3 Reasons Developing Economies Should Focus on Improving Their Human Capital

3 Reasons Developing Economies Should Focus on Improving Their Human Capital
Last Updated: October 12, 2023


In economic development circles, one of the most discussed topics is the apparent existence of a so-called “resource curse”. The resource curse is a paradoxical phenomenon where nations that enjoy vast natural resources tend to underperform economically. If you take a look at the world’s top 10 economies, only three—the United States, Canada, and Brazil, are well-known for their vast natural resources while the rest are dependent on foreign resource imports to varying degrees. 


When you examine this and other lists that rank countries by economic output or quality of life, it immediately becomes apparent that the presence of natural resources does not seem to be as big a predictor of wealth as it’s often made to be. In this article, we’ll explore several reasons why developing economies should make increasing their human development index a top priority over the simple exploitation of natural resources.

1) Human Capital Builds a Diverse and Resilient Economy

In purely extractive economies, investments are disproportionately focused on cost-effectively removing natural resources like timber or mineral ores from the environment and shipping them off elsewhere to be processed. Under such models, public infrastructure and education are often only provided to the extent to which they can aid the elites in extracting more natural resources. While such societies can enjoy excellent life quality for a time, this can all come to a halt if the resources run out, as infamously happened in the case of the formerly wealthy island nation of Nauru.


During its long colonial era, infrastructure development in the Philippines followed much the same pattern, with its natural resources and people exploited for the benefit of a few local elites and overseas colonial masters. However, with independence and decades of policymaking that aimed to develop the country’s human potential, infrastructure development in the Philippines has effectively moved from being a purely extractive economy to a diversified service-based one. 

 

Today, the country’s economy is considered by the World Bank to be dynamic, sustainable, and resilient, which means it will likely survive almost any commodity price collapse or one-off catastrophe. Because of its relatively high human development index, it can transition to new opportunities in a way purely extractive economies simply cannot.

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2) Reduces Poverty and Creates Better Health Outcomes

The same human-focused development that enables better economic resilience also gives ordinary people the capacity to achieve a decent way of life. Investing in human capital, particularly in transferable skills, can help break the cycle of poverty by providing people with the tools and opportunities needed to improve their economic circumstances and consequently, their health and overall quality of life. 


The importance of poverty reduction also transcends the benefits for individuals or families. Ensuring that people with sufficient financial security also reduces overall societal and financial costs to struggling economies. People living around the poverty line often require more socialized services, experience more health issues, and find it difficult to contribute to their communities. By ensuring that more people are financially empowered, overall social and health costs are reduced, creating even more wealth and more secure social nets for smaller economies.


3) Increases Innovation and Global Competitiveness

There are two principal ways of fostering innovation within a country. The first method is to develop it indigenously through multigenerational educational programs and targeted policymaking. The second way is to attract foreign entrepreneurs, experts, and thinkers to help cultivate it.

 

Many developed nations have the resources to actively pursue both paths. For instance, in addition to their world-leading educational systems, the United States and Singapore respectively offer the H1-B Visa and the SG Tech Pass to encourage foreign experts to immigrate and boost their innovation ecosystems. 


Less developed economies, on the other hand, cannot feasibly hope to attract sufficient foreign talents to build their own innovation capacity. Lacking that option, the only choice for remaining competitive is to further develop their domestic human potential.

 

This is far more feasible than one might expect. Developing nations have certain advantages that can accelerate their innovation efforts, including favorable purchasing power parity. As the cost of living and labor is often lower compared to developed nations, this affordability can make it more feasible for governments, businesses, and startups to operate, experiment, and innovate. In addition, most developing nations have youthful populations who, once trained and educated, have immense potential to be highly productive and creative. 


Indeed, many important digital innovations are gaining ground in less developed economies. The widespread use of digital wallets in the Philippines, Thailand, and Vietnam, for instance, may signal just the first in a pattern of tech innovations that did not originate from wealthy Western or East Asian economies. In rising economies like the Philippines, digital infrastructure developers are already connecting the most remote communities, digitally transforming the countryside and paving the way for more unique future innovations.


Current events and historical data strongly suggest that developing economies need to invest what they can in human capital. While natural resources are good to have, policymakers and business leaders should recognize the pivotal role that human drive and ingenuity play in their nations' futures. By doing what it takes to cultivate their peoples’ human potential, less developed economies the world over can pave the way for societies that are not only more prosperous but more equitable as well.


Editorial Team
Consultant
This article was written by Editorial a Consultant at Industrial Psychology Consultants (Pvt) Ltd

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