Banking on human capital: Beware unspecified returns

27 September 2018

Wrong tool. wrong problem.

Wrong tool. wrong problem. Credit: Frits Ahlefeldt

As announced in an August article, the World Bank will release its new Human Capital Index (HCI) at the October IMF and World Bank Annual Meetings in Indonesia. The HCI purportedly has three objectives: “to build demand for more and better investments in people; to help countries strengthen their human capital strategies and investments for rapid improvements in outcomes; and to improve how we measure human capital.”

The Bank’s efforts to present the Index as a progressive development tool with potentially wide appeal to those concerned with improvements in health and education outcomes, obscures long-standing critiques of Human Capital Theory (HCT) and its notion of ‘capitalisable humans’. As noted in Stephanie Allais’ 2012 Journal of Economic Policy paper, “Many studies have pointed to serious deficiencies of this notion of human capital conceptually, as well as severe difficulties in actually measuring the ‘capital’ obtained through education, and the rates of return obtained or obtainable from it.” For example, Allais and Oliver Nathan’s 2012 paper on education and labour markets in South Africa provided specific evidence of HCT’s poor explanatory power both in how skills are generated and how they are rewarded and/or function within labour markets more generally. The pertinence of the measurement issue is evidenced in the indicators for Sustainable Development Goal 4 on Education, where only two indicators have tier 1 status, that is, have an accepted methodology and reliable data for at least 50 per cent of countries. Another recent critique pertaining to the general weakness of HCT, as it applies to education, can be found in Marginson’s 2017 Limitations of human capital theory, which noted that HCT “fails the test of realism” and “cannot explain how education augments productivity.”

Critiques of HCT can be grouped with broader criticisms of the proliferation of other types of ‘capital’, such as the social capital critically reflected upon in Ben Fine’s 2010 Theories of Social Capital book, in which he detailed the evolution and poor underpinning of social capital theories. These theories, he argues, “tend to reduce complex conflictual and contextual economic and social phenomena to more or less (im)perfectly working markets.”

It is not an HCI that is needed but different conceptualisations of the nature and role of education and learning in a radically different conceptualisation of development itself.Ben Fine, SOAS

Longstanding concerns about the HCT’s reduction of workers to capital goods remain alarmingly apt in light of the Bank’s admission that the Index is partially the result of ‘insights’ gained through the upcoming 2019 World Development Report on the changing nature of work. The report has been heavily criticised by labour unions, academics and civil society organisations for many of its underlying assumptions and its attacks on the rights of workers by, for example, encouraging further labour market flexibilisation and the abolition of minimum wage legislation (see Observer Summer 2018).

What structural constraints?

In addition to these concerns, serious questions remain about HCT’s ability to address structural challenges to development. The UN Conference on Trade and Development’s (UNCTAD) 2016 Trade and Development Report, for example, noted that substantial structural constraints remain for developing states, which require “proactive industrial policies”. The report stressed however that, “many developing countries have not been able to develop sufficiently their manufacturing sector or have even endured a ‘premature de-industrialization’ since the 1980s owing to a policy strategy centred on unilateral trade opening, financial deregulation and the retreat of the developmental State”, precisely the types of policies for which the World Bank is well-known and heavily criticised (see Observer Autumn 2018).

An October 2017 report by the US-based think-tank Center for Economic and Policy Research (CEPR) supported UNCTAD’s assertions, noting that “from 1981 to 2010, it [poverty reduction] is even more a story of Chinese success: about 94 percent of the reduction of extreme poverty was in China.” This is relevant because, as noted by the report, China did not follow the Bank and Fund’s policy prescriptions, and the interventions of the state, much beyond investments in human capital, were imperative for its success.

Fine noted that “it is not an HCI that is needed but different conceptualisations of the nature and role of education and learning in a radically different conceptualisation of development itself.”