Human Capital: Challenges for Russia

Vladimir Mau

Human Capital: 

Challenges for Russia

Russian Presidential Academy of the National 
Economy and Public Administration 

Publishing House Delo
Moscow · 

Vladimir Mau
Human Capital: Challenges for Russia. PANEPA

Abstract
The development human capital is now recognized as being the most 
important precondition of economic growth in modern times. It should 
be a priority in our socio-economic policy. However, recognition of 
this fact alone will not produce a qualitative leap in the development 
of education, healthcare and the pension system. We need fundamental 
changes in these sectors if they are to become capable of meeting the 
challenges of post-industrial society. This will mean individualization 
of the services provided, continuous delivery of these services (over the 
lifetime of an individual), privatization (an increase in the role of private 
funding), the internationalization of competition and implementation of 
the latest technologies in the delivery of services.

Key words: human capital; education; healthcare, pension system, socioeconomic policy. JEL: E24, G23, H75, I15, I18, I25, I28.

УДК 331.1
ББК 65.240
     М12

Мау, В.А.
Человеческий капитал: вызовы для России / В.А. Мау. — М. : 
Издательский дом «Дело» РАНХиГС, 2013. — 31 с. — (Научные 
доклады : экономика).

ISBN 978-5-5749-0783-0

ISBN 978-5-5749-0783-0                                                                   УДК 331.1
ББК 65.240

© ФГБОУ ВПО «Российская академия народного хозяйства и 
государственной службы при Президенте Российской Федерации», 
2013

М12

T    

The debate over national priorities that began when 
the Communist period of Russian history ended 
has now almost run its course. A consensus has 
been reached in our understanding of the crucial 
importance for the country of those sectors of the 
economy that are associated with the development 
of the individual (the development of human capital 
or of human potential).
This is a great step forward in our social 
awareness. For one thing, we do need widespread 
agreement as to what the key issues are for Russia’s 
economic development if we are to overcome the 
after-eff ects of the fundamental revolution that we 
experienced at the end of the twentieth century. A 
revolution shatters the value system of a society 
and it takes much longer to acquire new values than 
it does radically to deconstruct the old régime.
Secondly, and this deserves particular emphasis, 
the giving priority to human capital means that 
society acknowledges the post-industrial character 
of the challenges that it faces: in searching for a 
new model of development it looks not to the past 
but to the future. It is not so very long ago that 

V M



discussion of national priorities focussed on the key sectors of 
the economy of the last century: the aircraft industry, machine 
construction, ship-building, electricity, agriculture were given 
priority by Russian politicians and economists in policy for 
economic development and, what is most important, in budget 
expenditures. It was only in the mid-s that the élite began to 
address the issue of social capital. Education and healthcare were 
the fi rst to receive attention, followed by the pension system. 
Egor Gaidar was the fi rst to point out the crucial importance of 
these sectors for the future economic development of Russia (see 
Gaidar, ). The programme of «priority national projects» 
introduced by V. V. Putin and D. A. Medvedev in  endorsed 
these priorities.
Russia is not alone in facing this challenge. Creating an 
eff ective system for the development of the potential that is 
latent within the population is a problem that confronts all of 
the relatively developed countries. The challenges of the postindustrial era and demographic change have made for a «crisis of 
the „universal welfare state“ and forced many countries to accept 
the need for profound transformations in the social sphere. At 
a time when population ageing has become endemic and the 
demand for social services has continued to increase the need 
has arisen for a fundamentally new model of social support. In 
other words, Russia is facing not so much a crisis of the system 
of social services that was created during the Soviet period but 
a much deeper crisis of industrial society. This means that a 
new policy for the social services social must be sought not in 
the process of «catching up» in economic development but as 
a response to the general problematic that Russia, in common 
with other developed countries, is facing. The collapse of the 
Soviet Union should be understood as having been a crisis of 
the industrial system and of the welfare state that was a part of 
that system.
To date, no country has succeeded in developing a system 
that is capable of responding to contemporary challenges in 
the development of human capital. This means that the search 
for an optimal model of development need only to a minimal 
degree take into account eff orts that have been made elsewhere. 

H C: C  R



Moreover, the country that succeeds in creating a viable system 
will acquire an enormous advantage in the post-industrial world.¹
According to the traditional (industrial society) model, these 
sectors belong to the social sphere of the economy. But for all the 
importance of the social dimension, the development of human 
capital in modern developed countries is known to interact with 
and depend also upon fi scal and investment considerations and 
to have political implications. Unlike the end of the nineteenth 
and most of the twentieth centuries, education, healthcare 
and pension provision now involve the entire population (as 
taxpayers and as consumers of these goods). The demographic 
crisis has added to the complexity of this state of aff airs. Funding 
the development of these sectors has become a dilemma for 
national budgets and can undermine the fi nancial stability 
of any developed country. What is more, the funding of these 
sectors has to be long-term and this has signifi cant implications 
for any country’s investment resources. Finally, the political 
and social stability of societies in which the urban population 
is predominant depends upon the effi  cient functioning of these 
sectors.
If human capital is to be developed, fi nancial and structural 
issues have to be addressed. The extent of the fi nancial problem 
can be gauged by comparing the expenditure of Russia with that 
of countries of similar or more advanced economic development, 
in particular countries of the OECD. Russia spends . to  times 

          ¹ Strictly speaking, an eff ective solution to present-day social problems is 
an important pre-condition of the eff ort to «catch-up» economically. 
This idea is implicit in the writings of Alexander Gershenkron, who 
held that backwardness can itself provide an impetus to accelerated 
development. For Gershenkron, the less developed countries do not 
need to repeat the experience of the advanced countries; instead, they 
can adopt the technologies and the institutions that have been created 
by the latter. Applying this notion to present day conditions, we could 
say that if Russia succeeded in creating the most eff ective institutions 
for the development of human capital (against a background of general 
crisis in this sphere) then it would acquire signifi cant comparative 
advantages in its eff orts to overcome its economic backwardness 
relative to the more advanced countries.

V M



less than the OECD on education and  –  times less on healthcare 
as a percentage of GDP.
There are two sets of problems that have to be resolved: 
fi rstly, ways have to be found for allocating additional budget 
resources to employees in these sectors and to the population 
groups that they serve; and secondly, structural reforms have 
to be implemented. Financial measure and structural reforms 
should not be implemented separately: it would be politically 
dangerous and economically ineffi  cient to adopt one course of 
action while ignoring the other. Of course, this approach entails 
a number of signifi cant risks.
An increase in the pay of doctors and teachers, investment 
in equipment and similar fi nancial measures are necessary if we 
are to resolve the problems that have arisen, but these measures 
alone will be insuffi  cient. The quality of educational and medical 
services depends not so much on the level of employees’ pay as 
upon improvements in the operation of the systems involved. 
Reform of the social sector will not be achieved by an increase in 
budgetary allocations alone.
An increase in funding if not accompanied by structural 
reforms can even produce negative results. An increase in salaries 
can lead not to the renewal of personnel but to the retention of 
cadres, the continued employment of doctors and teachers whose 
qualifi cations have become out of date and who would not provide 
better care or better teaching even if one doubled their salaries. 
An increase in expenditure on equipment often means that it is 
procured at infl ated prices or that equipment is purchased that is 
not essential for hospitals or laboratories. By analogy, an increase 
in the funding of the housing sector, given the current degree of 
monopoly in the market for housing services, will make for an 
increase in prices and an enrichment of local monopoly holders.
This means that the increase in funding for the human capital 
sectors in the s must be viewed as being only the fi rst and by 
no means the most important step towards their improvement. 
Above all, we need institutional reforms, and funding should 
follow only once these reforms have been implemented. This must 
be the guiding principle of any policy for the formation of a model 
for the development of human capital in the present day.

H C: C  R



T       

It is not suffi  cient to argue that in the development of human 
capital institutional reform should take priority over fi nancial 
policy. We need to be clear about those aspects of the functioning 
of the relevant institutions that are typical for present-day postindustrial society. There are no universally applicable solutions 
whether in the economic or the social spheres. Any measures that 
can be adopted will depend upon both the level of development 
of a particular society (its per capita GDP) and upon the global 
socio-economic paradigm that happens to prevail.
The institutional problems that we face in present-day 
Russia in the sphere of human capital are, for the most part, 
those that are being encountered in other developed countries, 
notwithstanding the fact of our lower level of per capita GDP. 
To a signifi cant degree this is a legacy of the Soviet period: 
demographic development, reproductive development and 
gender behaviour during the late Soviet period were beginning 
to approximate to the norms of developed countries.¹
There are fi ve typical features (functional principles) of human 
capital that need to be borne in mind when it comes to structural 
modernization. These, in turn, refl ect aspects of contemporary 
technology, namely dynamism (rapid renewal) and an ever more 
pronounced individualization of the use of technology.
The lifelong delivery of services: In the past, education was for 
the most part customized to the age of an individual. Healthcare catered only for the ill. Now people study and have 
appointments with their doctors throughout their entire lives. 
Our understanding of work and of pensions is also undergoing 
fundamental change. A reduction in the importance of heavy 
industry and an increase in the importance of the service 
sector, taken together with our abandonment of the Soviet-era 
criminalization of the «parasite» have made for a reappraisal of 
our understanding of the «pension» and of the age at which work 
should end (or not end).

          ¹ This characteristic of the Soviet model of development is examined in 
E. T. Gaidar ().

V M



The increasingly individual nature of services: In future, 
the individual will increasingly choose his or her own path 
in education and health-care from a multitude of available 
educational and medical services. It is evident that the retirement 
age, the age at which an individual decides to terminate his or 
her productive activity, is increasingly a matter of individual 
choice. The consequence for the pension system is that systems 
for supporting the older age groups have to be diversifi ed.
The increasingly global nature of services: Educational and 
health-care institutions are competing not only with schools 
and hospitals in their own neighbourhood but with similar 
institutions throughout the country and throughout the world. 
Of course, this degree of choice is not available to everyone, 
but as standards of living improve and the real cost of these 
services and of travel falls as a result of global competition, more 
and more people will participate. Opportunities for building up 
personal savings in a global fi nancial system will mean that 
pensioners will be less and less dependent upon the pension 
system of their own country.
An increase in the importance of private expenditure in the 
development of human capital (this is a logical accompaniment 
of the previous three trends). The fi rst three trends point to 
a growth of opportunities for people to purchase the services 
that they need. This means that the role and the importance 
of individual demand will increase, eventually overtaking the 
volume of state expenditure in the sectors in question. Private 
purchase of services, or shared state-private purchase, are not 
only a natural development, they are the inevitable consequence 
of the technological modernization of these sectors and of an 
increase in the living standards of the population. The increase 
in private expenditure is associated with the fact that any further 
increase in state expenditure became impossible towards the end 
of the twentieth century: any increase in taxation was impossible, 
while the demand of the population for social services continued 
(and continues) to increase, in line with social progress.
The increasing importance of new technologies. These are 
radically transforming the nature of service-delivery. As 
information and communications technologies and transport 

H C: C  R



technologies continue to develop, traditional forms of healthcare and education are withering away. Innovations in systems 
of organization are having a similar impact.
All of these trends must be taken into account since they are 
making for a modernization not only of the human capital sectors, 
but contributing to the political and economic modernization 
of the entire country, including that of our technological 
infrastructure. Ignoring these trends creates a risk that Russia 
will continue to lag behind or will lag even further behind, the 
socio-economic development of the developed countries.
The process of globalization makes for an intensifi cation of 
competition and this is also true of institutional competition in 
the market of human capital. In the immediate post-Communist 
period many argued that we had inherited a high level of 
development of human capital, in particular in the quality 
of our systems of education and healthcare. It was frequently 
maintained that in Russia the level of development of human 
capital was high by comparison with our level of economic 
development.
The data provided in the accompanying table indicate that 
the picture is not so positive. In a ranking based on level of 
social and economic development, our systems of education and 
healthcare approximately correspond to our level of per capital 
GDP. However, the indicator for quality (outcome) of healthcare 
(life expectancy) in Russia is in steep decline. Reversing this 
trend will not be easy.
The fact of the matter is that if an advanced system of 
education or healthcare is to be created there has to be a demand 
for high quality educational and healthcare services. This is how 
these sectors developed until recently.
However, the explosive development of communications and 
transportation systems has made for a steep reduction in the 
transaction costs of switching from a national system of delivery 
of these services to a global system. It is now much easier than 
it was  years ago to enrol in any university (if the applicant 
has passed the necessary exams) or to receive healthcare in 
any clinic throughout the world. This costs money, but as the 
economy grows the disposal income of the Russian citizen will 

V M



also grow, and, as experience shows, Russians are prepared to 
invest in themselves — in their education and healthcare.

T. S   -  
(R)

Indicator

Level of Economic 
Development and 
Quality of Institutions

Per Capita GDP


Competitiveness of the economy (World Economic 
Forum) 
 

Competitiveness of Higher Education


Competitiveness of healthcare
 

Life Expectancy
 (–) 

Per Capita Medical Expenditure


Quality of Institutions


Corruption


Index of Human Development
 

Of course, if those capable of paying for high-quality 
services turn predominantly to foreign educational and medical 
institutions, then Russia will be deprived of opportunities for 
improving its own services, and this will become even more of a 
problem if Russia becomes a magnet for those seeking a higher 
standard of education and healthcare than exists in their home 
countries. The demand for high quality education and healthcare 
will be limited and supply will also be limited. This is the major 
strategic challenge for the development of human capital and the 
principal challenge facing the overall modernization of Russia.
This enables us to identify the second pre-requisite of the 
creation of a modern system for the development of human 
capital: the modernization of Russia requires not a reconstruction 
of the Soviet system of social services, not a «return to the 
wellspring», but the formation of a qualitatively new model for