Human Capital, Inequality and Growth in Transition Economies Essay

Human Capital can be defined as the accumulation of competences and knowledge in individuals gained through education and experience, not forgetting their personality attributes. All these put together enable individuals effectivley perform profitable and revenue generating economic activities. Such competent persons in a society are at times reffered to as a workforce or laborforce. Some examples of investments in humans that result in human capital are education, health and training. As Becker says, human capital investments raise the earning ability of individuals, improve health and add to an individuals’ good habits. The term inequality generally refers to disparities in access to opportunities or resources amongst individuals, groups or even countries. Some of the common causes of inequality are; gender, race, age, geographical location and even cultural practices. Inequality normally results in observable differences in levels of growth and development of individuals or from one society to another. Education is the process through which individuals are able to acquire basic skills necessary for life. It is the understanding and interpretation of knowledge that empowers individuals to develop a logical and rational mind. The rational mind is then is able to determine relationships amongts pertinent variables, thereby fostering understanding. Education involves completing curriculum based fixed time achievements, aimed at building professional capabilities. At the individual level, it develops the capabilities and potentials of the individual so as to prepare them to be successful in a specific society or culture. In this case therefore, education serves an individuals’developmental needs. When education happens at the societal level, it is thus defined as a process by which society transmits to new members the values, beliefs, knowledge and symbollic expressions that make communication possible within that society. In this sense, education serves a social and cultural function. Roland (2000) says that transition economics, also known as transformation economics refers to a state whereby economies have gradually changed over from socialism to capitalism, an example being the former socialist economies. There is a shift from standardized prices and monetary theories to institutions geared towards a higher efficiency. This transition can only thrive if there is sustained government and political support. The Soviet Union in full, is known as the Union of Soviet Socialist Republics (USSR), It was characterised by a single communist political party, a planned economy and the KGB security agency which closely monitored activities within the union. USSR was formed in December 1922 and by 1956, it was comprised of 15 countries with Moscow being the capital city. The fifteen countries included; Armenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Kyrgzstan, Latvia, Lithuania, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan. Dissolution of USSR begun in 1985 and continued upto 1991, with the fifteen member states gaining their independence a few months before the Soviet Union collapsed in late 1991. Following the collapse of the Soviet Union, restructuring of the administrative functions and development of a market based system was immediately embarked on through Yeltsins’ shock program. The aim was to improve standards of living, ensure equitable resource allocation, create new production avenues, promote liberalization, and provide incentives through privatization activities. However, a free and liberalised market did not come without ny challenges. By 1992 Russia suffered a deppressed life expectancy, twenty five percent of the population lived in abject poverty, there were low birthrates, and a downward sloping Gross Domestic Product (GDP). However, due to increased investment activities, exploitatation of valuable natural resources and increased business development activites, the economy begun to make significant improvement. The aim of this paper is to explore how education as a factor of human capital and inequality influenced growth in transition economies, with respect to the former Soviet Union countries (FSU). Theoretical research Human capital with regard to education and levels of inequality both have an impact on the growth experienced in transition economies. This growth is therefore an end result of quality educational investments and equitable distribution and allocation of vital resources across a country. Such a hypothesis makes growth the dependent variable whose outcome is influenced by two independent variables namely; education and inequality. Observation of growth and development trends in transition economies and the developing world, have shown that education can have both positive and negative impacts on an economy. One of the positive impacts is that persons who possess the relevant knowledge and skills required by organizations are able to access better job opportunities as opposed to those who are poorly educated. In addition, high levels of education enable individuals to secure jobs in other countries, thus helping to alleviate the problem of unemployement in their mother country. Spagat (2002) observed that during Russia’s transition, intellectual individuals were more motivated to pursue more education opportunities and in return, became very successful in their careers. In regard to the economic transition in the former Soviet Union countries (FSU), educated parents who still held education in high esteem, were very focused on ensuring that their children acquired the same level of education as them or even higher. While on the other hand those parents who viewed education as a burden rather than an investment focused on the bare minimum, that is, basic education. The result of this attitude was that these particular families remained trapped at a basic education level and so was their access to income generating opportunities. Through education and training, individuals acquire problem solving skills and entrepreneur management skills which inturn, help them set up and operate successful ventures, in the process creating employment opportunities. In addition, as the field of education grows within a country with more universities, colleges, high schools and primary schools being constructed, more job opportunities are created in the education sector. Persons who are well educated are likely to secure better paying jobs, which inturn increases their purchasing power plus it increases the demand for goods and services available in the economy. The net effect of this, is creation of more job opportunites in the production and service sectors. These persons are able to improve their standards of living including those of their dependants. In addition, issues of health and fertility are decided upon from a knowledgeable point, (Newell and Reilly, 1999). Through education, individuals are exposed to society and they acquire important attributes and values that can help them enhance their capacity to interact and relate with other persons in society. As a result, they able to adapt and cope with the dynamics of the workplace. Last but not least, education as a contributor to human capital enhances economic growth and development in a country, since the human capital is equipped on how to exploit the countrys’natural resources profitably. Countries lacking this human capital are neither able to exploit their resources adequately, nor are they able to develop their economy at the desired pace. Barro (1998) argues that human capital enhances absorption and application of superior technologies from other countries. Young and educated persons under the guidance of the older folk are able to conduct research and development. The improved technology in a transitional economy enhances the speed and quality of production of goods and services, through improved and more cost efficient work processes. The young industries are in turn able to meet rising demands, both domestic and foreign hence increasing their revenues and taxes to the government. Munich et al (1999), argue that in a transition economy, government support and positive attitude towards investments in human capital is essential. The government has to allocate funds for example for building schools and also for enticing people to enroll in this schools. However, the maintenance of the enrollment levels is a continued process whose economic benefits are only realised over time as was seen in the Czech Republic. In support of this argument, Spagat (1995) warns that it is even though human capital takes years to accumulate, it actually takes a very short while to deteriorate, hence governments cannot afford to postpone this investment, even temporarily. The governments must ensure that education and other skills are transferred effectively from one generation to the next. Restructuring of education, needs to be done from the very beginning of the transition from socialism, in order to immediately improve educations’ quality. There is a multiplier effect that comes with better quality education. The first being an increased access to job opportunities, higher wages and consequently more tax revenue for the government. The major effect however, is that it sets the standards for future generations, both in terms of quality of education and future incomes, (Spagat, 2002). Fan et al (1999) said that the young people of Russia during the transition had little or no motivation to put effort to pursue education. This is because the education system had not been restructured to match the market-oriented system and therefore the returns were not high. World Bank (1995) accused Russia of concentrating on spewing out scientists and engineers instead of producing a mixture of professionals who would support the different sectors of Russia’s’ economy. They only increased between 1991 and 1994, but this human capital investment deteriorated again by 1996, (Brainerd (1998). In order to make ends meet, many dropped out of school and opted for jobs such as taxi drivers, street vendors and some even joined the Mafioso for a quick buck. All was not lost however, when we remember individuals like the Hungarian–American entrepreneur George Soros, who provided funds that would help these countries implement reforms for a better future. OECD (1996) advised that schools and tertiary institutions should not be the only avenues through which education is attained. OECD (1996) advised that adult learning should be encouraged in order to help the older generations access more income. In addition, pre-schooling of children below the age of formal schooling, which was a common feature of the FSU countries fostered child development and also prepared these children for formal education. In these former Soviet Union countries, the major advantage of pre-schooling their young children was in the fact that it freed the women to participate in economic activities, and it also reduced education disparities between children of the educated parents and those of the less educated parents. Micklewright (2000) wrote that investment in learning institutions ensures sustained educational gains. For example, in some of the Soviet Union countries, teachers earned wages so low that they spent their time looking for more income instead of teaching. In addition, repair and maintenance of the buildings was neglected and with lack of heating during winter, schools would be closed. The other problem was the shortage of textbooks. However, these countries tried to salvage the situation by offering meals at school between 1989 and 1996, in order to entice parents to take their children back to school. In countries such as, Yugoslavia, Armenia, Georgia, Tajikistan and Albania, the transition was characterised by serious geographical disparities caused by war, civil and ethnic strife. Facilities were destroyed, hundreds of families were displaced out of their homes and schools were closed, (World Bank, 1997b), thus slowing down the ongoing projects. Human capital is vital for growth of transition economies. Growth should be stimulated across all sectors of the economy and in each part of the country so as to rapidly raise the standards of living and reduce inequalities between urban and rural areas. Keen interest should be paid especially to rural areas, in order to eliminate the possibility of mushrooming of pockets of poverty across the country. According to Flemming and Micklewright (1999), ensuring that access to education is recognized by FSU countries as a human right as stipulated in international law, will greatly boost growth of human capital. Equal rights promote equal access to opportunities and it also reduces discrimination based on gender, race, religion or economic status. Income inequality rose in the Czech Republic and Russia and was very high between 1988 and 1996. In order to support a transition economy, Spagat (2002) suggests that a balance should be created between skilled and unskilled labour. This is because most young people either worked on a full time basis and neglected pursuit of higher education, or they pursued higher education and then begun working at a later stage. One of the negative impacts of education on a country is that by having too many educated persons, the labor market gets saturated thus resulting in a drop in the amount of wages that employers are willing to offer. In turn this acts as a demotivator of the labor force and may also result in brain drain whereby qualified personnel leave their mother country for better opportunities in other countries. The unemployed persons are normally seen resulting to social ills such as alcoholism, drug abuse and robbery amongst others. These social ills inturn dissuade local and foreign investors from putting their money in an unsafe country.