Why human development is key to global growth

The global slowdown since the Global Financial Crisis has both cyclical and structural causes, both of which may take years to work out. But at the same time, history tells us that the seeds for spectacular growth are often sown during recessions and depressions. Our job as development agents is to identify these seeds and nurture them into full bloom.

The pace of structural reform has been sluggish in many countries. The slow growth environment exerts a headwind against the process of reform. Moreover, the fruit of these reforms will take years to show up in growth numbers - and may exacerbate the growth contraction in the short term.

There are also clear, permanent, structural shifts in the global economy, which present both a challenge and an opportunity for emerging markets. A combination of globalization and the digital revolution has devalued everything simple, common and easy to understand. This includes unskilled labor, raw energy and bulk commodities, and risk-free financial products. The commodity super cycle appears to have ended. The productivity gap between skilled and unskilled labor continues to widen. And the devaluation of money seen in negative interest rates is shocking.

The problem for emerging markets is that generally they have an abundance of unskilled labor and raw materials, and their real or perceived macro riskiness makes it hard to take advantage of the devaluation.

However, there are also opportunities in this new world. Most significant is the number of young people that are born in less developed countries. In a sea of deflation, what has been rapidly appreciating is human capital. The world is in desperate shortage of creative talent, and not just in technological innovation. Natural human capital is roughly evenly distributed among populations. Therefore it is a demographic certainty that emerging markets will have a larger share of this pool of global capital. To a large extent, emerging markets’ fortune depends on how fast they can realize and utilize more of what human capital they have, through better employment systems, investment climates, health care and education. A fuller utilization of human capital will enable the creation of robust domestic demand within the emerging market universe, in a world that is in search of consumer demand and business investment.

Furthermore, we need to harness the digital revolution to help people become more productive in their jobs. It has been estimated that roughly half of the per capita growth slowdown in the US is due to the productivity slowdown. The reason for the productivity slowdown is still unclear. But we do know the digital revolution has so far been concentrated in communications and information processing. This narrowness of technological progress is unlikely to be permanent.

Embedding these technological advancements throughout the global economy depends not only on the genius of scientists and entrepreneurs but also on fundamental social and political transformations. That’s why it has proven to be a more difficult and slow going process than the digital revolution. As the most recent World Bank WDR argues, to fully reap the benefits of the digital dividends we must get the underlying “analog complements” of the real economy in good shape.

Fundamental social and political transformations rarely happen because many pieces of a complex puzzle have to fall into place. Take one example: how do we turn rising income inequality in many countries from a headwind to a motivator for sociological transformation? History shows us, for instance, that the Industrial Revolution erupted in the British Isles and not elsewhere because it was only there that technological feasibility, economic necessity and ideological clarity were sufficiently supportive.

Therefore, a high priority for us is the formulation of new development models, which take into account the new reality and the need for these enabling structures to thrive. We recognize that the traditional East Asian growth model’s potential has diminished in the new environment. That model largely depends on manufacturing and export driven growth fueled by savings from financial repression. Today, more and more unskilled manufacturing jobs have been automated, and surplus global savings are ready to finance low-risk investments. Urbanization, if driven by dead-end and not higher value service jobs, is unlikely to be a good solution. In addition, globalization and new technologies are forcing developing countries to deal with the gale force of creative destruction at a much earlier stage of their development.

The key analytical challenge for us is to connect the micro with the macro. At IFC, we are working on understanding what makes a country move up the value chain and realize its potential. This starts with observables such as export data, and expands into understanding the necessary physical, social, infrastructural, institutional, and intellectual capital that enable human talent to realize their potential. We are also working on data-rich analytical frameworks with dynamic interconnected dimensions, which include household demographics, occupation/tasks, and productivity/income.

Our work and empirical evidence will help governments in formulating new growth models. These will likely be multiple, rather than singular. But if we start from two key premises, we can undertake this work with confidence: firstly that the seeds for spectacular growth are often sown during recessions and depressions; secondly that is a demographic certainty that emerging markets will have a larger share of global human capital. Now is the time to invest in this human capital.