To pursue economic growth, Russia must develop its human capital, which requires structural reforms in education, healthcare and pensions. These, in turn, must respond to major trends in service provision, including the increasing role of individual choice, the need to deliver lifelong learning and healthcare, and the risk that Russians will increasingly buy services abroad, rather than work to develop their own national systems.
Russians have now reached a consensus on the crucial importance of developing their country’s human capital– the skills, education, health and overall capacity of the individual. This, of course, is a challenge for all relatively developed countries, and to date, none has fully succeeded in developing a response that meets all its needs.
According to the traditional industrial model, the sectors most relevant to the development of human capital belong to the social sphere. In reality, in modern developed countries they also carry fiscal and political implications. Unlike in previous centuries, education, healthcare, and pension systems now involve the entire population, if only as taxpayers and consumers.
The demographic crisis has added to the complexity of this situation. Funding the development of these sectors has become a dilemma for national budgets and can undermine the financial stability of any developed country. Furthermore, funding has to be long-term, which has significant implications for any country’s investment resources. Finally, the political and social stability of societies depends upon the efficient functioning of these sectors. In short, if human capital is to be developed, policy measures should address both financial and structural issues.
All this carries two sets of consequences: the first is that a way must be found to allocate additional budget resources. Compared with the average OECD country, Russia currently spends 1.5 to 3 times less on education and 3 to 4 times less on healthcare as a percentage of GDP. The second is that there is a real need for structural reforms. The quality of education and medical services depends not so much on the level of employee salaries, but rather on making improvements in how those systems operate.
Financial measures and structural reforms should not be implemented separately; it would be politically dangerous and economically inefficient to do one while ignoring the other. Above all, funding should come only once institutional reforms have been implemented.
In thinking about structural reforms, we need to understand the nature and function of the institutions that deliver services in this area in contemporary post-industrial societies. Five elements, in particular, are worth considering:
First, services need to adopt a “lifelong” perspective. In the past, education was mostly for the young and healthcare catered only for the ill. Nowadays, people study and see their doctors throughout their entire lives. Our understanding of work and of pensions is also undergoing a fundamental change: heavy industry is yielding in importance to the services sector, which means we need to rethink our understanding of pensions and the age at which work should end.
Second, services will in the future be increasingly “individualised”, meaning that people will choose their own paths in education and healthcare from a range of service options. This is true, too, regarding pensions: it is already evident that the retirement age is increasingly a matter of personal choice. The consequence for the pension system is that systems for supporting older age groups must be diversified.
Third, services are becoming increasingly internationalised. Schools and hospitals face not only competition in their own neighbourhoods, but also throughout the country and globally. Of course, this degree of choice is not available to everyone. Yet as living standards improve and the real cost of these services falls–along with the cost of travel–more and more people will have these choices. Opportunities for building up savings in a global financial system will also mean that pensioners will be less and less dependent upon the pension system of their own country.
Fourth, the role of private spending in developing human capital is growing: this is a logical development from the first three trends, which all point to a growth in opportunities for people to purchase the services they need. This means that the role and importance of individual demand will increase, eventually overtaking the volume of state expenditures in the relevant sectors. The increase in private expenditures is also associated with the fact that further increases in public expenditures became impossible towards the end of the 20th century: no increase in taxation was possible, while the public’s demand for social services continued–and still continues–to increase.
Finally, new technologies are radically transforming the nature of service delivery. As information, communication and transportation technologies continue to develop, traditional forms of healthcare and education are withering away.
Ignoring these trends creates a risk that Russia will continue to lag behind–or even further behind–other developed countries. The fact of the matter is that an advanced system of education or healthcare can only be created on the back of a demand for high-quality services. This is how these sectors developed until recently. However, the explosive development of communications and transportation systems has caused a steep reduction in the transaction costs of switching from a national system of service delivery to a global system. It is now much easier than it was 20 years ago to enrol in any university or to receive health treatment in any clinic throughout the world. This costs money, but as the economy grows, the disposable income of Russian citizens will also grow, and as experience shows, Russians are prepared to invest in themselves–namely in their education and healthcare.
Of course, if those who can pay for high-quality services turn mainly to overseas suppliers, then Russia will be deprived of opportunities to improve its own services. This will thus limit the demand for high-quality education and healthcare and, inevitably, the supply. This is the major strategic challenge for human capital development and the principal challenge facing the overall modernisation of Russia.
The development of human potential is now a national priority. However, Russia will not realise its human potential simply by increasing funding for education, health and pensions. Instead, it is only through structural reforms in these sectors that Russia will meet the needs and challenges of the 21st century.
References and recommended sources
The Russian presidential Academy of National Economy and Public Administration
OECD work on the Russian Federation
OECD Forum 2013 Issues
More OECD Observer articles on Russia
Subscribe to the OECD Observer including the OECD Yearbook
A version of this article first appeared in Voprosy Ekonomiki
By Vladimir Mau, Rector, Russian Presidential Academy of National Economy and Public Administration
©OECD Yearbook 2013