Russia Growth Diagnostics (4): Human Capital

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I find it difficult to diagnose human capital in Russia because the literature on topic is scarce and the market differs from what economists know well. Like with the rest of economics, economists know much about human capital in the United States and almost nothing about human capital in other countries.

Still, a couple of points.

First, being careful with interpreting the data. The relations between education and output became an instant classic after Mankiw, Romer, and Weil (1992):

gdc_gdp_humca

While Russia is clearly under the regression line and underperforms for its stock of human capital, such cross-country comparisons have the following limitation. Acemoglu, Gallego, and Robinson (2014) remind us that cross-country regressions overestimate the contribution of human capital, at least, its traditional proxies. If you measure the impact of education on wages in mico, the reported effect is like five times smaller than cross-country analysis implies.

For Russia, the wage premium for each year of formal education varies from 5 to 9%. Denisova and Kartseva (2007) show occupational premia for being an engineer, lawyer, and (drum roll!) economist.

But these premia don’t mean that the Russian economy needs more of these types. Depending on the model chosen by authors, these evidences leave questions. How much does positive selection contribute to the premia? What are the costs of switching to another profession? Is physical relocation of workers expensive? We have to answer these questions to make robust policy recommendations.

The second point to mention, education in Russia is a state-owned enterprise, much more centralized than banks mentioned in the previous post. Heavy centralization creates distortions. When government sets policies incorrectly, this lever just moves the entire education system in a wrong direction. Such a system either needs more discretion at low levels or evidence-based public policies. Better to have both, but government doesn’t tolerate the discretion. Then you need evidences for policies.

Few are available even for changes in aggregate variables. Like, how would GDP respond to one more year of education for each citizen? In terms of the HRV framework, GDP may be insensitive to changes in raw human capital. Also accounting is tricky when you compare the gains from more education against (1) full costs of the respective programs, including foregone earnings, (2) benefits of investing the same amount in physical capital or technology.

Careful policymaking could equalize returns to investments, which are now distorted. Government discourages investments in human capital by taxing labor more than financial capital. A person prefers investing in stocks and real estate to education because his wage-related tax rates are about four times higher than taxes on income from financial assets. This is sort of a good example, because we can understand the magnitude of the distortion. Some other distortions have no clear estimates.

Where to move from here? I’d say, randomized evaluations for effective policymaking, plus James Heckman and Stefanie Stantcheva for rigorous thinking about human capital. For any mid-income country, not just Russia.

Next Post

It was supposed to be about infrastructure, but infrastructure shares many conceptual problems with human capital. I’m not even sure that with all cost overruns infrastructure investments are more predictable than money put in human capital. Perhaps, here benevolent stakeholders should do very local analysis, when specific infrastructure projects are compared against each other.

Attention to opportunity costs. Governments like to spend on construction because it creates opportunities for corruption. First, costs have no direct market pricing. Second, stealing inputs in a capital-intensive industry is easier, since in labor-intensive industries workers monitor their managers. That makes wages an unlikely source for corrupted officials.

So instead, there will be a post on government failures.

Government Resistance to Human Capital

James Heckman has a great paper called “Policies to foster human capital“. Apart from excellent integration of economics into government policies, this paper relentlessly reminds the reader about the lifetime aspects of investments in human capital:

Heckman and Carneiro - 2003 - Human Capital Policy
Heckman and Carneiro – 2003 – Human Capital Policy

Heckman refers to the evidences that late investments do not pay off. Late learning costs money, including foregone earnings, but it only modestly increases wage rates and generates less human capital, since investments are made closer to retirement.

Heckman also criticizes the excessive attention to formal education, which is all about a few narrow cognitive abilities and in any case just one of many ways to acquire skills.

This paper was published in 2000. To count how many of its insights made it into government policies, I looked into the 2013 Economic Report of the President. This report includes a chapter on human capital.

The chapter discusses three things. First, labor inputs of women and immigrants. Second, rising debt and enrollment bias in college education. Third, educational opportunities for adults. So, formal education and adult learning?

Why does this influential publication promote the exact policies that Heckman criticized fifteen years ago? Alan Krueger — who edited the 2013 report — is a brilliant labor economist himself. The entire Council of Economic Advisors is well staffed. So it’s not about competence.

The problem seems to be in the complexity of the policies that Heckman proposes. When economists remind the Congress about student debt, they have better chances of being heard than economists who suggest targeted programs in preschool education. Student debt is something that even US presidents had. Preschool education? TL;DR.

But rephrasing Neil deGrasse Tyson, science is true whether you read it or not. The complex stuff still explains well why policies fail when consensus is reached.

For the United States, this complex stuff is about fine-tuning the system that works well. For the middle-income countries, on the other hand, ignorance is costlier, not least because these countries tend to aggravate mistakes with more government intervention. Policy makers in these countries often frame human capital accumulation as another industrialization. Like, if we could raise savings-investments to 50% of GDP, we can accumulate human capital in the same way. Obviously, it doesn’t work this way; and for BRICS, it’s an important challenge.

As for the least developed countries, the major innovators out there are international organizations, which recently got an open letter from Chris Blattman asking to “stop hurting” poor people with skill training programs. For the same reason: the programs don’t work as intended; even if being accumulated, this human capital solves no important problem.

“Stop hurting” is a good suggestion because it encourages policy makers to do less, which is the idea they like. The second part is more difficult: stop hurting and accept better policies. Some of the better policies look unconventional but remain as simple as training programs. Their main disadvantage is that they are not invented here, that is, in government. And before anything happens, someone has to market these policies as if they were government’s genuine invention.