Human Capital in Latin American Economic Development

Human Capital in Latin American Economic Development

HUMAN CAPITAL IN LATIN AMERICAN ECONOMIC Developtment

The concern for the economic development in the developing countries has been an issue for several decades. Many policy makers around the globe in various developing countries have formulated development strategies for their economies in consultation with the developed countries and international bodies. The central focus of all the policies have been on the development and investment on the following areas which will lead to the economic strengthening of the developing economies.

a) Investment in human and physical capital

b) Technological change transfers

c) Assistance from foreign development

d) Private capital flow

e) Creative investments which lead to increased return on investments

f) Investment in research and development.

g) Encouraging the environment of entrepreneurship

h) Institutional framework of the economy

Positive contribution of political freedom and infrastructure in structuring economic development framework.

Economic Outlook of Latin American Countries

The analysis on the emerging economies by 2050 has identified some countries as the largest economies of the world and they are China, United States, India, Brazil and Mexico. The Latin American countries like Argentina, Chile, Uruguay, Mexico and Panama have per capital GDP greater than the China in the year 2009. Despite of this enormous growth in the economic indicator, Latin American countries have been faced with the challenge of unequal distribution of income. This unequal distribution of income has been a major source of low standard of living of its population in major cities of the region as it fuels poverty and reduced the ability of an economy to grow at its optimum level. Income inequality is not new to the Latin American economic system. It has been generated from years and has been transferred through generations. The major cause of this transmission mechanism of income inequality is political system's ability and capacity to give room to the socio-economic differentiation. This differentiation have been benefitting the most influential groups of the society thus pressurizing and weakening the least favored and less influential group. The differentiation based on the caste, race, ethnicity, locality and gender have great contribution towards the income, wealth, investment and political considerations. The summary of socio-economic performance based on the United Nations development report 2007 the performance of some of the high, medium and low performing countries of the Latin America are given in the table below that covers the economic parameters of growth evaluation like GDP calculated on purchasing power parity, income equality through gini index, poverty index and human development index. Countries that turn out to be highest in the unequal income distribution according to the UN development report in 2007 were found to be Haiti, Colombia, Bolivia, Honduras, Brazil and Panama.

Summary of Socio-economic performance indicators for Latin American countries-

UN development report

Country

GDP (PPP)

Per capita estimates

2010 billion USD

Income Equality

2000-2010

Gini Index

Human Develop

2010

Poverty Index

2009

HPI %

Argentina

15,603

48.8

0.775

3.7

Bolivia

4,584

57.2

0.643

11.6

Brazil

11,289

55.0

0.699

8.7

Colombia

9,445

58.5

0.689

7.6

Haiti

1,122

59.5

0.404

31.5

Honduras

4,405

55.3

0.604

13.7

Panama

12,398

54.9

0.755

6.7

Mexico

14,266

51.6

0.750

5.9

Paraguay

4,915

53.2

0.640

10.5

Venezuela

11,889

43.4

0.696

6.6

(Source: (Haar, Jerry & Price, n.d.)

Economic Development in Latin America

The economic development of Latin America is faced with two key economic challenges which are likely to have increased rate of sustainable economic growth and to reduce instability of growth. The increased rate of sustainable economic growth can be achieved by improving upon the economic indicators of high GDP growth, equal distribution of income and resources, better creation of employment opportunities, favorable investment climate in the region, balanced position of countries imports and exports and reducing the inflationary pressures in an economy. However, in the light of second type of challenge faced by the Latin American economies i.e. To reduce instability of growth is of considerable importance as the countries can't afford to have economic growth today at the cost of downturn economy tomorrow. The Managing Director, International Monetary Fund, Dominique Strauss-Kahn have identified this sustainable economic growth for the upcoming years as 'managing good times' and have exemplified it as Canadian economy which is maintaining sound standards on managing the good times but is still a challenge for many countries like Latin America and others around the globe.

While considering Latin America for managing good times and coping with the challenge of reduce instability or vulnerability in an economy three pathways to success have been identified. First is the focus on sound economic policies. Countries that have managed their survival during the regime of economic and financial crisis and were able to significantly rise in the following years of crisis were found to be the one who had strong economic policies governing their growth under vulnerable climate. Monetary and fiscal authoritarian's collaborative work is required in achieving the targets of low inflation and public debts, introduction of the exchange rate flexibility that can benefit in reducing the balance of deficit and increasing foreign reserves, control of credit creation in an economy and thus improving the living standards of its population. This all is materialized through strong institutional framework in policy formulation and positive contribution of the government and private enterprise in its growth. Government initiatives to control the monetary parameters through expenditure and revenue formulation of fiscal policy have to be friendly on the people's income including disposal income, wealth, property and investment.

Second focus is on the financial stability. The effect of globalization to the large extend had exposed economy to volatility in the capital structure and investment flow in both public and private sector. As the local enterprises have the benefits of share of foreign investments in their capital structure and the economy is benefited with more foreign direct investments this on the other hand has welcomed the challenge of credit creation that could lead to problems like credit bubbles. To address this issue strong regulatory supervision and institutional policy formulation is required where private sectors have been empowered to take proactive measures that indirectly affect the macro-economic variables. Prudential measures in the process of credit creation by the financial sector and its sound management is critical in its respect. Regulatory framework should be a guide to all the players of financial institutions in the distribution and management of credit and other financial facility in an economy. The monetary and fiscal authoritarian in an economy can control the supply and demand of credit in an economy through their tools of open market operation, changing reserve requirements, changes in marginal requirements, credit rationing/credit ceiling and tax structure in an economy.

Third focus is on the diversified economy. The advent of globalization in addition to their economic and financial implications in an economy has a contribution in the creation of diversified economic structure and there is no single formula to cope with it. Diversity instead of consider as hindrance to the growth should be taken up as an opportunity in searching for new areas of economic growth and development. People belonging to cultures, countries, race, backgrounds and educational profiles bring in new skills, talents and intellectual capital in an economy. This calls for a better human capital development within the countries. Business opportunities increases and more areas of employments are discovered. The overall governance of the private enterprises in this respect needs to be strong and motivational.

Although poverty and income inequality remains a challenge for the Latin American countries, the attention is required in the areas of improvement for educational development, provision of healthcare, better housing and sanity services and strengthening of the public infrastructure. For this reason, government expenditures should not to be focused on the majority influential parties but on the needed sector of the economy.

Building Human capital for economic development

Defining Human Capital

The Nobel-Prize winner economist, Theodore W. Shultz has used the word "Human Capital for the first time in 1961 in an article published in American Economic Review titled "Investment in Human Capital." Since then great amount of literature have been build up to the concept of human capital. By the initial economist it was considered as the skills, knowledge and experience. Later on by the management gurus the term "skilled and educated people" was added to the definition. The advance concept of human capital is on the value addition made by human. The value is measured by the person's ability to perform well and his/her behavior towards work. Performance is thus the combination of person's ability, behavior, skills, knowledge and the amount of time invested in performing the job. Companies are therefore investing to attract, develop and retain people to add value to their firm. On the other hand, people are educating themselves, adding knowledge and skills to create competitive advantage to the firm. In the business world it is termed as ROI or return on investment in human resource or human capital. Employees are considered as an asset to the firm that helps them achieve economic benefits and firm's development. Likewise, labor force or manpower is considered as an asset to the economy and its return is their contribution to the economic development.

Defining Development:

The concept of development originates from the notion that people are enjoying improved standards of living. The improved standard of living includes parameters like per capita income, the poverty level in an economy, infrastructure availability and utilization, housing, healthcare, water and sanity services availed, education, spending and consumption which is sometimes classified beyond basic necessities, the sources of entertainment and the list continues. Thus it comprises everything that defines an individual living pattern and the facilities availed by him/her. The concept of health, food education, housing employment, cultural values, and environmental concerns all these are part of welfare of the society which contributes towards society's social and economic development. Therefore, to have development in an economy there has to have the awareness of bringing about change in the parameters contributing towards welfare of the society and the political system should supportive and well structured. If society is exposed to internal and external misbalance, undue influence by some elite groups, lack in the administrative capacity and prevalence of violence in the country then the process of development can't take place.

Human Capital contribution in Latin American Economic Development

Globally the demand for natural resources like oil and gas have spurred the investment in the areas of exploration, production, mining and finding alternative sources of energy like wind and solar energy. New technological advancement has been made in the areas of research and development for the advancement of renewable energy so that business community, investment climate in an economy and population can benefit from it. But the challenge that remains for countries is the scarcity of human capital. The skilled, educated and talented workforce is not easily available in the economies like that of Latin America which can affect the economic development of the country (Kahn & Strauss, 2011).

We all are living in a knowledge driven society where production of goods and services are greatly contributed to the knowledge intensive industries. Therefore, betterment and advancement of knowledge has become an ever increasing concern of the developing countries for their growth sustainability. The modern economists are of the view that investment made on educating workforce will bring more return than dollar invested on the infrastructure and material resources. This doesn't mean that all the material investments are useless rather it exert a pull on the economy towards educational development of its population. As professor Galbraith has said: "we now get the larger part of our industrial growth not from more capital investment but from investment in men and improvement brought about by improved men."

The contribution of human capital toward the economic development of the Latin American countries can be viewed in the following areas:

Human Capital in Creative Solutions: For the nation's economic and social development, developed and developing countries are making capital investment in the areas of construction, agriculture, infrastructure, international trade, financial sectors, energy and mining, consumer goods market, health care etc. More and more industries are developed in these sectors ranging from large, medium to small capacity of production and greater international influence have been experienced. Bricks and mortar buildings and walls are not enough for the economic development. It requires creative ad logical minds behind its functioning. Administrators, engineers, financial advisors, doctors, production crew, teachers and skilled labor is required for the efficient functioning of the system and maintaining quality standards through continuous improvement. Therefore investment in the intellectual capital or human capital has become an increasing element of development never thought of as before.

Efficiency of the human capital for productivity: human capital is regarded as the most reliable source of economic growth. The productivity of the industries are not only increased by increasing the capacity of the machines rather its increased with the addition of creative alternative sources for the efficient utilization of these mechanical instruments and developing the machines to increase its productivity. Investment in human capital through proper education in various fields of economic growth and training to specialize in their respective field makes possible for them to increase marginal efficiency of capital.

Efficiency in resource management: many of the developing countries of Latin America are provided with international assistance from the developed countries in the form of financial assistance and expert opinions. If the developing lacks in its ability to utilize these resources makes the maximum out of it then they are useless and burden to the nation. Therefore through proper skills training, awareness and education to the human capital these resources can be deployed to the maximum level contributing towards the growth of the country and increasing the living standards of its population. For this purpose skills development programs, social welfare programs, women empowerment bodies and human resource development centers have been established on the public and private level to boost investment in human capital and maximize the potential output from them.

Bring about social change in an economy: Investment in human capital has impact on the overall outlook of the nation, which includes economic conditions, social conditions and personal living standards of the individuals. When there is illiteracy, infant mortality, child abuse, social abuse to women, unhygienic living and unemployment in the society then this society can never grow to cope with the global competition. Investment in human capital will have improved education system that will increase literacy rate in an economy with training on skills and development to provide them with alternative sources of income which will reduce unemployment and raise the living standards of the people. Investment in human capital through healthcare, safety and security and endowment of proper hygienic living will increase the welfare of society and make them economically developed. When people are being cared their contribution towards national development will increase and they will be more committed towards country's growth.

Driver of Growth in Human Capital Development

In the Global Competitiveness Report 2005-2006, Lopez-Claros has said that:

"A country's ability to absorb new technologies, to produce goods and services that can reach standards of quality and performance acceptable in international markets, [and] to engage with the rest of the world in ways that are value-creating, is intimately linked to the quality of its schools…"

Importance of quality education is clear from these words. Good and improved education system produces skillful labor which is important for the economic growth, reduction in the poverty level of the country and foundation to the strong institutional development. Education and knowledge society is thus considered as the driver for human capital development and economic growth of the country which creates profound governance, financial and social transparency and increased production level. To survive international competition 'innovation' has become increasingly important for all businesses. Creative solution to the problem and new product and service development is the key to success. Global economy is shrinking and businesses are spreading far and wide. Collaborative measures are being adopted for the conduct of enterprise building and growth. In such a scenario of the human capital of the country are not capable enough to compete and work with the people from diverse backgrounds than the survival for the nation would be at stake. Therefore substantial amount of investment is required in the areas of education and skill development for human capital ( Roosevelt, 2003).

Latin American education system is at vulnerable position because:

Due to low economic condition and high unemployment rate, companies are able to recruit cheap labor. The developing countries of South and East Asian countries like India, Pakistan and China has made the labor market of other international countries like Latin America highly competitive with unskilled labor. Therefore in the domestic market unskilled labor is being hired on lower wages.

There is a difference in the education and quality of education. In today's knowledge intensive era quality of education is very important. This is analyzed by the students' abilities in the area of scientific reasoning and mathematical capabilities. The level of schools in majority of Latin American countries lack in both these capabilities. Therefore top quality graduates have not been produced to take up the challenge of changing economic and social environment. The local market provides lesser opportunities to these individuals so quality graduates migrate to more financially attractive countries.

Income inequality in the Latin American countries is a major economic concern. It is greatly contributed by the weak education system prevailing in the region. Under-utilization of the labor force augments social problems and policy concerns. Due to the high level of income inequality people doesn't have financial resources to access primary, secondary and higher level of education through proper schooling? Only the rich class gets the opportunity to educate them. Out of which very few % of graduates are willing to stay in the region and give their positive contribution towards the social and economic development of the country. Thus lack of education and income inequality creates a vicious circle of poverty, unemployment and meager standard of living of country's population.