Effective Human Capital Investments Will Require More Than "More of the Same"

Effective Human Capital Investments Will Require More Than More of the Same

In a recent piece, Jim Kim explained that the World Bank’s new Human Capital Index (HCI) will “encourage countries to invest in human capital with a fierce sense of urgency.” Indeed, a key objective of the HCI is to spur more investments in education and health. The rankings on the HCI scale are meant to mobilize action in countries where investments are falling short.

It is expected that education ministers and policy makers will look at the rankings to assess where their country is falling behind and direct investments towards those areas. One of the three components of the HCI is the expected learning-adjusted years of schooling, an index that combines data on both quantity and quality of education. The real innovation in the HCI compared to other similar international efforts so far is to include learning directly into the measure of human capital, not just years completed. The HCI defines complete education as 14 learning-adjusted years of schooling, which serves as a benchmark against which performance can be compared. For example, according to the WDR 2018, the mean learning-adjusted years of schooling in Morocco is 3.56. According to the HCI, an average Moroccan child can expect to be 84 percent less productive as an adult compared to the benchmark where all Moroccan children obtained a full 14 years of quality schooling by age 18 (a gap of 10.44 years in schooling multiplied by 8 percent, which is assumed to be the return to earnings from an additional year of schooling). 

The gain in HCI from more schooling will vary depending on the country

Given the commitments in the SDGs, the HCI rankings will inevitably draw focus on more children completing additional years of schooling to get closer to the goal of 14 years of schooling. However, a country’s improvement in the HCI from children completing more years of schooling will look very different in different countries. Because the index is multiplicative in terms of schooling years and learning, the increment in the HCI in response to an additional year of schooling will vary depending on the learning levels of the country.

In fact, simplifying the HCI formula reveals that the change in HCI in response to an increase in schooling is directly related to the existing learning levels in a country:  Equation 1 In simple words, the (percentage) gain in the HCI from an additional year of schooling in country versus country is proportional to their levels of learning. This means the gain in the HCI from doing more schooling will be different in every country. In the extreme case, if learning is zero, then the gain in human capital from more years of schooling is zeroIf you are interested in the details of the algebra behind the equation above: The education component of the HCI formula is depicted by Equation 2 Taking logs of both sides and then taking the first derivative of (log of) HCI with respect to schooling gives us Equation 3  It follows that Equation 4 

Let’s assume that learning levels of a country can be captured by the percentage of girls with 6 years of schooling who can read a sentence, as measured by DHS. 97.1 percent of Rwandan girls can read a simple sentence after 6 years of schooling compared to 12 percent of Nigerian girls. It follows that the improvement in HCI from an additional year of schooling in Rwanda will be 8.1 times (97.1 divided by 12) larger than the improvement in HCI from adding a year of schooling in Nigeria.

Another example: 72.7 percent of Ethiopian girls can read a sentence after 6 years of schooling compared to 32.6 percent of Bangladeshi girls. The improvement in HCI from an additional year of schooling will be 2.2 times larger (72.7 divided by 32.6) in Ethiopia compared to Bangladesh. This is despite the fact that the per child cost of primary schooling in Bangladesh is already more than double that in Ethiopia: $232 versus $106 (calculation uses UIS figures for government expenditure on primary education in constant PPP$ for 2011 and enrolment in primary education for 2010). Bangladesh invests more than twice the amount Ethiopia does on primary schooling, but the returns on that investment in terms of human capital are expected to be more than twice as low. The sad fact is that the poorest countries with the worst education systems are going to get the lowest returns in terms of HCI on standard education investments. They’re the ones that need to worry about making sure that their investments lead to actual improvements in human capital.

Where learning is low, gain in HCI from more schooling will be low

The overall learning levels of a country can be captured by a learning profile—the relationship depicting the gain in learning per each additional year of schooling (for simplicity, we use descriptivelearning profiles as a stand-in for causal profiles). Because learning profiles look different across the world, investments to increase schooling will translate into different HCI gains in different countries. 

 

Figure 1: Where does schooling produce literacy?

Chart showing where schooling produces literacy
Source: Author's visualization using most recent DHS survey data for women aged 25-34

 

Take a country like Nigeria, which has the highest number of out-of-school children in the world and for children who are in school, grade-to-grade improvements in basic literacy are extremely low. A girl born in Nigeria can cycle through 6 years of schooling only to graduate without acquiring basic literacy. The Education Minister in Nigeria will probably gain little by adopting a “spend more” strategy to just raise schooling years, when schooling quality itself remains so poor. Not surprisingly, the gain in HCI from investing in an additional year of schooling is relatively low in Nigeria because the learning profile is so shallow—the vast majority of women complete six years of schooling to come out functionally illiterate.

Ethiopia, on the other hand, does a relatively good job of ensuring that each year spent in a grade translates into some improvement in learning (at least on a basic measure of literacy as used in DHS). At the same time, 32 percent of primary school aged children are out of school. The gain in HCI from an additional year of schooling is relatively larger (compared to Nigeria) because Ethiopia’s learning profile is steeper—after 6 years of schooling, more than 70 percent of women in Ethiopia are able to acquire basic literacy.

The HCI is meant to spur investments to improve education outcomes today that will affect the productivity of future generation of workers. Taking the HCI seriously brings into focus both “more” schooling and “better” learning. When learning profiles are flat “more” alone is not enough as the contribution of “more” to the HCI is low.  

To see meaningful improvements in human capital, countries will have to make investments that go beyond the “spend more” strategy—countries will have to think about how to “spend better.” Existing data already tells us that more of the same will not result in adequate improvements in human capital if learning levels are low. The strategy for each country for their investments in human capital will depend on their relative current position in schooling and learning, and on discovering the cost-effectiveness of different strategies for raising years completed and improving learning. Moreover, successful strategies will require more than just an “intervention” approach—they will require thinking about how entire systems need to “align” around “learning for all.”

 

For other blogs related to the HCI, see:

We Need More Investment in Education – Not Just Spending on “More of the Same”

 

 

Maryam Akmal is a Policy Analyst at the Center for Global Development. She works with Lant Pritchett and Justin Sandefur on effective education systems under the RISE programme. Previously, Maryam worked in Pakistan on education policy. 

 

RISE blog posts reflect the views of the authors and do not necessarily represent the views of the organisation or our funders.