Is human capital superior to technology?

Thu, 23 Jul Pre-Open

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A notable trend has been seen in the global economic development for the past few decades. Global growth has been strong-usually more than 3%. Further, developing countries have grown at a much faster pace than developed ones. This has also helped in distributing the global income much more equally. However, no country can shelter itself from any of the economic developments over a long period. So the question now comes as - Until when will this economic evolution last?

As per an article in Livemint, the main engine of global growth since 2000 has been the rapid industrialization of China. By shifting millions of farmers from villages to cities, China was able to carry out the stupendous modernization.  However, there has been a slowdown in recent times, which has led to an economic moderation in the country. The problem that China has slowed down  from 10% annual growth to about 7% is only the beginning. This has posed threat to many other nations too. What would be the impact on the global economy if other nations won't be able to pick up the slack when China slows? What would be the impact on industrialization?

One approach that was made famous was by the economist W Arthur Lewis, who stated that when you move surplus farmers to cities, their productivity improves. This is one of the time tested ways by which a country can get rich. It moves the farmers to factories and imports foreign manufacturing technology. Foreign technology can be easily imported for manufacturing purposes. Poor nations are very good in replicating technologies from rich countries. This is easy as manufacturing technologies are embodied in the machines that are used to make the products.

However, the approach, which works for manufacturing, does not stand true for service businesses. This is because service businesses get their productivity from organizational models, human capital and other intangibles. Unlike in manufacturing, these intangibles and human capital are harder to imitate for poor countries.

So as the importance of services increases in overall GDP growth, the solution lies in improving the effectiveness of human capital. For developing countries such as India, however, there is scope for improvement in both manufacturing and services. Indeed, India has still not made the kind of strides that China has when it comes to manufacturing and one reason for this has been the lack of adequate infrastructure. So there is significant scope for improvement in the latter.

As far as human capital is concerned, India's demographic dividend has often been cited as one of the key drivers for growth in the country. This is because it is expected to have more number of young people in the working age as compared to China and the aged population in the developed world. However, this can turn out to be a double edged sword, if these young people are not armed with requisite skills. And for that education in the country will have to be significantly ramped up. Only then will human capital in India contribute significantly to India's GDP in the long run.