Human Capital Index: How do China and India fare?

After I wrote my blog on Gross Capital Formation- Trends for India and China (http://ramnarayanan1112.blogspot.com/2013/09/gross-capital-formation-trends-for_27.html), I received various interesting comments. A Harvard economist, who also taught me during my masters at London Business School, commented that” if the same analysis were done for human capital formation (HCF) what would it look like”?

Is HCF important? I guess so. After all human skills are very important to extract the maximum value from any advantage that a country may possess. The Japanese, with superior skills, have been world beaters despite lack of many natural resources while the oil rich Middle East nations thoroughly lack skill sets and hence have to depend on outside workers to run critical functions in their economies.

The WEF Global Competitiveness Report ranks countries on 12 parameters. Two of them are (a) Health and Primary education and (b) Higher education and training which are listed as a basic index and as an efficiency enhancer index respectively. These two parameters are directly linked to the well being of individuals and hence taken as indicators to look at HCF. To be more specific, the World Bank data lists health expenditure (as a % of GDP) and primary school enrolment % for basic indices and for higher education and training, tertiary education enrolment % has been taken as an indicator.

The World Bank Data shows that for the last decade (2000-11) the average world health expenditure is about 10% of the world GDP. The highly developed countries lead the pack as expected. As shown in table no.1 during the peak development period the developed countries had an average spending of more than 8% as shown in table no. 2

India and China lag behind the world in health expenditure with the 10 yr averages at 4.1% and 4.6% respectively. In fact the Indian figures have shown a declining trend since 2004 (since UPA-1!).

During the peak development years, the developed nations like USA and Germany have recorded health expenditures of above 10% consistently. In fact among the BRIC nations, Brazil is the closest the global average with health expenditure in 2000-11 of close to 8%. Thus the aspiring nations like India and China need to boost their health expenditure to sustain their growths. 

One of the main factor in having better health expenditure is the government`s share in the entire spend pie. Even though private expenditure is advantageous to the health systems, government intervention ensures affordable health care within reach to all the people. The World Health Organization (WHO) is driving the Universal Health Coverage (UHC) which seeks to increase health coverage to all people with the help of the governments. As chart no. 2 shows developed countries like Germany, Japan have a very share of government spending in the health expenditure. Even China which was lagging behind in early 2000`s has overtaken USA in terms of government spending. However with the “Obamacare” health insurance bill, the government spending would go up in the USA. Indian government lags far behind which explains the shoddy state of health care and the rise of private health care facilities in India. Will this help the poor get access to health care in India? Certainly not!

 In terms of education most of the countries do pretty well when it comes to primary education which gives basic sustenance and elementary skills like reading, writing and counting. The World Bank lists Primary Gross enrolment ratio (GER, primary)[1]  as an indicator. The major education parameter which increases the efficiency and effectiveness of humans and has a major role in the economic development is tertiary education. Tertiary education also referred to as third stage, third level, and post-secondary education, is the educational level following the completion of a school providing a secondary education. This is the stage where people learn higher skill sets like engineering, vocational skills, accountancy, etc. which enable them to do higher skilled jobs. The World Bank lists Gross Enrolment Ratio for tertiary education[2] as an indicator.

Most of the countries do well in terms of primary education and have enrolment ratios very close to 100% as shown in chart no.3. The average world Primary GER (P-GER) is 104% for the year 2000-11. Chart No. 4 shows the scatter plot of the T-GER and indicates a wide variation and a decreasing slope. The average global T-GER is 24.7% in 2000-11.

       

Naturally the enrolment ratios keep dropping as the progress is made from primary to secondary to tertiary education. Kids enrol for schools and steadily the dropout ratios increase as they progress from primary to secondary. Depending upon the status of the economy and social structures and the thrust given to higher education, the countries with higher degree of development have consistently had a higher proportion of enrolment in tertiary education.

As table no. 3 shows, there is not much of a difference between the nations in P-GER but there exists a huge difference in T-GER between developed and developing countries. India and China are abysmally low in T-GER.

How do the so called developing tigers (I am disinclined to call then developing economies anymore) fare comparatively? Table no. 4 shows that Brazil is a leader of the pack from a health expenditure perspective. Russia, which has inherited most the remnants of the erstwhile Soviet Union where lots of emphasis was laid on technology, research and vocational skills, is far ahead in the tertiary education sector. China and India lag behind in health as well as in tertiary education matrices.

 

However the silver lining for India and China is that T-GER has been consistently increasing over the last decade as shown in chart no. 5. Thanks to the growing economies there has been an increasing trend among people to upgrade their skills to enter the job market. However both these countries lag well behind the global enrolment numbers.

Is the public spending the most important driver in education sector? Well, there are mixed signals. The top 5 spenders as a % of GDP in 2007-11 are Lesotho, Cuba and Timor-Leste! The comparison of some indicator countries is a mixed bag as in table no. 5. USA is above the world average but countries like Japan, Russia and Germany are lower. This lends supports to a hypothesis that for an effective education sector, the private sector spending has to go hand in hand with government. A higher proportion of private spending in the tertiary sector helps in aligning the skill sets of the job seekers with the job needs.

In terms of HCF, if we look at some of the major countries in developed world and the developing tigers, it’s very clear why the USA is the world`s leading nation. As table no.6 shows, The USA leads in both the health expenditure as well in tertiary education. The health expenditure figures will further go up once the medical insurance scheme of President Obama, which is his pet scheme, goes into full swing. The US universities are symbols of excellence and attract the best of the brains from across the world. As we discussed earlier, primary education is for sustenance while tertiary education is for the future sustenance of an economy. It’s better if higher proportions of people who undergo primary education enroll themselves for secondary and tertiary education and hence lower the difference between primary and tertiary enrolment rates. As table no.7 shows, not surprisingly, the USA scores way above others in the difference parameters. India and China are just below the global average of close to 80%.

Thus the analysis of HCF throws up the following points:

a) Leading nations like USA, Europe, and
     Japan have spent a    higher figure on
     health as one of the basic drivers to
                                                  sustain growth.

                                               b)Tertiary education is very important to

                                                   drive growth  especially innovation driven

                                                   growth as in USA.

                         
                                               c)  China and India still lag far behind in HCF

                                               indices.

As is my usual habit I leave the following questions to be debated:

1. What should be role of private sector in education especially tertiary education?

2. Should the governments of developing countries like India and China focus only on primary and secondary education?

3. What should the governments, especially the Indian government, do to make health care more accessible and affordable?

 Data & Information Sources:

1) World Bank

2) World Health Organization

3) Wikipedia

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[1] GER, Primary is defined as enrolment in primary education, regardless of age, expressed as a percentage of the population of official primary education age. GER can exceed 100% due to the inclusion of over-aged and under-aged students because of early or late school entrance and grade repetition.

[2] GER for tertiary education defined as including universities as well as institutions that teach specific capacities of higher learning such as colleges, technical training institutes, community colleges, nursing schools, research laboratories, centres of excellence, and distance learning centres.[