ABOUT THE AUTHOR:

Professor Vladimir Alexandrovich Mau is Rector of the Russian Presidential Academy of the National Economy and Public Administration in Moscow.

Dr Mau has published numerous articles and many books, including two for the CRCE: “The Political History of Economic Reform in Russia, 1985-1994 (1996)” and “From Crisis to Growth (2005)”.

HUMAN CAPITAL: CHALLENGES FOR RUSSIA

THE ABSTRACT

The development of human capital is now recognised as being the most important precondition of economic growth in modern times. It should be a priority in our socio-economic policy. However, recognition of this fact alone will not produce a qualitative leap in the development of education, healthcare and the pension system. We need fundamental changes in these sectors if they are to become capable of meeting the challenges of post-industrial society. This will mean individualisation of the services provided, continuous delivery of these services (over the lifetime of an individual), privatisation (an increase in the role of private funding), the internationalisation of competition and implementation of the latest technologies in the delivery of services.

THE 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. First, we 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 régime.

Secondly, and this deserves particular emphasis, giving priority to human capital means that society acknowledges the post-industrial character of the challenges 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 and agriculture were given priority by Russian politicians and economists in policy for economic development and, what is most important, in budget expenditure. It was only in the mid-2000s that the élite 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 post-industrial 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 aging 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 must be sought not in the process of ‘catching up” in economic development but as a response to the general set of problems 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.
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 also depend upon fiscal and investment considerations and to have political implications. Unlike in the late nineteenth and most of the twentieth centuries, education, healthcare and pension provision now involve the entire population (as taxpayers and as consumers of these services). 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 at a similar or more advanced level of economic development, in particular OECD countries. Russia spends one-third to two-thirds of the OECD average on education and between two-thirds and three-quarters of the amount spent on healthcare as a percentage of GDP.

There are two sets of problems that have to be resolved: first, ways have to be found for allocating additional budget resources to employees in these sectors and to the population groups they serve; and second, structural reforms have to be implemented. Financial measures 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 that is not accompanied by structural reforms can even produce negative results. An increase in salaries can lead not to the renewal but to 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 their salaries were doubled. 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 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.

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