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Enhancing human capital

THE most significant investments that people, firms and governments can make in the changing nature of work are in enhancing human capital, the World Bank said in its projection development report for this year.

In particular, the World Bank suggested for governments to:

1) Invest in human capital, particularly early childhood education, to develop high-order cognitive and socio-behavioral skills in addition to foundational skills.

2) Enhance social protection. A solid guaranteed social minimum and strengthened social insurance, complemented by reforms in labor market rules in some emerging economies, would achieve this goal.

3) Create fiscal space for public financing of human capital development and social protection. 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 optimize their taxation policy and improve tax administration to increase revenue without resorting to tax-rate increases.

According to the report, “A basic level of human capital, such as literacy and numeracy, is needed for economic survival. The growing role of technology in life and business means that all types of jobs, including low-skills, require more advanced cognitive knowledge. The role of human capital is also enhanced because of the rising demand for socio-behavioral skills.

“Machines will not readily replace jobs relying on interpersonal interaction. However, to succeed at these jobs, socio-behavioral skills—acquired in one’s early years and shaped throughout one’s lifetime—must be strong. Human capital is important because there is now a higher premium on adaptability.

“Solutions are available. For example, to prepare for the changing nature of work, countries must boost their investment in early childhood development. This is one of the most effective ways to build valuable skills for future labor markets. Countries can also boost human capital by ensuring that schooling results in learning. Important adjustments in skills to meet the demands of the changing nature of work are also likely outside compulsory schooling and formal jobs. Countries can, for example, utilize tertiary education and adult learning more effectively.

“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. The World Bank’s human capital project, described in the report, is designed to address the shortcomings of political incentives and provide the impetus for investing in human capital.

“Social assistance and insurance systems should also be adapted to the changing nature of work. The concept of progressive universalism could be a guiding principle in covering more people, especially in the informal economy. When social protection is established, labor regulation eases work transitions.”

The report also mentioned that:

“The current social contract is broken in most emerging economies, and it is looking increasingly out of date in some advanced economies, as well. A new social contract should include investing in human capital to generate more opportunities for workers to land better jobs. This will improve the job prospects for newborns or schoolchildren.

“How will governments raise the additional resources needed to invest in human capital and advance social inclusion? The share of tax revenue in low-income countries is half that of high-income countries. Investments in human capital, basic social protection [including community health workers in some developing countries] and productive opportunities for youth are likely to have fiscal costs of 6-8 percent of gross domestic product [GDP].

“This is an ambitious goal. Increasing tax revenue, however, should go hand in hand with improving public service delivery. If not, increasing tax rates will only spur further public discontent.

“Other taxes and savings could also contribute to the financing of human capital,” said the report, arguing that Saudi Arabia adopted excise taxes in 2017: 50 percent on soft drinks and 100 percent on energy drinks, tobacco and tobacco products. It is estimated that nationally efficient carbon pricing policies would raise more than 6 percent of GDP in China, the Islamic Republic of Iran, Russia and Saudi Arabia. Taxes on immovable property could raise an additional 3 percent of GDP in middle-income countries and 1 percent 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 billion to $240 billion in annual revenue, which is equivalent to 4–10 percent of the global corporate income tax revenue. The increasingly digital nature of business only creates more opportunities for tax avoidance.

“Generating revenue from new kinds of assets, such as user data, makes it increasingly unclear how or where value is created for tax purposes.”


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