How Low Human Capital Can Limit Productivity Improvements. Examples from Turkey and Peru

Comparing two middle-income countries is not unusual, but two that are geographicallystudent1 far and are apparently different is less common. However, both Turkey and Peru have had the highest growth in their respective regions in recent years, aspire to become high-income economies in the next decade, depend on trade. Both countries face downside risks if structural changes—in the education and training system, and the economy more broadly—are not made to ensure that contributions to economic growth come from improvements in productivity. Both countries recognize there is a large gap between their productivity levels and the global productivity frontier, and both have growing populations that are not adequately equipped to meet labor market needs, with average productivity levels. Given these (similar) challenges, both countries have as their development goal, central to their development agenda, to improve productivity to continue growing in a sustainable manner.

Why is productivity important now? Turkey and Peru would like to benefit ongoing demographic changes. Both countries see it as an opportunity to accelerate growth. But they recognize that to benefit from having a young, active and highly productive population certain reforms and activities are needed. Among them is the improvement of human capital. By improving the education, skills and abilities of workers, these countries can potentially improve the productivity of their workers and their economy. A recent article that explores the link between human capital and economic growth finds that human capital can explain between 10% and 30% of the differences in per capita income between countries. And the positive effects of human capital gains are persistent over time which emphasizes its importance for governments and societies to improve peoples’ quality of life permanently (intrinsic value), and increase the sustainability of productivity and economic growth (instrumental value).

What is the situation of human capital? Both countries increased their accumulation of human capital in the last decade. Both countries have a growing number of people entering working age. With a population of more than 81 and 32 million people, in Turkey and Peru, respectively. Both increased their labor force participation rates (Turkey, from 46% in 2006 to 52% in 2017) or maintained a high level (Peru, 73%), during the last decade. Unfortunately, both countries have relatively high rates of informality (34% in Turkey and 60% in Peru) indicating that the formal sector can’t absorb a large part of the workforce (for several reasons, including low human capital).

Despite having a greater participation of people entering the workforce with higher levels of education than previous generations, Turkey and Peru face challenges in the quality of their human capital, which limit the growth of productivity. Large segments of young populations (aged 15) in Turkey and Peru achieve relatively low scores in international assessments. Approximately 31.2% and 46.7% received the lowest score in the three subjects tested (math, science and reading), in Turkey and Peru, respectively. The average for the OECD is 13%. Such low levels of human capital before entering the labor market can have negative effects on the person’s performance once they enter the labor market.

But productive workers must not only have good fundamental skills (acquired in the formal educational phase), they should also have high-level functional skills (related to work) to be most productive. Therefore, although educational attainment in the formative years is a key tool in the development of basic skills, and investments from both countries are correctly focused there, basic education alone is not enough to develop job related (practical) skills. In Turkey workers (ages 16-65) have a lower than average competence in literacy, arithmetic, problem solving using technology.  Less than half of adults obtained the lowest levels (Level 1 or less) in literacy and arithmetic sections, respectively; a high share of people compared to the OECD averages of 19% and 22.7% respectively. In Peru, more than 50% of workers are over-or-under qualified for their work. And approximately half of employers cite the lack of competent qualified personnel with relevant cognitive and technical skills as a limiting factor for their ability to hire workers and to be more productive. Social-emotional skills, such as work ethic, teamwork, persistence, adaptability, initiative, are also critical skills not easily found in many aspiring workers. And because skills are formed throughout a person’s life cycle, productive workers require continual learning to acquire new skill and hone practical skills. Therefore, technical training programs, whether in the classroom, virtual, or at work, play a fundamental role in retraining workers to remain relevant to changing demands and be productive.

What steps can these countries take to improve their human capital and productivity? Both governments should continue to ensure that kids learn basic skills, and that workers have opportunities to continuously adapt their skills. Both countries should focus on improving the quality of teachers (e.g. in the initial selection, providing incentives for performance, requiring regular testing, offering regular training) and pedagogical tools. Quality improvements are critical for the youngest cohorts who conform large part of the workforce and whose productivity is essential for the sustainability of economic growth. Making adequate financial investments remains important in both countries; but such investments should be accompanied by efforts to ensure cooperation between relevant stakeholders and formation of public-private partnerships to ensure that formal (and informal) training systems and policies respond to changing demands.

In the formulation of any strategy to improve human capital one must remember that although the demand for university graduates in both countries remains high (and growing), many graduates are unemployed or underemployed. Students/workers often make career decisions based on limited information, as a result they select fields of study that may be in low demand (or saturated). This underscores the importance of improving the provision of school counseling and labor market information (e.g. online information system). The quality of the content taught (often static content, overvaluing theory and undervaluing practical training) seldom reflects market demands. This emphasizes the need to improve the alignment between formal content and practical skills. Much of the creation of new formal jobs in both countries is driven by the growth of manual occupations or occupations that require less cognitive skills and are more dependent on physical abilities. This limits the ability to absorb workers with higher skill levels in new jobs. Various activities and changes are needed to address this problem, beginning with structural changes in the economy, which can decrease dependence on jobs with low qualifications in less productive sectors. Improvements to active labor market programs and job-search and job-placement support services are also needed to provide better job counseling, facilitate upskilling of workers and ease (re)entry to the labor market.

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