Education, institutions and human capital

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Human capital

While many countries in the transition region perform well with respect to primary and secondary education, they are weaker when it comes to training and retaining highly skilled people. In addition, the financial returns to education vary substantially across countries. This reflects weak university systems, as well as a mismatch between supply and demand. To address this, countries must improve the quality of higher education and their economic, legal and political institutions.

This chapter examines the state of human capital and education in the transition region and in southern and eastern Mediterranean (SEMED) countries.¹ There is substantial evidence that human capital – defined as the accumulated stock of education, knowledge and skills ‒ is important for economic development and growth.² Some economists believe that this is the most important factor.³ Human capital may affect growth not only directly, but also through its interaction with other factors, particularly economic, legal and political institutions (the “institutional environment”). Education may lead to improvements in those institutions which are conducive to growth. Conversely, the accumulation of human capital is influenced by the institutional environment. Furthermore, institutions may have an important impact on how human capital is used.⁴

Modern economies tend to provide significant returns to those with the most talent.⁵ This chapter argues that for transition economies to converge towards their mature economy counterparts, their returns need to be comparable to – or even greater than – those available in advanced economies. High returns not only provide incentives to invest in graduate or postgraduate education, but also help to retain the country’s most talented people. This is important because brain drain has proven to be an obstacle to development.

The following analysis shows that returns to tertiary education – the increase in lifetime income, relative to the income associated with secondary schooling, which an individual can expect as a result of obtaining a tertiary degree – differ greatly across transition economies. It highlights a strong correlation between these returns and the quality of institutional factors – such as the business environment, governance, the rule of law and political freedom. Where returns are low, the gap relative to advanced economies may widen because of the consequent under-investment in education, erosion of the education system and brain drain.

While most transition economies are ahead of their emerging market peers at similar levels of development, convergence with the most advanced economies in the European Union (EU) is not improving, and may slow down in the future. By providing comparative evidence on three key aspects critical to the accumulation of human capital – quality of education, brain drain and returns to tertiary education – this chapter can help policy-makers to identify critical weaknesses that require attention in order to close that gap.

1. In this chapter, the term “transition region” refers to Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, FYR Macedonia, Georgia, Hungary, Kazakhstan, Kosovo, Kyrgyz Republic, Latvia, Lithuania, Moldova, Mongolia, Montenegro, Poland, Romania, Russia, Serbia, Slovak Republic, Slovenia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. The southern and eastern Mediterranean (SEMED) refers to Egypt, Jordan, Morocco and Tunisia. [back]
2. See Sianesi and Van Reenen (2003) and Eichengreen et al. (2013). [back]
3. See Gennaioli et al. (2013). [back]
4. See Easterly (2002) and Natkhov and Polishchuk (2013). [back]
5. See Kaplan and Rauh (2013), Katz and Murphy (1992), Garicano and Rossi-Hansberg (2006), Autor et al. (2006), Garicano and Hubbard (2009), Terviö (2008) and Gabaix and Landier (2008). [back]

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