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Human capital and the benefits, explained

The concept of a human’s intrinsic value to the economy, and world, isn’t new — but changing world demographics are changing its perception.

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In the business world, people are a company’s most valuable resource. An individual can be the difference between closing a deal or losing a customer, for example, or they might boast a robust network of helpful contacts. In short, people possess intrinsic social and business currency.

One way to assess this personal value and impact is by considering human capital. In simple terms, human capital is the sum total of a population’s health, knowledge, and skills; and it’s bolstered by ensuring people have sufficient and consistent access to healthcare and education.

Devoting funds to education and healthcare only has upsides, which leads to the big question: Why aren’t more countries prioritizing these investments — and, as a result, giving their populations a chance to thrive? Here’s some brief history for context.

Economists have been fascinated by the impact of human capital for centuries.

Despite its relatively simple definition, human capital has a somewhat complicated (and occasionally controversial) history. In the 1950s and ‘60s, human capital had a major moment, thanks to the work of labor economics thought leader Jacob Mincer and future Nobel Prize winner Gary Becker.

Yet the concept of human capital was hardly new. In fact, a 1966 Journal of Political Economy article by B.F. Kiker established that economists had been trying to quantify individual human capital for centuries. Around 1691, English Renaissance man Sir William Petty worked to “place a money value on laborers,” as Kiker put it. In the 19th century, German economist Ernst Engel came up with a mathematical formula to figure out “total cost of producing a human being (neglecting interest, depreciation, and maintenance)” up to the age of 26.

Despite the post-World War II rise in human capital’s popularity, Nobel Prize-winning economist Theodore Schultz noted in 1961 that some hesitated to use the term itself due to a potential connotation with slavery, or an insinuation that people were a commodity: “To treat human beings as wealth that can be augmented by investment runs counter to deeply held values.”

Schultz himself, however, stressed the importance of human capital to a thriving economy, and pointed out “the simple truth that people invest in themselves and that these investments are very large.” This gets to the heart of human capital’s benefits: These are investments in people and their quality of life — a category including such things as employment attainment and a longer lifespan — and their impact goes beyond mere numbers.

Investments in healthcare and education lead to many positive benefits.

Nurturing human capital is an essential and foundational part of economic growth and prosperity, and is vital for fostering an educated population that’s ready, willing, and able to tackle 21st century challenges. This makes sense, since healthcare and education are inextricably linked: If people are healthy and free from physical and emotional stressors, they are better equipped to amass aptitude and expertise and develop the tools needed to be productive members of society.

Plus, more education is also good for you: A 2006 National Bureau of Economic Research paper found that “an additional four years of education lowers five-year mortality by 1.8 percentage points; it also reduces the risk of heart disease by 2.16 percentage points, and the risk of diabetes by 1.3 percentage points.”

Prioritizing education and healthcare investment has been shown to have enormous economic benefits. For example, Vietnam overhauling its education and healthcare system coincided with a 1,500 percent increase in GDP since 1985. A 2008 EducationNext study of the 40-year GDP growth rate of 50 countries, meanwhile, found that when the “average number of years of schooling in a country was higher, the economy grew at a higher annual rate over subsequent decades” — to the tune of a 0.37 percentage point increase with each added average number of years.

”The human capital investment is a long-term social wealth creation,” says Fred Swaniker, chairman and founder of the African Leadership Academy. “And it’s what allows us to drive progress and really solve our greatest challenges and capture our greatest opportunities.”

There are great global opportunities for human capital investments.

In the coming decades, global demographics are going to shift dramatically. Crucially, the world is aging. The United Nations estimates that by 2050, the percentage of the population aged 65 and up will double, and the percentages of both children up to age 14 and young people between the ages of 15–24 are decreasing. To ensure there are educated, healthy employees to replace those who are reaching retirement age and leaving the workforce, it’s vital to cultivate and encourage the talents of the younger generations.

If extrapolations hold true, the bulk of these younger workers will be located in Africa: By 2035, the continent is on track to have the largest workforce in the world, to the tune of about 1.1 billion people. In an interesting twist, however, Africa is also the youngest continent. The average age of an African is just 19.5.

”Prosperity is only created through the ingenuity of a nation’s people, and Africa’s greatest resource, therefore, are the young people,” Swaniker says.

It’s clear that Africa has a great opportunity to intervene and influence future generations, but it’s also a societal and economic imperative to do so. The solution is implementing human capital-centric solutions, drawn from existing best practices. For example, two of the highest-performing African countries in the World Economic Forum’s 2016 Human Capital Index — Mauritius and Ghana — offer intriguing models.

Mauritius already offers free education and healthcare for residents, but is working on modifying its higher education curriculum in order to produce workers that are better aligned with modern technology and employer needs. In the last two decades, Ghana has paired greater government healthcare investment with policies and initiatives aimed at addressing infant, child, and maternal health. Although a 2017 study found that maternal mortality rates decreased but remained high between 1995 and 2014, the country’s average life expectancy rose by more than four years in the same time frame, and infant deaths decreased by 50 percent.

Yet Africa isn’t alone in having a human capital opportunity. According to the World Economic Forum’s Human Capital Report 2016, over one-third of the world’s workers aren’t having their talent (and, as a result, economic) potential maximized. In other words, greater investment in education and healthcare is a global concern that touches all countries, from the most prosperous on down.

For example, Finland — which ranked No. 1 on the WEF’s 2016 Human Capital Index — is known for its enviable educational system, but saw its reading, math, and science scores decrease precipitously in the 2015 Program for International Student Assessment (PISA), potentially due to post-recession cost-cutting.

”What Finland should learn from these recent results is that reducing education spending always comes with consequences,” Finnish author and education thought leader Pasi Sahlberg told the Washington Post. “It is very shortsighted to think that high educational performance and continuing betterment of schools would be possible when resources are shrinking.”

Human capital investments are long-term, meaning they won’t pay off right away, but are worth the wait.

Finland’s choice isn’t necessarily out of the ordinary, and it signifies the larger challenges of investing in human capital. One reason that investments in education and healthcare are not always at the top of the to-do list? Lack of funds. “When nations and societies have limited resources, there’s always competition for those resources,” Swaniker says.

Complicating matters further is that human capital investment isn’t turnkey. Solutions that work for one country need severe modifications in another. And investment and output don’t have a 1:1 correlation. Just look at the United States, which spends slightly more than international averages on education per student, but lags behind on achievement due to other factors.

Still, all of these challenges are nothing compared to the consequences of ignoring the importance of human capital. Even though healthcare and education investments might not offer instant gratification or immediate dividends, they provide a dramatic payoff down the line. Think of human capital investment as a rocket booster that accelerates achievement, health, and personal satisfaction — and economic growth.

Progress is possible when we invest in young people’s potential. Read the Goalkeepers 2018 report to learn more.

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