required in the labour market, and develop and use those skills effectively in better jobs that lead to better lives. These represent major challenges in developing countries where data on the available skills is of poor quality and the demand for skills, present and future, is often a black box. 


    In addition, skills policy requires coherence and co-operation across all areas and levels of government, as well as with the private sector, social partners, teachers and parents. Skills development is more effective if the world of learning and the world of work are linked. Compared to purely government-designed curricula taught exclusively in schools, learning in the workplace offers several advantages: it allows young people to develop “hard” skills on modern equipment in a workplace, and “soft” skills, such as teamwork, communication and negotiation, through real-world experience. Hands-on workplace training can also help to motivate disengaged youth to stay in or re-engage with the education system and to smooth the transition from education into the labour market. Workplace training also facilitates recruitment by allowing employers and potential employees to get to know each other, while trainees contribute to the output of the training firm and earn some income. Employers have an important role in training their own staff; but some, particularly small and medium-sized enterprises, might need public assistance to provide such training. Achieving this co-operation and ensuring it is fruitful is a major challenge in both developed and developing nations. Key issues concern the development and management of a coherent skills strategy, the involvement of the private sector and social partners in the setting of curricula that are more relevant to labour demand, the splitting of financing responsibilities between government, students and their families and the private sector.


    Maintaining skills throughout each individual‘s lifecycle is another key challenge as it requires setting up high-quality, easily accessible opportunities for adult learning – both up-skilling and re-training. This is particularly challenging in developing countries where participation in initial education remains an issue for a sizeable share of the population. In these countries, action will have to balance carefully equal access and completion of lower-secondary education and further learning in school and for adults.


    Finally, to ensure that firms make the best use of the skills available, both developed and developing countries need to put in place framework policies that help create better skilled jobs in the formal sector. Failure to do this risks generating significant mismatch between the skills of young cohorts and the opportunities that the local labour market offers, increasing the likelihood of brain drain and, ultimately, social unrest.