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The Role of the Global Financial System
Investing in broad-based human capital distinctly creates a three-way win-win. Human capital is key for economic growth. Human capital investments are also key for building equitable societies. And human capital is not only “capital”—that is, an input for production—but higher levels of human capital immediately translate into superior quality of life. Better health and nutrition, achieving literacy and numeracy, and access to modern sanitation services not only make people more productive but vastly improve their living conditions and well-being. Human capital improvements translate into longer, healthier, and more fruitful lives.
Is the global financial system ready to support human capital investments of the type and in the scale that the world needs? For now, it is not. The required type and scale of human capital investments will only happen if financial resources, data, knowledge, coordination, leveraging, surveillance capacity, and governance in the IFIs are revamped and realigned. The EPG report recommends actions and reforms conducive for the needed revamping and realignment of the IMF and the multilateral development banks.
- Better inter-institutional coordination: Proposals 2 and 3 focus on building country and regional collaboration platforms to facilitate joint and mutually re-enforcing efforts, while Proposal 7 proposes integrating trust fund activities into core operations to avoid fragmentation.
- Better data and cutting-edge knowledge: Proposal 8 focuses on the importance of IFI’s continuing to invest in data and policy-relevant research.
- Innovation and capillarity at the grassroots level: Proposal 9 focuses on the importance of leveraging more on the ideas and operating networks of business alliances, NGOs, and philanthropies.
The IFIs are also uniquely positioned in helping governments estimate how much reaching the human development goals would cost and find the mechanisms to finance these investments. In particular, the IFIs can help governments ensure tax collection is efficient and progressive and target resources where they are most needed, reduce waste and corruption in public spending, and adopt best practices in the deployment of education, health, and sanitation services.
The IFIs can also provide realistic assessments of how much of the financing of investments in human capital can actually rely on improvements in domestic resource mobilization. The IMF estimates that, on average, low-income developing countries will need additional annual outlays of 14 percentage points of GDP on average in the areas of education, health, water and sanitation, roads, and electricity to achieve the SDGs. Across 49 low-income developing countries, about $520 billion a year in additional spending is needed.
However, where will the additional needed resources come from? Boosting domestic tax revenue is an obvious option, especially for emerging economies but it will not be sufficient to meet the financing needs of most low-income developing countries. In fact, too much emphasis on domestic resource mobilization—especially in the poorer countries—could backfire: if, for instance, consumption taxes are raised, the poor may be left worse off. Moreover, borrowing may not be an option for many of these low-income countries because they are at risk or are already experiencing debt distress. Foreign assistance will have to continue playing its part, but this too will not suffice. Recognizing these limitations, the EPG report makes a central recommendation: Proposal 4, to shift the basic business model of Multilateral Development Banks from direct lending towards risk mitigation (including political risk insurance schemes) to mobilize significantly greater private equity investment.
As important as finding ways to invest more and more efficiently in human capital is, it is also crucial to prevent human capital from falling. We often forget that one of the greatest costs of financial crises, natural disasters, and pandemics is the destruction of human capital, which often can never be rebuilt. Malnutrition at an early stage in life cannot be reversed by consuming more food at an older age. Adult literacy programs cannot replace not attending school or not completing primary school.
