Human capital vital to economic growth

By Elayne Yee Siew Lin

TODAY'S workplace, with its focus on managerial skills and technological innovation, imposes higher educational demands on the labour force of developing nations, including Malaysia.  

Lower labour cost is no longer sufficient to attract investments. In its place, the “human capital of the local labour force” is gaining momentum as labour cost differentials or proximity to raw materials become less important in decisions to locate technology-intensive facilities. Like other capital, human capital could be increased through investment in, and commitment to, human factors such as education, training and healthcare. 

Strong human capital attracts and encourages growth, not the other way around. An educated population also leaves an enduring effect economically with a larger tax base and socially through increased political involvement.  

Although easier said than done, an investment in human capital should be a part of any economic development policy. The availability and the prevalence of a nation’s human capital determine the rate of growth of its economy and integration in world markets.  

With the technological advancements in transportation and communication, mobility of qualified workers is the norm. Most importantly, people with wanted skill sets have a larger probability of leaving developing nations due to the competitive nature of the international job market.  

This becomes a substantial problem if the more competitive nations are in short supply of certain skills which developing nations need to retain, producing what some development economists have dubbed “brain drain.” 

This phenomenon is nothing new and has been occurring throughout time. 

Unstable Governments, poor economies, uncompetitive wages, lack of infrastructure and appropriate opportunities for acquired skills are some of the many causes of brain drain. These causes must be addressed realistically within the context of each nation’s needs. But most importantly, there must be a serious effort to amend the trends.  

The loss of human capital is a symptom, not the cause, of a problematic system. The key issue is why professionals leave. Efforts must be made and incentives developed to retain human capital.  

India is a good example. Although emigrated professionals in technology-related fields did not start the Indian software industry, many have returned because of changes in government policies.  

Therefore, brain drain has been turned into “brain circulation” which happens when qualified expatriates return to invest or work domestically. The assumption is that these professionals’ acquired knowledge and experience will be shared, benefiting the local communities. 

The Government’s latest initiatives to attract Malaysian professionals abroad to return and work in the country, such as through the second home plan and the provision of permanent residence status to non-Malaysian spouses and children within six months from the date of their arrival in Malaysia, are clearly positive steps in this direction.  

Sustainable development requires an investment in human capital. Although human capital takes at least eight years to mature and requires constant support, its returns are fundamental for improvement. 

Investment in human capital has proven successful in many developing nations, including Malaysia, South Korea, and Thailand. Unlike increases in GDP, increases in the quality of human capital show the extent to which development has reached the population. Investment in education that caters to the immediate needs of industry – both foreign and domestic – is essential. 

The educational system should also maintain the long-term goal of self-reliance, promoting programmes that create thinkers and entrepreneurs.  

A report by the United Nations Educational, Scientific and Cultural Organisation (Unesco) and the Organisation for Economic Cooperation and Development (OECD) on emerging economies in 2003 finds that investments in human capital over the past two decades may have accounted for about a half percentage point in the annual growth rates of those countries, including Malaysia. 

The report also finds that the link between education and economic growth over this same period was strongest in Argentina, Chile, Jamaica, Malaysia, Peru, the Philippines, and Uruguay, and during the 1990s, alone, in Brazil, Indonesia, Thailand and Zimbabwe.  

To ensure adequate working environments for acquired skills and transparency instilled to attract investments and corporations, infrastructure must be built and Malaysia has the resources for this. 

Developing nations experiencing loss of human capital must promote a sharing of ideas between residents and non-residents through the facilitation of networking and communication between expatriates and residents. The maintenance of professional connections with peers in similar domestic industries for expertise sharing should also be encouraged. 

Most importantly, developing nations should avoid “picking winners.” India focused on a specific industry to nurture, which yielded results that were regionally limited and accessible to only a fortunate few. 

For development to bring tangible societal improvements, it must encompass a larger segment of the society.  

Therefore, a conscious effort should be made to promote entrepreneurship at all professional levels. Last but not least, foreign investors are crucial in the current international economic landscape.  

To lure steady investments, it must maintain an educated population, infrastructure and prospects for growth. An investment in human capital is the recipe to achieve all three. 


  • Elayne Yee is a research fellow at the Malaysian Institute of Economic Research. 

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