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Challenge for human capital development

Russia needs an structural reform in education

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According to the traditional industrial model, the sectors most relevant to the development of human capital belong to the social sphere. In reality, in modern developed countries they also carry fiscal and political implications. Unlike in previous centuries, education, healthcare, and pension systems now involve the entire population, if only as taxpayers and consumers.

The demographic crisis has added to the complexity of this situation. Funding the development of these sectors has become a dilemma for national budgets and can undermine the financial stability of any developed country. Furthermore, funding has to be long-term, which has significant implications for any country’s investment resources. Finally, the political and social stability of societies depends upon the efficient functioning of these sectors. In short, if human capital is to be developed, policy measures should address both financial and structural issues.

All this carries two sets of consequences: the first is that a way must be found to allocate additional budget resources. Compared with the average OECD country, Russia currently spends 1.5 to 3 times less on education and 3 to 4 times less on healthcare as a percentage of GDP. The second is that there is a real need for structural reforms. The quality of education and medical services depends not so much on the level of employee salaries, but rather on making improvements in how those systems operate.

Financial measures and structural reforms should not be implemented separately; it would be politically dangerous and economically inefficient to do one while ignoring the other. Above all, funding should come only once institutional reforms have been implemented.

Ignoring these trends creates a risk that Russia will continue to lag behind–or even further behind–other developed countries. The fact of the matter is that an advanced system of education or healthcare can only be created on the back of a demand for high-quality services. This is how these sectors developed until recently. However, the explosive development of communications and transportation systems has caused a steep reduction in the transaction costs of switching from a national system of service delivery to a global system. It is now much easier than it was 20 years ago to enrol in any university or to receive health treatment in any clinic throughout the world. This costs money, but as the economy grows, the disposable income of Russian citizens will also grow, and as experience shows, Russians are prepared to invest in themselves–namely in their education and healthcare.

Of course, if those who can pay for high-quality services turn mainly to overseas suppliers, then Russia will be deprived of opportunities to improve its own services. This will thus limit the demand for high-quality education and healthcare and, inevitably, the supply. This is the major strategic challenge for human capital development and the principal challenge facing the overall modernisation of Russia.

The development of human potential is now a national priority. However, Russia will not realise its human potential simply by increasing funding for education, health and pensions. Instead, it is only through structural reforms in these sectors that Russia will meet the needs and challenges of the 21st century.

Source: OECD

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