Human Capital. Challenges for Russia

В. А. Мау
Human Capital. Challenges for Russia

Russian Presidential Academy of the National Economy and Public Administration


Key words: human capital; education; healthcare, pension system, socioeconomic policy. JEL: E24, G23, H75, I15, I18, I25, I28.

The search for national priorities

The debate over national priorities that began when the Communist period of Russian history ended has now almost run its course. A consensus has been reached in our understanding of the crucial importance for the country of those sectors of the economy that are associated with the development of the individual (the development of human capital or of human potential).

This is a great step forward in our social awareness. For one thing, we do need widespread agreement as to what the key issues are for Russia’s economic development if we are to overcome the after-effects of the fundamental revolution that we experienced at the end of the twentieth century. A revolution shatters the value system of a society and it takes much longer to acquire new values than it does radically to deconstruct the old regime.

Secondly, and this deserves particular emphasis, the giving priority to human capital means that society acknowledges the post-industrial character of the challenges that it faces: in searching for a new model of development it looks not to the past but to the future. It is not so very long ago that discussion of national priorities focussed on the key sectors of the economy of the last century: the aircraft industry, machine construction, ship-building, electricity, agriculture were given priority by Russian politicians and economists in policy for economic development and, what is most important, in budget expenditures. It was only in the mid-2000s that the elite began to address the issue of social capital. Education and healthcare were the first to receive attention, followed by the pension system. Egor Gaidar was the first to point out the crucial importance of these sectors for the future economic development of Russia (see Gaidar, 2005). The programme of «priority national projects» introduced by V.V. Putin and D. A. Medvedev in 2005 endorsed these priorities.

Russia is not alone in facing this challenge. Creating an effective system for the development of the potential that is latent within the population is a problem that confronts all of the relatively developed countries. The challenges of the postindustrial era and demographic change have made for a «crisis of the „universal welfare state" and forced many countries to accept the need for profound transformations in the social sphere. At a time when population ageing has become endemic and the demand for social services has continued to increase the need has arisen for a fundamentally new model of social support. In other words, Russia is facing not so much a crisis of the system of social services that was created during the Soviet period but a much deeper crisis of industrial society. This means that a new policy for the social services social must be sought not in the process of «catching up» in economic development but as a response to the general problematic that Russia, in common with other developed countries, is facing. The collapse of the Soviet Union should be understood as having been a crisis of the industrial system and of the welfare state that was a part of that system.

To date, no country has succeeded in developing a system that is capable of responding to contemporary challenges in the development of human capital. This means that the search for an optimal model of development need only to a minimal degree take into account efforts that have been made elsewhere.

Moreover, the country that succeeds in creating a viable system will acquire an enormous advantage in the post-industrial world.[1]

According to the traditional (industrial society) model, these sectors belong to the social sphere of the economy. But for all the importance of the social dimension, the development of human capital in modern developed countries is known to interact with and depend also upon fiscal and investment considerations and to have political implications. Unlike the end of the nineteenth and most of the twentieth centuries, education, healthcare and pension provision now involve the entire population (as taxpayers and as consumers of these goods). The demographic crisis has added to the complexity of this state of affairs. Funding the development of these sectors has become a dilemma for national budgets and can undermine the financial stability of any developed country. What is more, the funding of these sectors has to be long-term and this has significant implications for any country’s investment resources. Finally, the political and social stability of societies in which the urban population is predominant depends upon the efficient functioning of these sectors.

If human capital is to be developed, financial and structural issues have to be addressed. The extent of the financial problem can be gauged by comparing the expenditure of Russia with that of countries of similar or more advanced economic development, in particular countries of the OECD. Russia spends 1.5 to 3 times less than the OECD on education and 3–4 times less on healthcare as a percentage of GDP.

There are two sets of problems that have to be resolved: firstly, ways have to be found for allocating additional budget resources to employees in these sectors and to the population groups that they serve; and secondly, structural reforms have to be implemented. Financial measure and structural reforms should not be implemented separately: it would be politically dangerous and economically inefficient to adopt one course of action while ignoring the other. Of course, this approach entails a number of significant risks.

An increase in the pay of doctors and teachers, investment in equipment and similar financial measures are necessary if we are to resolve the problems that have arisen, but these measures alone will be insufficient. The quality of educational and medical services depends not so much on the level of employees’ pay as upon improvements in the operation of the systems involved. Reform of the social sector will not be achieved by an increase in budgetary allocations alone.

An increase in funding if not accompanied by structural reforms can even produce negative results. An increase in salaries can lead not to the renewal of personnel but to the retention of cadres, the continued employment of doctors and teachers whose qualifications have become out of date and who would not provide better care or better teaching even if one doubled their salaries. An increase in expenditure on equipment often means that it is procured at inflated prices or that equipment is purchased that is not essential for hospitals or laboratories. By analogy, an increase in the funding of the housing sector, given the current degree of monopoly in the market for housing services, will make for an increase in prices and an enrichment of local monopoly holders.

This means that the increase in funding for the human capital sectors in the 2000s must be viewed as being only the first and by no means the most important step towards their improvement. Above all, we need institutional reforms, and funding should follow only once these reforms have been implemented. This must be the guiding principle of any policy for the formation of a model for the development of human capital in the present day.

The human capital sectors in the present day

It is not sufficient to argue that in the development of human capital institutional reform should take priority over financial policy. We need to be clear about those aspects of the functioning of the relevant institutions that are typical for present-day postindustrial society. There are no universally applicable solutions whether in the economic or the social spheres. Any measures that can be adopted will depend upon both the level of development of a particular society (its per capita GDP) and upon the global socio-economic paradigm that happens to prevail.

The institutional problems that we face in present-day Russia in the sphere of human capital are, for the most part, those that are being encountered in other developed countries, notwithstanding the fact of our lower level of per capita GDP. To a significant degree this is a legacy of the Soviet period: demographic development, reproductive development and gender behaviour during the late Soviet period were beginning to approximate to the norms of developed countries.[2]

 

There are five typical features (functional principles) of human capital that need to be borne in mind when it comes to structural modernization. These, in turn, reflect aspects of contemporary technology, namely dynamism (rapid renewal) and an ever more pronounced individualization of the use of technology.

The lifelong delivery of services: In the past, education was for the most part customized to the age of an individual. Healthcare catered only for the ill. Now people study and have appointments with their doctors throughout their entire lives. Our understanding of work and of pensions is also undergoing fundamental change. A reduction in the importance of heavy industry and an increase in the importance of the service sector, taken together with our abandonment of the Soviet-era criminalization of the «parasite» have made for a reappraisal of our understanding of the «pension» and of the age at which work should end (or not end).

The increasingly individual nature of services: In future, the individual will increasingly choose his or her own path in education and health-care from a multitude of available educational and medical services. It is evident that the retirement age, the age at which an individual decides to terminate his or her productive activity, is increasingly a matter of individual choice. The consequence for the pension system is that systems for supporting the older age groups have to be diversified.

The increasingly global nature of services: Educational and health-care institutions are competing not only with schools and hospitals in their own neighbourhood but with similar institutions throughout the country and throughout the world. Of course, this degree of choice is not available to everyone, but as standards of living improve and the real cost of these services and of travel falls as a result of global competition, more and more people will participate. Opportunities for building up personal savings in a global financial system will mean that pensioners will be less and less dependent upon the pension system of their own country.

An increase in the importance of private expenditure in the development of human capital (this is a logical accompaniment of the previous three trends). The first three trends point to a growth of opportunities for people to purchase the services that they need. This means that the role and the importance of individual demand will increase, eventually overtaking the volume of state expenditure in the sectors in question. Private purchase of services, or shared state-private purchase, are not only a natural development, they are the inevitable consequence of the technological modernization of these sectors and of an increase in the living standards of the population. The increase in private expenditure is associated with the fact that any further increase in state expenditure became impossible towards the end of the twentieth century: any increase in taxation was impossible, while the demand of the population for social services continued (and continues) to increase, in line with social progress.

The increasing importance of new technologies. These are radically transforming the nature of service-delivery. As information and communications technologies and transport technologies continue to develop, traditional forms of healthcare and education are withering away. Innovations in systems of organization are having a similar impact.

All of these trends must be taken into account since they are making for a modernization not only of the human capital sectors, but contributing to the political and economic modernization of the entire country, including that of our technological infrastructure. Ignoring these trends creates a risk that Russia will continue to lag behind or will lag even further behind, the socio-economic development of the developed countries.

The process of globalization makes for an intensification of competition and this is also true of institutional competition in the market of human capital. In the immediate post-Communist period many argued that we had inherited a high level of development of human capital, in particular in the quality of our systems of education and healthcare. It was frequently maintained that in Russia the level of development of human capital was high by comparison with our level of economic development.

The data provided in the accompanying table indicate that the picture is not so positive. In a ranking based on level of social and economic development, our systems of education and healthcare approximately correspond to our level of per capital GDP. However, the indicator for quality (outcome) of healthcare (life expectancy) in Russia is in steep decline. Reversing this trend will not be easy.

The fact of the matter is that if an advanced system of education or healthcare is to be created there has to be a demand for high quality educational and healthcare services. This is how these sectors developed until recently.

However, the explosive development of communications and transportation systems has made for a steep reduction in the transaction costs of switching from a national system of delivery of these services to a global system. It is now much easier than it was 20 years ago to enrol in any university (if the applicant has passed the necessary exams) or to receive healthcare in any clinic throughout the world. This costs money, but as the economy grows the disposal income of the Russian citizen will also grow, and, as experience shows, Russians are prepared to invest in themselves – in their education and healthcare.

1Strictly speaking, an effective solution to present-day social problems is an important pre-condition of the effort to «catch-up» economically. This idea is implicit in the writings of Alexander Gershenkron, who held that backwardness can itself provide an impetus to accelerated development. For Gershenkron, the less developed countries do not need to repeat the experience of the advanced countries; instead, they can adopt the technologies and the institutions that have been created by the latter. Applying this notion to present day conditions, we could say that if Russia succeeded in creating the most effective institutions for the development of human capital (against a background of general crisis in this sphere) then it would acquire significant comparative advantages in its efforts to overcome its economic backwardness relative to the more advanced countries.
2This characteristic of the Soviet model of development is examined in Е.Т. Gaidar (1997).
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