HUMAN CAPITAL AND INTERNATIONAL COMPETITIVENESS OF OECD COUNTRIES

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1 Adam Giegiel Anna Wildowicz Political Economy Chair Economic Faculty Białystok University HUMAN CAPITAL AND INTERNATIONAL COMPETITIVENESS OF OECD COUNTRIES Abstract The main purpose of this article is an analysis of international competitiveness of OECD countries in the context of human capital theory. In this paper human capital is understood as the knowledge, skills, competencies and other attributes embodied in individuals or groups of individuals acquired during their life and used to produce goods, services or ideas in market circumstances. Undoubtedly investment in human capital is not only one of a basic condition for long-term economic growth, but influences international competitiveness of given economy as well. There is also a well-established relationship between human capital quality and labour productivity. Cross-country differences in educational attainment explain an important fraction of observed productivity differentials. It should be emphasized that public and private expenditure on educational institutions accounts for about 6 per cent of the collective GDP of the OECD member countries. This figure shows the strong empirical support for a key role of human capital in increasing international competitiveness and in achieving higher rate of economic growth. Keywords: human capital, international competitiveness, economic growth, education. Introduction Because of the increasing role of science and knowledge in contemporary economy human capital investment seems to be one of the most important factors which positively influence national competitiveness. In the case of fast technological changes and globalization processes, that take place in the 21st century, human capital can be used as an accelerator of economic development. New theories of economic growth emphasize that human capital accumulation generates positive externalities through which social returns on education are significantly higher than the sum of individual returns. Despite the fact that individuals invest in education for their own benefits, their investment increases the general level of society s knowledge which, in turn, facilitates the accumulation of knowledge by others and so on. What starts as an individual decision becomes a self-amplifying virtuous cycle. It s commonly known that the ties between higher education, scientific research and production processes characteristic for knowledge driven society are getting stronger. The key role of competence and knowledge in stimulating economic growth has been also widely recognized by many economists. That s why all countries, which strive to sustain economic growth and prosperity, or to be competitive in the long run, have to pay particular attention to such issues as human capital accumulation and its quality.

2 Human capital and international competitiveness of OECD countries 57 Theoretical aspects of international competitiveness The concept of international competitiveness can be understood in many different ways. First of all, competitiveness shows how nations and enterprises of a given country are able to manage the totality of their competencies in order to achieve prosperity or profit. According to IMD s World Competitiveness Yearbook (2003) it is a field of economic knowledge, which analyses the facts and policies shaping the ability of nation to create and maintain an environment that sustains more value creation for its enterprises and more prosperity for its people. The IMD World Competitiveness Yearbook (WCY) looks for an example at the relationship between a country s national environment and the wealth creation process (which is the result of enterprises and individuals activity). The WCY takes into consideration four competitiveness factors, that generally define a country s national environment. These are: Economic performance, Government efficiency Business efficiency Infrastructure. Competitiveness is defined as the collection of factors, policies and institutions which determine the level of productivity and the level of prosperity that can be attained by a given economy. Thus, a more competitive economy should grow faster over the medium to long term. In the light of these considerations it should be clearly emphasized that at least two types of competitiveness can be distinguished. Firstly, result competitiveness, which refers mainly to the share of a country in international markets. Secondly, factor competitiveness which is in other words called as a long-term competitive ability of an economy, required to keep pace with the international competitiveness (Bieńkowski 1995, p. 32). The concept of result competitiveness differs from the factor competitiveness, which comprises the analysis of such development factors as: factors of production and their efficiency (especially labour efficiency), socio-economical system, government economic policy or international situation 1. The World Economic Forum has been measuring national competitiveness using the specific methodology developed by J. Sachs and J. McArthur, which is called the Growth Competitiveness Index (GCI) since 2001 (The Global Competitiveness Report ). The GCI enables to measure competitiveness by formulating the range of factors that are responsible for the evolution of growth in a country: the quality of macroeconomic environment, the state of the country s public institutions, the level of its technological readiness. 1 According to the Porter diamond model to the main determinants of national or regional competitiveness belong (K. Obłój, 2007): factor conditions (inputs) -the national factors of production, natural resources, skilled labour or infrastructure, demand conditions home market demand for the respective product or service, related and supporting industries (the concept of cluster) close working relationships between industries promote innovation and upgrading needed to maintain the competitive advantage, firm strategy and rivalry- the conditions governing how national firms are created, organized and managed, as well as the nature of domestic rivalry which influences innovativeness in a given industry.

3 58 Adam Giegiel, Anna Wildowicz Table 1. Growth Competitiveness Index Rankings Country GCI 2006 Rank GCI 2006 Score GCI 2005 Rank Switzerland 1 5,81 4 Finland 2 5,76 2 Sweden 3 5,74 7 Denmark 4 5,70 3 United States 6 5,61 1 Japan 7 5,60 10 Germany 8 5,58 6 Netherlands 9 5,56 11 United Kingdom 10 5,54 9 Norway 12 5,42 17 Austria 17 5,32 15 France 18 5,31 12 Belgium 20 5,27 20 Ireland 21 5,21 21 Luxemburg 22 5,16 24 Spain 28 4,77 28 Source: A. Lopez-Claros, ed., The Global Competitiveness Report , World Economic Forum, Geneva 2006, p. 17. It s noteworthy that competitiveness can be considered: at firm, at industry and at national level (Jordan s Competitiveness Book 2004, p. 7). Firstly, competitiveness at the firm level means the ability to provide products and services more effectively and efficiently compared to the other competitors. It enables to reach a sustained success in international markets without protection and subsidies. Measures of such kind of competitiveness usually include firm profitability, measures of cost and quality, the exports of foreign sales of the company divided by output, regional or global market share. Secondly, competitiveness at the industry level is the ability of the nation s firms to achieve sustained success in the international marketplace and its measures include the overall profitability of the nation s enterprises in the industrial sector, the trade balance in the industry, the balance of outbound and inbound foreign direct investment, etc. Lastly, the national competitiveness is the country s ability to create, produce, distribute products and services in international trade, which can be obtained thanks to the very specialization required to achieve international success in some industries. To put it another way, competitiveness at the national level refers to a country s ability to achieve sustained high rates of growth in GDP per capita, that means constantly rising standard of living, by generally focusing on productivity trends. The standard of living is mainly determined by productivity, but the concept of competitiveness embraces many other factors which are responsible for country s macroeconomic performance. They include not only productivity and technological innovation, that in turn depend on investment in human and physical capital, but also the institutional and structural policy environment.

4 Human capital and international competitiveness of OECD countries 59 Picture 1.The golden rules of competitiveness 1. Create a stable and predictable legislative environment 2. Work on a flexible and resilient economic structure 3. Invest in traditional and technological infrastructure 4. Promote private savings and domestic savings 5. Develop aggressiveness on the international markets as well as attractiveness for foreign direct investment Rules of competitiveness 6. Focus on quality, speed and transparency in government and administration 7. Maintain a relationship between wage levels, productivity and taxation 8. Preserve the social fabric by reducing wage disparity and strengthening the middle class. 9. Invest heavily in education, especially at the secondary level, and in the life-long training of the labour force 10. Balance the economies of proximity and globality to ensure substantial wealth creation, while preserving the value systems that citizens desire Source: IMD Competitiveness Yearbook 2006, Lausanne The notion of competitiveness is the result of a long history of thought. According to A. Smith s theory of absolute advantage all counties should specialize in the production of those goods in which they have an absolute advantage. However, a high level of competitiveness in almost every area is highly unlikely. This leads to the theory of specialization in international trade developed by D. Ricardo. The important contribution was made by Max Weber, who established the relationship between systems of values, religious beliefs and economic performance of nations or J. Shumpeter, that perceived the entrepreneur as a main factor of competitiveness. It s also worth mentioning of R. Solow s studies on the factors underlying economic growth in the US between He points out the importance of education, technological innovation and increased know-how. To sum up, an economy is competitive if certain rules are obeyed (see Picture 1). The new development paradigm involves the whole market and all institutional structure, that accounts for the strength or weakness of a given economy. It should be emphasized that competitiveness is determined by economic and non-economic factors, such as education, sciences, political stability or value systems. Without any doubt, competitiveness is a dynamic concept, changing its meaning over the last years from a classical approach focusing on exports, tangible goods and basic infrastructure to the modern, which highlights the importance of education, knowledge, intangible goods and technological infrastructure. There are many examples around the world where the traditional sources of comparative advantage are getting less valuable. Because of the increasing role of science, or knowledge, in contemporary economy, this factor may be seen as one of the main sources of competitive advantage. That s why numerous modern economists, including N. Negreponte, try to refine the concept of knowledge, which is the most recent input factor of competitiveness. The essence and the economic significance of human capital The role of human capital in promoting the performance and growth and therefore determining the competitiveness is increasingly recognized. The concept of human capital can be traced back to the work of classical economists such as Adam Smith and J. B. Say. It

5 60 Adam Giegiel, Anna Wildowicz should be emphasized that especially Smith treated improvements in workers qualifications as the fundamental source of economic growth and well-being. Smith was followed by J. B. Say, who claimed that the necessary condition to create the wealth of nations is the progress of knowledge and development of education. The significance of human capital was also stressed by J. S. Mill and F. List, who regarded accumulated skills and competencies as the most important component of nation s wealth. A comprehensive theory of human capital was formulated by T. Schultz and G. Becker in 20th century. Schultz pointed out that individuals consciously invest in themselves to improve their own, personal economic returns. According to Becker each individual is equipped with specific knowledge, skills and qualifications, which can be treated as the factor of production. Some aspects of motivation and behaviour, as well as attributes such as the physical, emotional and mental health of individuals are also regarded as human capital. Contrary to physical capital, human capital is embodied in individuals. It grows through use and experience, as well as through informal and formal learning. Demand for additional or on-the-job training tends to be the highest among young to mid-life workers and among those with higher than average levels of education. More generally, demand for continuing education and training depends on habits acquired and opportunities availed of earlier in life. On the other hand, human capital tends to depreciate in the economic process, because some skills decline with the age. Human capital also diminishes through lack of use. Hence, human capital cannot be conceptualized as homogenous and invariable stock of skills and competencies. Some key skills and personal attributes relevant to human capital may be categorized as follows (The well-being of nations 2001, p. 19): Communication skills; Numeracy; Intra-personal skills (motivation, self-discipline); Inter-personal skills (teamwork, leadership); Other skills and attributes (tacit knowledge, problem solving, facility in using ICT). Because of its multifaceted nature, human capital is now a subject of analysis at various levels and dimensions, as illustrated in table 2. Macro economic theory suggests that human capital is a decisive growth factor, and differentials in its accumulation account for existing gaps in GDP per capita between countries. At the micro level the theory identifies the stock of human capital by calculating its costs and returns. This concept is based on assumption that there is a positive correlation between years of schooling or on-the-job training and personal income. Table 2. Level and dimensions of human capital Level/ Dimension Politics Economy Sociology Psychology Individual Increase skills level Increase earnings Increase equality Increase selfesteem Enterprise Comply with surrounding society Increase competitiveness Improve the enterprise image Improve work environment Government Complement Share the costs related to education and training Implement the lifelong learning concept The notion of a dynamic government/ society Source: Reporting on Human Capital; Objectives and Trends, International Symposium Measuring and Reporting Intellectual Capital: Experience, Issues, and Prospects, Amsterdam 1999, p. 5.

6 Human capital and international competitiveness of OECD countries 61 Human capital investment brings benefits both to individuals and societies. These benefits may be economic in nature and manifest themselves in the form of additional earnings, productivity or economic growth. Human capital investment can also give rise to a wide range of non-economic benefits (such as greater social cohesion, lower crime and better health). As it was noticed above, human capital, or the skills of the population, plays a major role in the nations productivity. First of all, human capital is productive, because of its immediate effect on raising the qualifications of workers. An individual s investment in his own human capital may also increase productivity of the other factors of production, i.e. physical capital or human capital of others. To the most important channels of such influence belong: sharing of knowledge and skills trough formal and informal interaction between people in the same industry, city, region or economy. Secondly, human capital improves the adaptability and allocative efficiency of resources. That means that human capital enhances the ability of agents to adopt to change and to respond to new opportunities. For example, greater skills facilitate worker mobility across occupations, industries and regions in response to new opportunities, and help people reallocate other resources towards more productive opportunities. It should also be noticed that better skilled workforce is more flexible and able to absorb new ideas, adapt to foreign technologies, understand and apply knowledge from outside to local situation (Heckman 2002, p. 2-3). In other words, human capital has a direct effect on the skills and productivity of the existing labour force, but also an indirect effect on the emergence of new ideas i.e. technological innovations. There are two main approaches to measure stock of human capital, which are used in international comparisons. The first, cost-based method, measures the cost of human capital investment. An useful approximation of that cost is the average number of years in education. In comparing human capital inputs across countries, it is assumed that the years of schooling are proportional to the human capital input. Unfortunately, this method is not perfect and has some shortcomings (Jeong 2001, s. 334): It does not measure the human capital acquired outside the school: before schooling, and on-the-job training. Undoubtedly a worker with no schooling has a human capital to the extent that he is contributing to the production; The method does not measure human capital in terms of health, which is an important factor in labour productivity. In terms of health, human capital may differ greatly between countries; The measurement using the years of schooling implicitly assumes that the formation of human capital per year of schooling is the same in all countries. In fact, the quality of education may vary significantly across countries, especially between the lowincome and the high-income countries; This measurement also implicitly assumes that the formation of human capital per year of schooling is the same at all levels of education. Actually, the marginal formation of human capital decreases as the duration of schooling increases and is the same as the marginal cost at the point when schooling stops. This is supported by the finding that the return to primary education is higher than the return to secondary education, which is higher than the return to tertiary education. The second approach, the income-based one, uses the earning differentials associated with levels of educational attainment as the measure of human capital. Assuming that those differentials are related to productivity, the ratio of the earnings of higher-educated to lowereducated workers provides an estimate of the total economic value of human capital. This indicator examines the relative earnings of workers with different levels of educational attainment as well as the financial returns to investment at these levels. Attaining higher levels of education can be treated as an economic investment which involves costs paid by the individual (including reductions in earnings while receiving education) but typically result in

7 62 Adam Giegiel, Anna Wildowicz higher earnings over the individual s lifetime. Through wage differentials (in particular through enhanced earnings accorded to persons with higher levels of education) markets provide incentives for individuals to develop and maintain appropriate skills. The income-based method, unlike the one based on the years of schooling, allows the disparities in human capital formation across education levels and changes in the relative productivity of workers over time and across countries, since these would be reflected in income differences. However, this approach depends on a few crucial assumptions which include (Human capital investment, p. 28): earnings from employment should provide a good indication of marginal labour productivity and returns to human capital; a perfect substitution between different individuals with a low level of human capital. In certain conditions these assumptions may be questionable. The first one is less true in countries where earning differentials are strongly influenced by institutional factors such as bargaining and minimum-wage provisions. The next assumption does not take into consideration that human capital is very different from one individual to another and that obstacles exist to the mobility or substitutability of labour at a low level of educational attainment. Nevertheless, income-based measures of human capital stock have the merit of being directly comparable with measures of physical capital. Human capital accumulation in OECD countries A well-educated and well-trained population nowadays is the key factor in social and economic development of countries and individuals. Education plays a decisive role in providing individuals with the knowledge, skills and competencies needed to participate effectively in society and in the economy. A level of educational attainment of the population is the most commonly used proxy for the stock of human capital. Educational attainment is usually expressed as the average years of schooling completed. An advantage of this measure is that it produces an estimate of a country s human capital stock in a single number. However, this measure is approximate, since it unrealistically assumes, that a year of education will add a constant quantity of human capital, whether undertaken by a primary school child or a university student. It should be also noticed that measures of educational attainment in principle go further towards expressing educational outcomes than years spent studying. For example, a certificate of upper secondary or tertiary education registers the fact that a student has passed certain courses and exams, not just that he or she has spent a certain amount of time studying. Table 3. Educational attainment expressed in average number of years in formal education (2004) 25-to-64-year-old population Males Males Females Total Austria 12,3 11,7 12,0 12,4 12,4 12,2 12,0 Belgium 11,4 11,4 11,3 12,4 11,7 11,1 10,3 Denmark 13,5 13,3 13,4 13,6 13,6 13,4 13,6 Finland 10,9 11,4 11,2 12,5 12,3 10,5 8,5 France 11,7 11,4 11,6 12,8 12,1 11,3 10,3 Germany 13,7 13,2 13,4 13,6 13,8 13,8 13,7 Greece 11,0 10,7 10,9 11,9 11,7 10,9 9,4 Ireland 12,9 13,1 13,0 14,0 13,4 12,3 11,2 Italy 10,2 10,0 10,1 11,2 10,5 10,0 8,7

8 Human capital and international competitiveness of OECD countries 63 Luxembourg 13,6 13,0 13,3 14,2 13,5 13,5 13,1 Netherlands 11,4 11,1 11,2 12,0 11,5 11,3 10,6 Portugal 8,3 8,7 8,5 9,3 8,4 7,8 7,3 Spain 10,6 10,6 10,6 11,9 11,2 10,1 8,9 Sweden 12,4 12,8 12,6 13,1 12,7 12,2 11,3 United Kingdom 12,7 12,4 12,6 13,0 12,6 12,7 12,4 Japan 1 12,6 12,1 12,4 13,3 13,3 12,4 11,2 USA 13,2 13,4 13,3 13,1 13,2 13,4 13,2 1 Year of reference Source: Education at a Glance. OECD Indicators 2006, OECD, Paris 2006, s. 41. Table 3 illustrates educational attainment of the population measured as the average number of years in formal education. Average duration of schooling is similar in all countries (except Portugal) and ranges from 10 to 13 years. The males level of educational attainment is usually still higher than that of females. In a few OECD countries (Austria, Finland, Ireland, Portugal, Sweden and the United States), the educational attainment of females aged 25 to 64 measured by the average number of years of schooling is at least slightly higher than that of men. Table 2 shows also that the difference in educational attainment varies across generations. A comparison of the levels of educational attainment in younger and older age groups indicates marked progress in some countries, especially in Finland, Greece, Ireland and Spain. On the other hand, in countries whose adult population generally has a high attainment level, differences among age groups in the level of educational attainment are less pronounced. OECD countries differ widely in the average levels of educational attainment of their populations (see table 4). In most countries, almost two-thirds of the population aged 25 to 64 has completed at least upper secondary education, and in Germany and the United States this proportion reaches 80 per cent. In other countries, especially in Southern Europe, attainment levels are much lower. In Greece, Ireland, Italy, Luxembourg, Portugal, Spain and Turkey, more than half of the population aged years has not completed upper secondary education. In recent decades, the growing skill requirements of labour market have led to a significant increase in demand for education. Upper-secondary and tertiary level qualifications, which were originally designed for an elite minority of the workforce, are now considered necessary for a high proportion of jobs. But the differences between countries in educational attainment at the tertiary level are still pronounced. The proportion of 25-to-64-year-olds who obtain a tertiary qualification, whether type B or type A ranges from 11 per cent in Italy to 38 per cent in Japan and the United States. A few countries i.e. Belgium, France, Ireland, Japan and Spain have experienced a particularly rapid intergenerational advance at the tertiary level. Table 4: Educational attainment: adult population (2004) 1,2 Pre-primary and primary Lower secondary Upper secondary Postsecondary non-tertiary Tertiary type B Tertiary type A and advanced research programmes Austria x(2) Belgium Denmark n 7 25 Finland n 17 17

9 64 Adam Giegiel, Anna Wildowicz France n Germany Greece Ireland Italy x(5a) 11 Luxembourg Netherlands Portugal x(5a) 13 Spain c 7 19 Sweden x(5b) United Kingdom n a 9 20 Japan 3 x(2) a USA x(3) Distribution of the 25-to-64-year-old population, by highest level of education attained. 2 Symbols for missing data: x(number) data included in another category or column of the table; a data is not applicable because the category does not apply; c there are too few observations to provide reliable estimates; n magnitude is either negligible or zero. 3 Year of reference Source: Education at a Glance. OECD Indicators 2006, OECD, Paris 2006, s. 37. Apart from formal educational system, knowledge can be acquired also in working life in different types of organizations and through specific activities such as R+D. The large amount of learning takes place in more informal environments such as families, communities and interest networks. All those actions are related to the notion of lifelong learning. Lifelong learning can be defined as all learning activity undertaken throughout life with the aim of improving knowledge, skills and competence within a personal, civic, social and/or employment-related perspective. It also includes postgraduate programs for those who want to improve their qualification, bring their skills up to date or retrain for a new line of work. Lifelong learning is therefore about: acquiring and updating all kinds of abilities, interests, knowledge and qualifications from the pre-school years to post-retirement. It promotes the development of knowledge and competences that will enable each citizen to adapt to the knowledge-based society and actively participate in all spheres of social and economic life, taking more control of his or her future. valuing all forms of learning, including non-formal learning, such as vocational skills acquired at the workplace; and informal learning, such as inter-generational learning, for example where parents learn to use ICT through their children. Lifelong learning is different from traditional formal education and training, because the substantive content of lifelong learning is far more heterogeneous, defined by the demand of individual learners for particular skills and knowledge, rather than by top-down policy embracing curriculum and learning objectives. As regards the benefits of lifelong learning, it offers substantial private benefits to individuals (in the form of higher wages and salaries and enhanced employability) and higher productivity and greater adaptability for employers. (Cofinancing lifelong learning 2004, p ).

10 Human capital and international competitiveness of OECD countries 65 Picture 2: Lifelong learning in EU15 Eurozone Females Males Austria Belgium Denmark Finland France Germany Greece Ireland Italy Netherlands Portugal Spain Sweden 1 Percentage of the adult female/male population (25 to 64) participating in education and training. Source: Europe in Figures. Eurostat Yearbook 2005, European Commission, Luxembourg 2005, p Involvement in lifelong learning varies considerably across countries. As it shows picture 2, in the Nordic countries and in the United Kingdom, at least one out of every four adults participates in some training activity throughout the year. Southern European countries, i.e. Spain, Portugal, Italy and Greece have significantly lower participation rates. There are different reasons for low and unequal participation rates. The most important barriers to undertake training are time and financial constraints. Yet another reason is the fact that often, those adults most in need of education and training are also those least aware of that need or the benefits. Many low educated or low-skilled individuals believe their skills are good or excellent and thus do not see any need to improve. As opposed to that, the higher educated people continue learning throughout life, because they are aware of the benefits, of the need for upgrading and reskilling, and are perhaps more motivated because of the potential returns. Another measure of human capital, used in international comparisons, is the one based on educational expenditure. An useful approximations of human capital formation are: the amount of money spent by individuals, companies and governments on training and education, and the time spent by participants in courses of study. Expenditure on education is an investment that can help foster economic growth, enhance productivity, contribute to personal and social development, and reduce social inequality. Relative to GDP, expenditure on education shows the priority given to education by each country in terms of allocating its overall resources. Table 5. Expenditure on educational institutions as a percentage of GDP, by level of education (2003) 1 Primary, secondary and postsecondary non-tertiary education Tertiary education Public 2 Private 3 Total Public Private Total Austria 3,7 0,1 3,8 1,1 0,1 1,1 Belgium 4,0 0,1 4,1 1,2 0,1 1,3 Denmark 4,1 0,1 4,3 1,7 0,1 1,8 Finland 3,9 n 4,0 1,7 0,1 1,8 France 4,0 0,3 4,2 1,1 0,2 1,4 UK

11 66 Adam Giegiel, Anna Wildowicz Germany 2,9 0,6 3,5 1,0 0,1 1,1 Greece 2,6 0,2 2,8 1,2 n 1,3 Ireland 3,1 0,1 3,2 1,0 0,1 1,2 Italy 3,5 0,1 3,6 0,7 0,2 0,9 Netherlands 3,2 0,2 3,4 1,1 0,3 1,3 Portugal 4,2 n 4,2 1,0 0,1 1,1 Spain 2,8 0,2 3,0 0,9 0,3 1,2 Sweden 4,5 n 4,5 1,6 0,2 1,8 United Kingdom 4,0 0,6 4,6 0,8 0,3 1,1 Japan 2,7 0,3 3,0 0,5 0,8 1,3 USA 3,9 0,3 4,2 1,2 1,6 2,9 OECD average 3,6 0,3 3,9 1,1 0,4 1,4 1 From public and private sources, by source of fund. Missing data: n - magnitude is either negligible or zero. 2 Including public subsidies to households attributable for educational institutions, as well as direct expenditure on educational institutions from international sources. 3 Net of public subsidies attributable for educational institutions. Source: Education at a Glance. OECD Indicators 2006, OECD, Paris 2006, s All OECD countries invest a substantial proportion of national resources in education. Table 5 shows the proportion of GDP devoted to education and training, both primary, secondary, post-secondary and tertiary. Most of this expenditure is from public sources, but in many countries a substantial portion is private. On average, OECD countries spend 5,3 per cent of GDP on education and training, of which 4,7 per cent of GDP is direct public expenditure on educational institutions. With regard to the private sources of expenditure (including families, individuals and businesses) the total amount spent varies from around 1.9 per cent of total GDP in the United States to 0.1 per cent in Finland and Portugal. Around two-thirds of expenditure on educational institutions, or 3.9% of the combined GDP in the OECD area, is devoted to primary, secondary and postsecondary non-tertiary education. The highest spending on educational institutions can be observed in the Nordic countries and the United States and the lowest in Greece. Many of the countries with high overall spending relative to GDP also have high spending per student. In particular, the Nordic countries have mainly high relative spending on both measures. Conclusion To sum up, there are many factors which have a significant influence at the competitiveness of an economy. Among them, human capital seems to be vital, due to the changes in economic and social conditions that have given knowledge and skills an increasingly central role in the economic success of nations and individuals. According to analysis carried out in this study there is a distinct correlation between expenditure on educational institutions (measured as a percentage of GDP) and national competitiveness. That s why educational policy can not be viewed only as an expense in a nation s budget, because it brings many benefits. The excellent examples of such way of thinking are the Nordic countries or the United States, which are at the top of the rankings of the Word Economic Forum. Human capital is the driving force behind R&D, and there is a positive relationship between each of these activities. To put it another way, research is conducted using human capital and a minimum amount of skilled labour is needed for research to be undertaken. That s why human capital investment positively influences creating and diffusing knowledge within enterprises and, at the same time, international competitiveness of the

12 Human capital and international competitiveness of OECD countries 67 economy. A correlation between the average levels of educational attainment of a population, measured as average number of years in formal education, and competitiveness of OECD countries is also observed. In case of Germany or the United States this proportion reaches 80 per cent, but in Southern Europe (Greece, Italy, Spain or Turkey) attainment levels are much lower. Moreover, these countries in comparison with the Nordic countries or the United States are less competitive. For the above mentioned reasons, there is still a need for a huge progress in the level of education of human resources which would as a consequence increase the competitiveness of OECD countries. BIBLIOGRAPHY: 1. Bieńkowski W., (1995), Reaganomika i jej wpływ na konkurencyjność gospodarki amerykańskiej, PWN, Warszawa. 2. Co-financing Lifelong Learning. Towards a Systemic Approach, (2004), OECD, Paris. 3. Education at a Glance. OECD Indicators 2006, (2006), OECD, Paris. 4. Europe in Figures. Eurostat Yearbook 2005, (2005), European Commission, Luxembourg. 5. Heckman J. J., (2002), China s Investment in Human Capital, NBER Working Paper Series, Cambridge, Mass., no Human Capital Investment. An International Comparison, (1998), OECD, Paris. 7. IMD World Competitiveness Yearbook 2006, (2006), Lausanne. 8. Jeong B., (2002), Measurement of Human Capital Input across Countries: a Method based on the Laborer s Income, Journal of Development Economics, vol Jordan s Competitiveness Book (2004). 10. Keeley B., (2007), Human Capital. How what You Know Shapes your Life?, OECD Insights, OECD, Paris. 11. Lopez-Claros A. ed., (2005), The Global Competitiveness Report Policies Underpinnig Rising Productivity, World Economic Forum, Geneva. 12. A. Lopez-Claros, ed., (2006), The Global Competitiveness Report , World Economic Forum, Geneva. 13. Obłój K., (2007), Strategie organizacji, PWE, Warszawa. 14. Reporting on Human Capital; Objectives and Trends, International Symposium Measuring and Reporting Intellectual Capital: Experience, Issues, and Prospects, (1999), Amsterdam. 15. The Well-being of Nations. The Role of Human and Social Capital, (2001), OECD, Paris.