Serious efforts needed to improve human capital in Indonesia

Siwage Dharma Negara, Economic Researcher, Institute of Indonesian Sciences (LIPI), Jakarta

The recent calamity following the worst flood disaster in modern history here has raised concerns on the current and future quality of human capital in this country. Widespread malnutrition, disease and school dropouts are very distressing. Those problems may adversely affect the condition of our human resources.

Over the past century, we have witnessed an evolution of economic development thinking. One theory regards economic growth and development with a focus on greater recognition of the role of "human capital" as the driving force of growth.

Human capital -- the skills and knowledge embodied in the labor force -- has greatly contributed to East Asia's ability to become a major competitive industrial exporter in a relatively short time.

East Asia's experience has led to a belief that the focus of development has to be modified from simply physical capital accumulation to include human capital accumulation.

It is widely accepted among scholars that the objective of development is not just growth of the gross domestic product, but also poverty eradication, distributional equity, environmental protection and human resource development.

Economic growth alone is not enough to improve peoples' standard of living. On the contrary, investing in people through education and health care for instance has proven to be the most important determinant of sustainable development.

What is the source of innovation? According to Schumpeter, writing in 1939, ideas are the source of innovation. Ideas become accepted as individual knowledge, which is implemented through human capabilities. To sustain innovation, therefore, entitlements and enhancements of human capabilities are crucial (Sen, 1983).

Enhancements of human capabilities can be accelerated through investment in human capital such as promoting the quality of education, health care, medical attention and so on. As Sen indicates, the expansion of human capabilities will have both "direct" and "indirect" impacts. It will indirectly enhance productivity and raise economic growth. It also will directly constitute human well-being and improve quality of life. Therefore, development should be seen as two faces of the same coin; Expansion of human capabilities and the economy's productive capacity.

Education, through schooling and training, is widely advocated as a means of promoting creative capacity and inspiring achievement. Activities related to improved nutrition, better health, and other social investments are equally important in improving the quality of human capital. In fact, for very-low income countries the latter is much more crucial as it still insufficient in magnitude to have a direct impact.

Evidence shows that countries, which have made a substantial commitment to improve human capital have been rewarded by less poverty and less inequality as growth proceeds. The social benefits stemming from investment in human capital will allow simultaneous real productivity gains.

This empirical evidence of successful development experiences has confirmed the crucial importance of human capital development as necessary for sustainable economic development.

For Indonesia, greater emphasis on human capital is needed. In the short run, there is an urgency to restore the damage wrought by the floods, particularly regarding infrastructure. But in the long run, a lot of work is needed to improve human capital.

The important role of human capital development cannot be realized without the underlying support of a strong and pro- active government. Serious efforts must be undertaken to promote and maintain quality education, to improve nutrition and to provide better health services and other social investments for the people.

As public financing is limited due to fiscal stringency, the government should encourage the private sector to invest more in human capital. This can be done through regulatory and tax measures, which reward enterprises that innovate or contribute to human resource development. Facilitating a condition that is conducive towards competition among decentralized enterprises is also important to encourage ideas and innovation to flourish.