DISCUSSION If we want to see inclusive growth, we need to encourage companies to invest in human capital

by Bethan Lance _______7th December 2018
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Investment as a creator of sustainable and inclusive growth requires businesses to recognise the equal importance of investment in human capital as well as physical capital, argues Bethan Lance.

The United Nations rapporteur Philip Alston’s hard-hitting report on extreme poverty has brought the UK under harsh criticism after referring to poverty in the U.K as a ‘social calamity and economic disaster’.  Following this, the Moral Maze on BBC Radio 4 had an episode on the United Nations. Listening to it I was I was intrigued over the difficulty the panel had in agreeing – What is poverty? Melanie Phillips, a British journalist, argued that, although poverty is undoubtedly a significant issue in the U.K., this report had “used a definition of poverty that exaggerates it in a disgraceful way”, emphasising that it counts those that are proportionately less well-off than the average. Conversely, Giles Fraser, an Anglican Priest, believed that the report painted a picture of poverty in the U.K that he entirely recognised.

What struck me as the important take-away from the debate was that irrespective of which definition of poverty one chooses to align themselves with, what certainly remains is an issue of increasing inequality.

The picture of rising inequality across the U.K has continued to worsen post-2008 due to weak wage growth and rising living costs. Typically, the immediate response is to ask: What has the government done to tackle this? Although important, we cannot neglect the potential held by the private sector to play a role in addressing the problem, crucially via investment in human capital. Human capital is a measure of the skills, education and other attributes of labour that effect an individual’s productive potential and earning capabilities.

When we talk about the potential for investment as a means for economic growth, diversity is key. Investment focused on physical capital (i.e. machinery, factories or computers), although important, on its own can run the risk of encouraging only the type of economic growth that makes inequality worse. Investment as a creator of sustainable and inclusive growth requires businesses to recognise the equal importance of investment in human capital as well as physical capital.

Investment in human capital is often given little attention, perhaps as it is frequently not included in many of our core economic models. For example, the very popular neoclassical Solow Growth model, for which Robert Solow won the Nobel Peace Prize in Economics in 1987. The model describes the role of savings and capital accumulation as a means to achieving long-term sustainable economic growth, however it gives no mention to the role of human capital. In fact, it assumes labour to be homogenous.

Economists later adapted the model to give a human capital-augmented version that depicts those countries with lower human capital to have relatively lower output. However, there remains a need for greater awareness of businesses with regards to the impact investing in human capital can have on helping to achieve inclusive growth – something, given the UN extreme poverty report, clearly should be at the forefront of our minds.

Employers must realise that at the heart of their business is people and this requires the adoption of a people-centric approach. When reading the latest report by Tomorrow’s Company, ‘A Question of Investment – why are boards investing too little in British business?’ I appeal to you to remember that not only do British boards need to pursue more investment, they need to pursue investment with a balance.

 

 

 

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