Human capital in Latvia
For Latvijas Banka Monthly Newsletter, In Focus, March, 2018
It is human capital that primarily determines our satisfaction with life. Therefore, it should be among the top policy priorities, while various economic indicators like industrial output or export competitiveness may be regarded as tools, not targets themselves. Three dimensions of human capital – health, education and work life – are closely interrelated. Good health is a prerequisite for undertaking long-term investments like education. Good education increases the prospects to have exciting and high-paid jobs. More high-paid jobs with a value to society raise tax revenues from which education and healthcare systems are financed.
Despite significant progress in terms of life expectancy, Latvia still lags 5–10 years behind the EU and OECD peers; and the difference is twice larger when we look at healthy life expectancy. Low public spending and a high share of private out-of-pocket healthcare expenses decrease the accessibility of healthcare services, particularly for low income households. Expensiveness of healthcare services and long queues clearly contribute to large differences in the self-perceived health status across income quintiles. Moreover, people with lower income smoke more and spend less time on physical activities; overall, compared to other developed countries, people in Latvia smoke much but exercise little. Therefore, structural reforms in the healthcare sector, accompanied with public spending rise and promotion of a healthy life style could improve the health status of the society and substantially extend healthy life expectancy.
The fact that we compare Latvian human capital with the EU and OECD level without even thinking of trying to relate it to the world or the former USSR average is an apparent achievement in itself. Moreover, the state of human capital in Latvia continues to improve over time. However, it is true that large room for further improvement still exists.
While Latvia scores only slightly below the OECD average in the PISA test, there is a major shortage of pupils with outstanding skills. This is a modest result, given that Latvia spends a larger part of its budget on education than any other EU country. Recent Latvijas Banka research clearly identified three main characteristics of underperforming schools: low number of pupils, low teacher salaries, shortage of young (under age 45) teachers. Although maintaining a wide school network eats much funding, school merging that would free resources to substantially raise teacher salaries has been slow and often challenged by municipalities. Higher education prevalence in Latvia slightly exceeds the EU average, but this to some extent reflects the rather low study requests. Too many higher education institutions are competing (mainly with price and advertisement) for an ever decreasing number of students. And although there are notable examples of very good study programs, secondary school graduates lack information that would allow them to make an objective choice.
Although average labour indicators look decent, with participation and employment rates exceeding the EU average, human capital is being wasted via the still quite large shadow economy, emigration and very high unemployment in some districts of Eastern Latvia.
The fact that we compare Latvian human capital with the EU and OECD level without even thinking to relate it to the world or the former USSR average, is an apparent achievement in itself. Moreover, the state of human capital in Latvia continues to improve over time. However, it is true that large room for further improvement still exists. If people living just a few hundred kilometres from Latvia – in Finland, Sweden or Estonia – enjoy an even better state of human capital, there is no clear reason why Latvia should be predestined to perpetual lagging behind. The only question is how and when the progress will accelerate, and that mainly depends on ourselves.