Human capital, that is the set of skills, health and knowledge possessed by an individual, is an important contributor to productivity growth and ultimately to poverty reduction and shared prosperity. Investments in human capital are becoming increasingly important as the nature of work evolves in response to technological change. Yet despite its importance for economic and social development, countries often underinvest in health and education ─ the building blocks of human capital ─ depriving themselves of an essential source of prosperity.
It is in responses to the risks to stability and prosperity posed by this underinvestment that the World Bank Group has recently launched the Human Capital Project. This involves a set of three combined actions: (i) the construction of an index ─ the Human Capital Index, a measure of the human capital a child born today could expect to attain by the age of 18 ─ to track and monitor progress; (ii) data, analytics and research, to refine measurement and better understand human capital formation; and (iii) country engagement, to support client countries in identifying obstacles and pushing the human capital agenda.
Building and nurturing human capital demands significant investment, which will require new and effective revenue mobilization strategies and approaches. Fiscal resources are unlikely to be enough to close the existing investment gaps, especially given the many concurrent priorities that fiscally strained governments in developing economies face. At the same time, international aid cannot be reasonably expected to pick up the slack. Therefore, a significant portion of the resources needed to finance human capital development will have to come from the private sector and intermediated through the formal financial sector.
Advancing financial deepening is instrumental to human capital development. There are two key functions that a sound, efficient, inclusive and deep financial sector can play in the human capital agenda. First, Healthcare and education are typically the biggest household expenses after food, and represent a significant burden for households, especially for low-income households. In this context, there are obvious opportunities for financial services to play a role in building human capital. Savings accounts can help people plan for their healthcare and education expenses; access to credit can help families manage those expenses; insurance can help mitigate unexpected shocks that can make people unable to cater for their children’s healthcare and education needs; and payment services can help smooth out the process of access to healthcare and education services. In this respect, the growth of digital financial services represents an important opportunity to reach out to more households at lower costs. On the supply side, financial services can also help the providers of healthcare and education services, regardless of whether they are public or private providers, by facilitating investment in quality infrastructure and skilled people.
Once human capital is built it needs to be put at work if it were to contribute to productivity growth. A healthy financial sector capable of mobilizing long-term capital efficiently allocates resources and facilitates technology adoption, hence incentivizing investment in schooling and maximizing returns to human capital. It can also help consolidate human capital gains by easing access to tertiary and executive education through, for example, student finance and other forms of lending. True, “too much finance” can lead to misallocation of talent and resources, reducing its marginal contribution to productivity and economic growth. But it is unquestionable that financial development can amplify the gains associated with human capital development.
At the micro level, it would be important to scale up efforts to increase access to financial services for households by removing residual barriers and designing new products and services with an explicit link to human capital development. Several countries such as Bangladesh and Kenya are already experimenting with savings, credit and insurance products aimed at facilitating access to healthcare and education services while digital technology is being leveraged to increase outreach and affordability. These actions could be scaled up, packaged into integrated offerings and replicated in different contexts while at the same time continuing efforts to improve financial education.
At the meso level, financial institutions and markets should be given the right incentives to invest in human capital-enhancing projects. Considering the increasing demand for impact investments, there is room to channel a larger portion of financing towards health and education projects. Emphasizing the human capital component of Environment, Social and Governance, ESG investment criteria could serve as a catalyst for the inclusion of explicit human capital criteria into mainstream financial actors’ business practices and investment objectives. Conducive regulation could help create new instruments and markets while increasing the efficiency of financial intermediation through incentives to promote competition and innovation.
Finally, at the macro level, efforts should be made to preserve financial stability. Episodes of crisis and instability entail significant economic and social costs that not only dramatically reduce the value of the existing stock of human capital but also push people deep into poverty, reducing opportunities for access to healthcare and education, and having a profound negative long-term impact on the productivity potential of a country.