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Govts should invest in human capital: World Bank

Updated October 13, 2018

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One reason governments do not invest in human capital is lack of political incentives, says WB report.
One reason governments do not invest in human capital is lack of political incentives, says WB report.

ISLAMABAD: The ‘World Development Report 2019’ has asked governments to create fiscal space for public financing of human capital development and social protection.

Released by the World Bank, on Friday, the report suggests property taxes in large cities, excise taxes on sugar or tobacco, and carbon taxes are among the ways to increase a government’s revenue.

Another is to eliminate the tax avoidance techniques that many firms use to increase their profits. Governments can optimise their taxation policy and improve tax administration to increase revenue without resorting to tax rate increases.

The report pointed out that one reason governments do not invest in human capital is the lack of political incentives. Few data are publicly available on whether health and education systems are generating human capital. This gap hinders the design of effective solutions, the pursuit of improvement, and the ability of citizens to hold their governments accountable, report says.

Governments need to invest more in human capital.

Focus is needed on disadvantaged groups and early childhood education, and on developing the cognitive and social-behavioural skills needed in the current market.

The report says that most of the required fiscal resources are likely to come from improved capacity in tax administration and policy changes, particularly to value-added taxes and through expansion of the tax base. Taxes on immovable property could raise an additional 3 per cent of GDP in middle-income countries and 1pc in poor countries.

Age-old tax avoidance and evasion schemes by firms and individuals need to be tackled as well. Four out of five Fortune 500 companies operate one or more subsidiaries in countries broadly perceived to operate preferential corporate tax regimes - often referred to as ‘tax havens’.

As a result, estimates suggest that governments worldwide may miss out on $100-240 billion in annual revenue, which is equivalent to 4-10pc of the global corporate income tax revenue.

Fears about robot-induced unemployment have dominated the discussion over the future of work. The number of robots operating worldwide is rising rapidly. By 2019 there will be 1.4 million new industrial robots in operation, taking the total to 2.6m worldwide.

Robot density per worker in 2018 is highest in the Republic of Korea, Singapore and Germany. Yet in all these countries the employment rate remains high, despite the high prevalence of robots.

As for the current stock of workers, especially those who cannot go back to school or to university, re-skilling and up-skilling those who are not in school or in formal jobs must be part of the response to technology-induced labor market disruption.

But only rarely do adult learning programmes get it right. Adults face various binding constraints that limit the effectiveness of traditional approaches to learning. Better diagnosis and evaluation of adult learning programmes, along with better design and better delivery of those programs, are needed.

The report says governments can raise the returns to work by creating formal jobs for the poor. They can do this by nurturing an enabling environment for business, investing in entrepreneurship training for adults, and increasing access to technology.

The payoff to women’s participation in the workforce is significantly lower than for men - in other words, women acquire significantly less human capital than men do from work.

Published in Dawn, October 13th, 2018