- Blog Post
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In a recent interview, World Bank chief executive officer Kristalina Georgieva delivered a remarkable statistic: In the world’s wealthiest countries, human capital generates nearly 70 percent of gross domestic product; in the poorest nations, it accounts for closer to 40 percent. The takeaway: More than land or money, people are what make nations rich.
Latin America comes out on the higher end of the global scale, with human capital (defined as the present value of lifetime earnings) now some 60 percent of GDP. Still, most of its nations are struggling to escape the middle-income trap, presenting a puzzle.
Smart economists point to the lack of economic diversification, the drag of informal labor markets, and poor governance as the main reasons for Latin America’s tepid growth. The World Bank data increasingly suggest that slow advances in human capital are at least as responsible for the region’s stagnation. Latin America’s education systems bear much of the blame. Sadly, new leaders in Brazil and Mexico, its two biggest economies, risk making things worse.
Latin America comes second only to East Asia among emerging markets in terms of the weight of human versus financial and natural (i.e. land) capital in its economic mix. This strength is on full display in Uruguay’s information technology sector, which handles back-office functions for many European financial and insurance firms. It shines in the aerospace engineers in Queretaro, Mexico, home to world-class companies including Bombardier Inc., Airbus SE, General Electric Co. and Safran SA. And it has pushed Brazil to become a market leader in biofuels.
To be sure, vast differences exist within the hemisphere. Chile, Costa Rica and Argentina are similar to the U.S. and Japan in the importance of people to creating economic wealth; Haiti, Guatemala and Honduras rank nearer to Nigeria and Sierra Leone. Venezuela, Bolivia, and Cuba don’t share their data, but the first two undoubtedly come in toward the bottom of the human capital rankings, and regional wealth in general.
These lifetime earnings that undergird so many economies depend on education. Here, Latin America lags. The region scores in the bottom third on the Organization for Economic Cooperation and Development’s Program for International Student Assessment (PISA) exams; Chile, the region’s top performer, ranks 44th out of 71 nations. Mexico and Brazil score a dismal 58 and 63 respectively. Outputs of education are similarly low throughout the region: Patents are scarce, and research and development spending is just a third of that in the OECD.
It isn’t that Latin America doesn’t spend money: Average public education outlays are a respectable 5 percent of GDP, similar to those in the U.S. and European Union. But too much goes to universities over primary and secondary schools, subsidizing the rich over the poor. A portion is undoubtedly lost to phantom teachers, inflated contracts, and other forms of corruption. As important, methods for teaching and motivating students have yet to change. To start, poorly educated teachers pass along incorrect information to many students, especially in math and science; students are often not corrected if they make mistakes.
Unfortunately, some of Latin America’s newly elected leaders don’t look to fix these problems. In Brazil, Jair Bolsonaro seems more focused on purging what he calls the “Marxist garbage” taught in the classroom than in providing the skills that citizens need. He threatens to shrink the required core curriculum to just Portuguese and math, cutting out science, humanities, and social studies. In Mexico, Andres Manuel Lopez Obrador is undoing the education reforms that would have replaced rote memorization with critical thinking in curriculums. And he is eviscerating teaching metrics and evaluations that would bring more accountability and better instruction to Mexico’s youth.
Across the region, too many education debates are stuck in the 20th century rather than focusing on preparing citizens and workers for the middle of the twenty-first. Yes, more money needs to go to early years over higher education, giving the majority of the young a better chance. And nations need to keep kids in school, moving them beyond starting to finishing their degrees. But achieving quality more than quantity needs to be the focus. Education itself must change if Latin Americans are to make the leap from an industrial to an information age.
This matters all the more today as most of the region’s countries are in the middle of their “demographic bonus,” with more working age individuals than old and young. In today’s mature economies these extra workers headed to farms and factories, helping make these nations rich. Yet today, as other World Bank studies show, the nature of work is changing everywhere. Budding Latin American workers will need different skills to climb the income ladder. And these nations need to teach and train them now, before this favorable demography fades.
Many governments see foreign and domestic investment as the key to growth. But given the predominance of human capital in these economies, even significant upticks in financial flows won’t move the growth needle that far. Promoting “natural” capital has its drawbacks too, namely the commodity booms and busts Latin America already knows too well.
If the histories of the world’s advanced economies are still a guide, people are the path to greater wealth. For Latin America, they are already the dominant economic driver. But if its nations don’t invest in their citizens, they won’t live up to their full potential.