Global Corporations and Economy
The Macroeconomics of ‘Human Capital’ Development

The standard guidelines for economic policy prescribe either the maximisation of economic growth rates (accelerated modernisation, so-called “catch-up development”), or macroeconomic stabilisation (the reduction of inflation, budget imbalances and public debt). But there is a kind of third way, namely the development of “human capital”, which has more long-term objectives and which in many respects should serve as a basis for all other macroeconomic priorities. We can assume that the development of “human capital” may even be recognised as a goal in itself for economic development, since, ultimately, it is precisely the development that increases the potential growth of the economy while reducing imbalances associated with inequality and inadequate institutions.

The basis of an economic strategy focused on the development of “human capital” must necessarily be a strategy for the long-term development of the economy, with which all short-term and medium-term economic priorities are coordinated. Within the framework of this kind of long-term development strategy, it is necessary to develop economic rules that would sustain the policy course that targets “human capital” development even despite periods of volatility and instability. Thus, the main elements of a long-term strategy for economic development include:

  • a strategy for the long-term development of the economy, which prioritises the development of “human capital” and which is consistent with medium-term and short-term targets/programmes of economic policy;

  • planned guidelines for reducing poverty and mortality, increasing the education and literacy level of the population;

  • a long-term budget, which contains the main parameters of expenditures on a long-term basis, and also provides for the protection of a number of priority items for the development of “human capital”;

  • fiscal rules: creation of a “fiscal anchor” that would be based on a “safe level of public debt”;

  • , as well as the trajectories of the overall budget deficit dynamics the and government spending that would be necessary to maintain safe levels of public debt.

A fiscal rule for the development of “human capital” could be incorporated into the framework for limiting the non-oil budget deficit and could also include the following elements:

  • introducing an irreducible share of expenditures on the development of “human capital” as a share of GDP;

  • establishing criteria for the effectiveness of public spending on education and healthcare at the federal, regional and municipal levels;

  • creating a system of conditional grants for the development of education to stimulate competition for “human capital” between regions;

  • setting targets for the spending share on education and healthcare in total budget expenditures at all levels, as well as a percentage of GDP;

  • creating a system of incentives and grants for the exchange and "human capital"  flow between regions;

  • setting targets for the annual growth rates of expenditures for the development of “human capital” to achieve medium and long-term targets for the level of expenditures.

The structure of government expenditures and their targeting is a key factor influencing public confidence in the government and the willingness of ordinary earners to pay income taxes in the country.

Properly targeted, effective government spending on the development of education and healthcare (like no other category of government spending) is an indicator for the population of their investments (in the form of taxes) in the development of the country.

If the tax burden grows, but this is accompanied by an increase in the quality of services provided in the field of education and healthcare, then such an increase of the tax burden will not be perceived as painful and not with such costs for the economy (like the growth of the “shadow sector”, tax evasion and capital outflow),  as was the case in our economic history, primarily in the 90s, when the size and efficiency of “human capital” spending declined.

It could well be that today Russia has come close to the point of making a decision on increasing the level of taxation in the economy, including the taxation of personal income. This could be expedient both to obtain additional funds for the development of the economy, primarily in the regions, and to reduce the level of inequality in the country. However. this can be done without significant expansion in the size of the “shadow sector” only if such a decision is preceded by an increase in the share of expenditures on the development of “human capital” for several years. Meanwhile, the state will also have to demonstrate the ability to monitor the effectiveness of expenditures and increase the degree of the efficiency of spending.

In the Scandinavian countries, the rate of income taxation is among the highest in the world. 

The attractiveness of the Scandinavian model in today's world (in 2014 The Economist magazine proclaimed the “Scandinavian model” the most successful in the world) is supported not only by the stability of the Scandinavian economies in the context of the global financial crisis, but also by the greater “humanness” of the economic model, which, unlike the developed countries (which became the epicentre of the financial crisis), focused not on inflating bubbles, but on balanced development, which has more long-term and more humanitarian targets.

The Scandinavian model was also an important point of reference during the current period of the pandemic crisis, which yet again underscored the centrality of human capital development.

Based on the experience of Scandinavian economies in addition to the expenditure part of the budget, tax policy can play an important role in the formation of human capital, while this economic policy instrument can be used in a number of areas:

  • tax incentives for the development of promising areas for the development of healthcare, education and innovation;

  • excise taxes increase on alcohol and tobacco products. These measures are actively used in developed and developing countries. One of the recent examples of this kind was the Philippines, where at the end of 2012 it was decided to increase taxes on tobacco and alcohol. During the first year, tax increases generated an additional $ 1.2 billion in fiscal revenue, allowing the country to provide access to healthcare for 14 million families. At the same time, the income the taxes increase on alcohol and tobacco products is tied with funding for healthcare programmes - 15% of the income goes to fund programs to help those employed in the tobacco industry find alternative employment, while the remaining 85% goes to support the national healthcare system, the training of medical personnel, and improvements in the quality of equipment and infrastructure in the field of medicine. As a result of the implementation of this programme, the proportion of the population that received access to the state healthcare program increased from about 74% to 82%;

  • the introduction of taxes on unhealthy foods: this kind of practice has been adopted in a number of countries - including Mexico (in 2014), Hungary, Finland and France. In Denmark, a tax introduced in 2011 amounting to 2.15 euros per kilogram of instant food and semi-finished food led to a decrease in the consumption of these goods by 10-15% during the first 9 months. Collected tax amounted to more than 96% of the planned level. However, at the end of 2012, the tax was cancelled under pressure from lobbying groups

In addition to tax regime regulation, a tough policy in the field of sanitary and epidemiological standards in relation to food products that pose a threat to the health of the population should become an important component of the state's activities. Measures are also needed to inform consumers about the composition of food products, as well as the health risks that harmful components may pose.

In conclusion, we should say, that in the current difficult economic conditions, it is extremely important that the development of the priorities of the Russian budget policy, as well as of the entire Russian economic policy, solve not only conjunctural, momentary  tasks, but should also be properly oriented towards the long-term goals of the sustainable economic development. It is important to keep in mind that the development of “human capital” can increase not only the effectiveness of the internal economic development of Russia, but also the effectiveness of the foreign economic policy of the Russian Federation, including its “soft power” strategy.

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