Human Capital for Sustainable Growth and Development As international economic competition intensifies, the comparative advantages of countries

are determined more by their technical innovations and research and development than by their natural resources and cheap labour. This shift is imposing new demands on the process of shaping human capital. Human capital is a multifaceted concept, the components of which change with the development of society. Human capital includes peoples level of education, the quality of higher education and the level of development of science and innovation. In most developed countries, these components are considered to be interrelated and result in dynamic and sustainable economic growth and employment. And, while the education system is the foundation of human capital its development continues in the sphere of research and development (R & D). Although Uzbekistans economy has grown rapidly since 2000, in order to be competitive on international markets it desperately needs to invest in human capital. Between 2000 and 2011 the average annual economic growth rate in Uzbekistan was 6.7%, while investments increased by an average of 11%. Rapid GDP growth during this period came mostly from an increase in industry rather than from the traditional raw-material sectors of the economy, such as agriculture. During the same period the share of agricultural products in GDP decreased from 30.1% to 17.5 % while the share of industry and services rose from 14.2% to 24.0% and 42.5% to 45.1% respectively. This rapid growth in the economy and investments translated into an annual increase of 21.4% 1 in household income in Uzbekistan. As a result, the share of savings in total household income rose from 2% in 2000 to 20.2% in 2010. 2 The improvement in peoples financial situation has led to greater pressure on the systems that define quality of life (e.g. education and health systems) arising from increasing expectations. One of the principal trends in the world today is mobility , and consequently the brain drain. This is a serious problem in Uzbekistan, since the flow of knowledge away from the country creates obstacles for R & D and consequently obstacles to a new level of development. One of the few reliable ways of keeping the creative class in the country is to provide it with high-quality institutions that build up human capital. Investment in human capital Government expenditure on education is approximately 9% of Uzbekistans GDP. This is higher than expenditure on education not only in Central Asian states but also the average expenditure on education in the OECD countries, where it makes up 5% of GDP. However, a major share of this is used to finance secondary education firstly because the population is made up of a large percentage of children, and secondly because almost 100% of children attend school. At the same time,

1 2

Adjusted for changes in the consumer price index (during the period 2000-2011). Source: State Statistics Committee of the Republic of Uzbekistan.

financing allocated for students attending higher educational institutions is twice as much as that for children attending primary school.

In the OECD countries average expenditure on higher education, including scientific research, is USD 12 319 per student. In Uzbekistan the sum is approximately USD 2 875 per student, which is comparable with expenditure in the upper to middle income countries. 3 To maintain the relatively high level of expenditure per student there is a high proportion of private funding of education, which makes up 65,5% of the total expenditure on higher education. Although Uzbekistans level of expenditure on education puts it in the same league as leading countries, its expenditure on R & D brings it close to the less developed economies. The need to increase investment in R & D is important to bring Uzbekistan up to speed with the other countries.

10 8 6 4.4 4 2 0 0.5 1.03 2.03 4.8 5.3

8.9

12000 10000 8000 6000 4000 2000 0.19 0

Lower-middle income Upper-middle countries income countries Expenditure on education (in % of GDP) Expenditure on R&D (% of GDP)

OECD

Uzbekistan

Expenditure per student at higher institutions (USD based on PPP), right hand scale

Figure 1. Education expenditure per student at higher educational institutions in Uzbekistan and other countries (% of GDP) The level of education of the population As we have already seen, one of the most important indicators of the quality of human capital is the level of education of the population. Research results obtained using a number of models of

Based on the World Banks classification of income groups economies are divided according to 2011 GNI per capita to low income, $1,025 or less; lower-middle income, $1,026 - $4,035; upper-middle income, $4,036 - $12,475; and high income, $12,476 or more.

endogenous growth suggest that innovative activity in Uzbekistan is highly dependent on the level of education of the economically active population.4 In Uzbekistan only 10% of the working age population, and only 13% of people aged over 25 have gone on to higher education. This is a much lower percentage than in countries that have invested in innovation development. In general, if the international trend is to increase the number of people who have gone on to higher education it is the reverse in Uzbekistan: over the last 20 years enrolment in higher education has started to decline. In 1999, in terms of higher education enrolment Uzbekistan was ahead of the lower-middle income countries by 5.7%, but by 2000 it had fallen short on this index by 1.8%.

80 70 60 50 40 69.7 30 55.6 33 17 15.7 11.2 Lower-middle income countries 13 10 Uzbekistan 3.9 6.7
1991 1999 2009

20
10 0 High-income countries

16.1
Upper-middle income countries

Low-income countries

Figure 2. Proportion of population with higher education: The international aspect (%) The policy of introducing strict quotas for admission to universities that limits the amount of students entering higher education was introduced to solve the inconsistencies of supply and demand in the labour market when there was a low demand for highly qualified workers. At the same time, in order to modernize the economy and enhance innovation it is necessary to raise the general educational level. It is also clear that any increase in the number of students in higher education without the provision of good quality courses, highly qualified teachers and flexible programmes will not yield the expected returns. So there are two key issues facing Uzbekistans higher education system: on the one hand, access to higher education should be expanded, and on the other it is important to ensure that higher education is of good quality. Research capacity and research results are qualitative indicators of human capital. In Uzbekistan, the number of researchers engaged in R & D is 1,089 for 1 million people, which is a relatively high rate. In recent years the number of researchers in developing countries has grown at a faster pace than that in developed countries. The share of R & D in developing countries increased from 30% in 2002 to 38% in 2007. Two-thirds of this increase can be attributed to China alone, which is ready to overtake the United States and the countries of the European Union. Each of these three major contributors has 20% of the world's scientists. Figure 3 shows the correlation between the volume
4

Jones, Charles I., R & D based models of economic growth, The Journal of Political Economy, Vol. 103, Issue 4, University of Chicago Press, Chicago IL, 1995, pp. 759-784; Population and ideas: a theory of endogenous growth, NBER Working Paper No. 6285, NBER, 1997.

of investments in R & D and the number of researchers in certain countries. In the lower left part of the figure we can see the emergence of three new major actors in the sphere of R & D China, Brazil and India.

6000 Japan 5000 U.S. Developed countries Russia 3000

Number of researchers per 1,000,000 population

South Korea

4000

France

Germany

2000 Uzbekistan 1000 India Brazil China

Developing countries 0 Least developed 0 0.5 1 countries

1.5

2.5

3.5

Investment in R&D (% of GDP)

Figure 3. Number of researchers and investment in R&D in selected countries and Uzbekistan, 2007

Demand for human capital

The most important incentive for development of human capital is demand. Currently, demand for jobs in Uzbekistan exceeds supply. The annual growth of the working age population (approximately 400,000) exceeds the number of jobs created (approximately 270,000-290,000). In 2000 the rate of those in employment was 69.4% but by 2011 it had dropped to 66.9%. Despite the low demand for highly qualified workers by private business, there is a shortage of labour for a number of specialized fields. This is explained by the rapid growth of industries, including those in the science sector. In 1991 the share of these specialized sectors was 32.4% of total production, but by 2010 their share had almost doubled, reaching 62.6%. At the same time Uzbekistan embarked on the modernization of production, thus creating demand for highly qualified personnel. In Uzbekistan 27 universities offer specialized training in the sphere of education, 14 in industry, construction, transport and communication, 6 in healthcare, 4 in agriculture, 7 in economy and law, 1 in sports, and 2 in art and cinematography. Despite the long-term growth priorities over the last 10 years there has been a significant gap in training in technical and science fields. The share of graduates with technical qualifications is low compared to the world average, which is 24%. In China, 30% of graduates have qualifications from engineering faculties. In the Republic of Korea, Taiwan, Singapore and India the number of specialists in the natural sciences doubled from 1975 to 1995, and the number of those in engineering tripled.

Figure 4. Distribution of students of higher educational institutions by sectoral specialization (%)

In Uzbekistan
industry

4%

14%

construction

1% 6%
6% 53% 8% 8%

agriculture transportation and communications economics public health

In Korea
Human sciences
14% 12%

6%
11%

Social sciences Education

29%

Technical sciences
22% 6%

Natural science

The buildup of human capital is intended ultimately to make the national economy efficient and competitive. Yet an assessment of the quality of human capital in Uzbekistan shows that the measures taken to develop human capital over the past 20 years were aimed primarily at supporting specific education, science and innovation institutions and achieving particular results without taking account of their interconnectedness. In order for human capital to become a factor for economic growth and innovation, it is essential to apply a holistic approach, where each element takes into account other parts of the system. Only then will investments in human capital begin to

yield a return in the form of increased productivity based on innovation. To this end, the focus should be on the following areas: 1. More radical reforms in Uzbekistans higher education system. Change the social objectives of higher education institutions. Uzbekistans education system must not only contribute to rapid economic development but also develop at a very fast pace and help to modernize society. Increase the autonomy of higher education institutions. Significant institutional and financial autonomy is a major prerequisite for higher education institutions if they are to improve the quality of their teaching, increase their cooperation with the private sector and increase the efficiency of their financial management. Adapt higher education to changing needs. Measures should be taken to bolster the research component and integrate international norms into vocational education.

2. Incentives for higher education institutions to cooperate with other entities involved with innovation. Research and innovation by higher institutions are hampered by poor cooperation both between themselves and with business, the government and society. Government policy must be aimed at developing cooperation in the following ways: Forming national technology platforms, which constitute an automated electronic system that promotes educational, research and consulting services. Designing measures to stimulate cooperation between businesses and universities in order to promote innovation in education and science.

3. Development of adult education the creation of a system of continuing vocational education, retraining and advanced training for people of all ages. This would provide: support for a public-private partnership in the area of informal education; financing of advanced training programmes in the government-funded sector; formation of a core of educational consultants.

By CER Research Coordinator Umida Islamova The article is prepared on the basis of the Analytical Paper Improving the Quality of Human Capital in the Context of Modernizing the Economy and Society"(CER, 2012) enter for Economic Research, 2012 (www.cer.uz) UNDP, 2012 (www.undp.uz) All copyrights belong to the enter for Economic Research. Any reproduction of this Policy Brief or use of portions thereof is permitted only with written permission; reference to the source is mandatory. With regard to all questions concerning reprints, translation or acquisition of the printed versions, please contact the following address: 5, 1st blind alley, Shota Rustaveli Str., Tashkent 100070, Uzbekistan. Phone: (+998 71) 150-02-02 Tashkent, Uzbekistan.