Teach your children well: knowledge reaps dividends © Reuters
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A healthy and educated population is a foundation for economic success, raising living standards and the dignity of all people across the world, particularly those on the lowest incomes.

Broadly defined as the qualities that make people able to contribute to a productive economy, human capital has repeatedly been found to be at the core of development. Differences in such capital arising from inequalities in access to health or education abound both between countries and within them. 

There is little doubt about its importance. Whether it is the causal link between increased years of schooling in the US and rising incomes or the fact that most advanced economies have expanded higher education significantly in the past 20 years without depressing graduate pay, societies wanting to advance have often improved the health and education of their people first. 

In Asia, this is the dominant development strategy pursued by Japan, South Korea and China among many others as the most successful route both to eliminate poverty and to break through the middle income trap. 

But for all the known importance of human capital, defining and measuring it is difficult. What weight should you put on health and how much on education? Does the amount of money spent matter? Are all elements of human capital equal for development? How does one country’s human capital compare with that of others? These are all difficult questions, often without satisfactory simple answers. The World Bank hopes to galvanise countries into action however by publicly ranking them. 

Its new human capital index published on October 11 enables countries to benchmark themselves against a global league table.

The index intends to demonstrate how differences in education and health outcomes are linked to the productivity, prosperity and happiness of a country. It suggests that nations which prioritise human capital can expect more rapid development in future; laggards on this front threaten the prospects of the next generation. 

Jim Yong Kim, president of the World Bank, says the index will be “hard to ignore” in future, since it will measure “the consequences of neglecting investments in human capital in terms of the lost productivity of the next generation of workers”.

He adds: “In countries with the lowest human capital investments today, our analysis suggests that the workforce of the future will only be one-third to one-half as productive as it could be if people enjoyed full health and received a high-quality education.”

Chart showing that wealthy countries tend to havehigher human capital, but not inevery case

Generating a single measure of human capital in any country is difficult. The World Bank’s project has attempted to gauge how much useful human capital will be acquired by children born this year when they reach adulthood. In poor countries, many children will still not live to reach the age of five, while others will be malnourished, stunting their further physical and cognitive abilities. Adult survival rates are crucial for the education to generate wealth and productivity in later life. 

According to the World Bank, health levels, augmented by the coverage and quality of education children receive, are good predictors of an economy’s future success.

Individual health and education measures are weighted in the overall index by their ability to explain the differences in productivity between countries. 

The resulting human capital index seeks to compare each country with an imaginary place where all children will live healthily and receive the best education from the age of 4 until adulthood. 

Chart showing that many poorer countries outperform richer ones in human capital

The results show the broad patterns that are reflected in most indicators of development and prosperity. 

A country towards the bottom of the global league table, in the 25th percentile — with a quarter of its peers performing worse and three quarters better — received an overall score of 0.43.

This contrasted with a score of 0.72 for a country in the 75th percentile of the league table. So people in the worse performing country could expect to be only 43 per cent as productive as an adult with an ideal upbringing. 

In the richer country, that person could generate 72 per cent of the productivity of the best. This matters, the World Bank says. Over 50 years, “climbing from the 25th to the 75th percentile on the index brings an additional 1.4 per cent annual growth”. 

Chart showing that higher spending on education does not always mean better outcomes

The initial rankings produced by the World Bank are broadly in line with other indicators of development. Advanced economies dominate the top of the index with Singapore taking the highest place, with the poorest countries at the bottom propped up by Chad. 

Girls score significantly better than boys in nearly all the tables, primarily because their adult survival rates are higher and they now mostly receive the same level of schooling. With gender gaps still putting fewer opportunities in women’s way, this suggests that most countries waste female human capital. 

The World Bank hopes that the index will enter into widespread use, much as its popular Ease of Doing Business ranking has spurred countries to reduce corruption and improve the business climate. For the Human Capital Index to improve productivity and economic performance it must become well-known and widely accepted as the definitive guide.

Chart showing that spending on health in low income countries has little impact on stunting

But it is here that the World Bank faces its biggest challenge. There is a crowded field of human capital indices already published, which seek to achieve much the same aim. The World Economic Forum produces an annual global human capital report, which seeks to measure which countries’ people have the tools to manage its buzz phrase of “the fourth industrial revolution”.

A large group of academics published in September another index of human capital in The Lancet, which also ranked countries based on a different set of health and education indicators. Although the broad results are similar between the three with the rich world at the top and poverty-stricken countries at the bottom, any comparison of exact rankings shows how sensitive they are to the choice of measurement and weights used by each study. 

The US, for example comes fourth on the WEF measure, 24th on the World Bank ranking and 27th in the Lancet publication. China is ranked 34th in the WEF report but only 46th in the World Bank report. South Korea is second in the World Bank league table, but ranked only 27th in the WEF study. 

The interpretation of human capital scores is also complicated by the problem that correlation between these and prosperity is not necessarily indicative of a causal relationship. 

Rich countries are likely to achieve better health and education outcomes because they are rich as much as because health and education has fostered their prosperity.

These weaknesses require users to interpret the results intelligently. Yet they do not detract from the exercise. 

By lending its authority to the new index, the World Bank aims to encourage countries to devote more resources to health and education, and thus foster faster growth and development.

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About this Special Report

The World Bank’s new Human Capital Index allows countries to benchmark themselves globally on the health and education investments needed to fulfil their potential. Plus: how brain scans help poor children; Rwanda’s compulsory health system; and what needs fixing in the Asian Tigers’ education system.

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