Emerging Markets Have a Human Capital Problem

Countries develop economically and allow their citizens to prosper when they provide basic public goods and services with reasonably low taxes.  The responsibility of government is to promote a healthy environment  for the development of human capital, which entails the provision of  an efficient legal system, public security and basic social and physical infrastructure. Once these are present, the conditions may be propitious to unleash entrepreneurial activity and innovation.

Most governments in developing countries do not achieve the good standards of governance that deliver sustained improvements in prosperity. After an initial wave of productivity growth driven by urbanization and technology transfer, growth stalls for most countries. Latin America, with its low productivity and GDP growth over the past three decades, typifies this process, while the Asian tigers (Hong Kong, Korea, Singapore, Taiwan) provide rare exceptions. The reasons for growth stagnation are many but one stands out:  rent-seeking, extractive agents are allowed to flourish at the expense of society as a whole, until eventually the capacity of the state to provide basic public goods is exhausted.

Two separate annual surveys – one by the World Bank (Doing Business)  and the other by the World Economic Forum (WEF 2018)  – describe in detail the burdens on growth imposed by extractive forces on countries, making difficult the activities of citizens and enterprises.  These surveys rank countries in terms of “the ease of doing business.”  Because they have been conducted for many years, they allow us to evaluate how countries evolve over time.  A new survey launched this week by the World Bank, which focuses exclusively on the quality of human capital, is an important addition to the understanding of the growth challenges faced by developing countries.

The measure of a country’s human capital is probably the most important indicator of whether a government is providing basic education and health services to its people.  A citizenry that is unhealthy and uneducated will not be productive in its own country and will not compete successfully in the world. The importance of human capital has never been greater than today as technology (robotics, 3D printing, etc…) increasingly poses a threat to menial labor around the world.

The World Bank Human Capital Index (HCI)  tabulates health and education indicators to measure the relative development of human capital in 157 countries. In this report, Singapore is ranked the country with the highest level of human capital while Chad has the lowest rank. The chart below shows a sample of the ranking, focusing on important countries for emerging markets investors.

 

The high rankings of the Asian tigers go a long way towards explaining their remarkable economic success (Taiwan is not included in the HCI, but it would also rank near the top). These countries have a high capacity for investing in public goods and do an exceptional job at providing the basic public services that their citizens need to prosper. China ranks relatively well in the context of emerging economies and appears to be moving in the direction of the Asian tigers, with already high levels of HCI in major cities like Shanghai and Beijing. Vietnam also shows positive signs that it may follow in the path of the Asian tigers.

The remainder of Asia is a mixed bag. Thailand and Malaysia are much less effective in providing public goods and services to their citizens. This likely will stifle their growth, and they may increasingly be squeezed between new low-labor-cost competitors and highly productive developed economies. Indonesia, Philippines and especially India all do a very poor job for their citizens. However, unlike Thailand and Malaysia, they have large markets and still have high, early-stage development growth potential.

Eastern European countries formerly of the Soviet bloc score well in the World Bank HIC rankings. With high-quality human capital and accelerated integration into the very large western European market, these countries are well positioned to prosper.  Russia less so; though HCI is good, the country has not chosen integration with Europe, preferring instead to pursue costly geopolitical ambitions.

Latin America, by-and-large, has low rankings which will compromise its future performance in the global economy.  Only Chile appears on the right track towards improving human capital. Most of Latin America consist of  middle-income countries with poor human capital and seems badly equipped to face the future. For small economies the best path must be to seek full integration with the global economy but distance is a problem. Brazil, with its large market and huge potential to improve the business environment, and Mexico with its proximity to the U.S. and trade integration,  have the best prospects.

The major African economies are very poorly positioned, with very poor HCI rankings. This bad situation is worsened by extensive “brain drain,” as educated people leave these countries for better opportunities elsewhere.

 

Macro Watch:

India Watch

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  • India’s game-changing healthcare plan (Lowy)

China Watch:

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  • China faces a debt iceberg (FT)
  • Hainan free trade zone to boost international tourism (Caixing )
  • Is there a new “cold war” (WIC)
  • China middle-class desperate to get money overseas (SCMP)
  • Yan Lianke’s forbidden satire of China (New Yorker)
  • Chinese actress to pay $129 million tax-evasion fine (WIC)
  • A strategy for dealing with China (PIIE)
  • China and Islam ( Hoover)
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China Technology Watch

  • China’s smart-phone offerings (The Verge)
  • The battle for 5G (SCMP)
  • Dutch battery firm to build plant in China (FT)
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Brazil Watch

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  • In Brazil, campaign promises but no money (WSJ)
  • Emerging markets’ lost decade (Blackrock)
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EM Investor Watch

  • Turkey, the 1994 crisis (Seeking Alpha)
  • What next for Turkish-American relations (GMFUS)
  • The Global Competitiveness Report  2018 (WEFORUM)
  • The World Bank’s Human Capital Report (World Bank)
  • Indonesia’s bullet-train is stalled (Caixing)
  • Russia’s missed tech opportunity (Hoover)

Tech Watch

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Investing