South Asia's Human Capital Crisis

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South Asia, a region with 1.7 billion people and a combined GDP of almost US $ 3 trillion, faces a demographic nightmare if it continues to fail to invest in its human capital. The majority of the population in this region is under the age of 21 years, which could be asset with proper education and training. But the region is squandering its potential and faces a human capital crisis.

The World Bank’s ‘World Development Report 2018: ‘Learning to Realize Education’s Promise’, report ranks India second after Malawi in a list of 12 countries “wherein a grade two student could not read a single word of a short text.” India is also at the top of a list of seven countries “in which a grade two student could not perform two-digit subtraction.”

On September 13, 2017 The World Economic Forum released the Global Human Capital Report for 2017 that contained the Global Human Capital Index. This index ranks 130 countries “on how well they develop their human capital. According to the index the two regions with the highest human capital development gap were South Asia and Sub-Saharan Africa. Sri Lanka (rank 70) was the top performer of the region with others Nepal (98), India (103), Bangladesh (111) and Pakistan (125) far behind.

As the World Bank report notes education “spurs innovation, strengthens institutions, and fosters social cohesion.” Unfortunately South Asian countries have lagged behind in spending on basic human development indicators primarily education. The global average for government expenditure on education as a percentage of GDP is 4.7 percent. The South Asia average is 2.9 percent reflecting the lack of sustained government investment in investing in education, from investment in educational institutions to personnel training to vocational and skill based training.

Global literacy rate (percentage of people ages 15 and above who are literate) in 2016 stood at 86.3 percent. In South Asia, it stands at 66.7 percent, with Sri Lanka being the top performer at 91%, and others far behind with Bangladesh at 73%, India at 69% and Pakistan at only 57%.

Low human capital has an impact on economic growth and development. If we look at the figures for the two largest countries in South Asia they face a huge employment crisis. Every year 12 million Indians enter the labor market, however, as of 2015, only 5.5 million jobs were created annually in India. Around 2 million Pakistanis enter the job market annually and unemployment stands at almost 15 percent.

Economies that seek to grow invest in research and development (R & D) and how much a government spends on research and development (R & D) is another important measure of its investment in human assets. The global expenditure on R & D as a percentage of GDP stands at 2.23 percent with the United States investing 2.7 percent, China 2.1 percent, Japan 3.2 percent and South Asia less than 1 percent.

While South Asia is lacking, it is striking how abysmally low India’s numbers are. It is astounding that a country like India that seeks to grow in double digits and educate all its people spends less than 0.63 percent of its GDP on R & D.

The Hays Global Skills Index analyzes the global skills market and seeks to “throw a spotlight on the supply of skilled labor and the demand for those skills among employers.” The index examines 33 major economies with India the only South Asian economy.

According to the 2017 report lack of investment in India’s human capital has impacted India’s rankings on the global skills index. While India has moved up from 4.8 in 2015 to 5.0 in 2016 yet further upward movement is hindered because of lack of Indian graduates with degrees entering the labor market; India’s decades old labor market regulations which hinder ease of business and the increasing gap between high and low skilled wages. Both the Hays Index and the World Bank have also noted India’s “low labor market participation.”

In addition to not having enough skilled workers there is also the issue of developing skill sets. As of 2015 less than 5% of India’s 487 million workers had received any formal skills training. This is in sharp contrast to industrialized countries where the figure is closer to 60%.

Skills deficit is not an issue limited to India but is prevalent all across South Asia. In 2015 The Economist released a report titled ‘Skills needed: Addressing South Asia’s deficit of technical and soft skills: Analyzing the gap in Afghanistan, Bangladesh, India, Nepal, Pakistan and Sri Lanka.’ The report estimated that graduate unemployment stood at 33% in India, 28% in Pakistan, 20% in Nepal and only 7% in Sri Lanka.

The Economist also found that unemployment rate rose “with level of education” primarily because “youth with lower educational background come from lower income households and cannot afford to remain unemployed for long.” This, however, ensured that labor productivity remained low.

The skill deficit is not limited simply to technical skills but also soft skills. If we turn to India, numerous reports in the last decade have spoken of the need for better quality education, elementary English language skills and more on-the job training.

According to a 2017 study by Aspiring Minds, an Indian employability assessment company, which surveyed 36,000 engineering students in over 500 colleges across India, 95 percent of Indian engineers “are not fit to take up software development jobs.” In addition to lacking technical skills more than sixty-seven per cent of Indian engineering graduates are not fluent in the English language and more than three-fourths of these students “lack spoken English skills required for any job in the knowledge economy.

In the last two years the Indian government has sought to meet these challenges by launching programs targeting skill development. The Pradhan Mantri Kaushal Vikas Yojana was launched in July 2015. However, in the first year the placement rate only stood at 18 percent and in the second year at 12 percent. According to a report by the Confederation of Indian Industry, a leading Indian business association, the Indian economy created only 3.8 million jobs between 2014 and 2017 only enough to absorb one-fourth of the 12 million new laborers that enter the job market annually.

South Asia overall lags behind in female labor force participation. According to the International Labor Organization (ILO) the global female labor force participation ratestands at 49.5 percent but it stands at only 29 percent for South Asia. What is also striking is that as South Asian economies have grown there has been a decline in female participation in the labor force. In 1990 it stood at 62 percent in Bangladesh, 35 percent in India, and 46 percent in Sri Lanka. Today it stands at 43 percent in Bangladesh, 27 percent in India and 30 percent in Sri Lanka. Nepal is an outlier as the rate has hovered around 79-80 percent and Pakistan is the exception with rate rising from 13 percent in 1990 to 25 percent in 2016.

A 2013 International Monetary Fund (IMF) report ‘Women, Work, and the Economy: Macroeconomic Gains from Gender Equity,’ and a 2016 report by Mckinsey Global Institute argue that better education and higher female labor force participation boost economic growth.

A demographic dividend can turn into a demographic nightmare if there are large number of educated and uneducated unemployed youth. It can lead to a rise in crime, social unrest, and upheaval.

South Asia as a whole needs to invest heavily in its human resources by allocating more resources on improving standards of education, literacy and language learning, skills development, vocational training and research and development.