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The geopolitical value of human capital

The geopolitical value of human capital

The geopolitical value of human capital

Sophie Heading | Expert,

This blog is the fourth in a five-part series diving into our latest thinking ‘Growth in a G-Zero World’.

To save you the 53 minute read, here is a thought-provoking excerpt from The World Happiness Report (emphasis added):

“… Specialisation will favour the production factor that is hardest to increase and most vital to production, which in the past was human capital, but in the future, might be physical capital in the form of AI machines. We already see a reduction in the share of labour in national income, and Big Data might increase the importance of sheer computing power and data storage capacity, both likely to favour capital and thus increase inequality whilst reducing median wages. However, this is no more than pure speculation as it is also possible that Big Data will allow the majority of human workers to focus on a skill that is not AI-replicable…”

So how should we be thinking about the longer-term value of human capital to business?

Where we are now
For me, it comes down to the ever-increasing spotlight on the ‘S’ of ESG (Environmental, Social, Governance) issues – or to precis, “the extent to which a business’ actions or decisions contribute positively or negatively to a persistent change in the wellbeing (capabilities, relationships, health, etc.) of people living in society”.

First let’s preface with the positive. Framed by the SDGs (Sustainable Development Goals), progress has been made on the social front: extreme poverty has declined, particularly in crucial emerging markets like India and China, and the most basic metrics of health and wellbeing are improving.

But it is worth thinking beyond the minimum or the average, to the individual; raising national and global standards of living is critical, but so is understanding the very real differences in day-to-day life that individuals within countries and within communities face. We are at the highest level of income inequality in OECD countries in the past half century. Enter populism: social inequality has contributed to an expanding group of people around the world who believe their political systems are not meeting their needs. And, of course, this populism is then translating into politics.

So what next?
(Stick with me, this tangent is going somewhere). You don’t have to believe that this is the most likely scenario that will unfold over the next few years – but let’s call it a credible alternative:

Economic conditions weaken; global growth is projected at roughly 3% (IMF at 3.5%, OECD at 3%, and the World Bank at 2.7% in 2020). This places pressure on arguably already overburdened fiscal and monetary policy positions. Changing demographics also place significant pressure on healthcare and pension systems, with providers unable to meet their obligations; the mechanisms by which this gap is addressed exacerbates the wealth gap. Despite best efforts, governments have less bandwidth to materially address inequality, and worse, may turn to nativist policies in an attempt to respond to social discontent.

These underlying socioeconomic factors add fuel longer-term pressures on the labour market, including technological displacement and environmental migration (in chronological order). By 2022, 75 million jobs are displaced in 20 major economies. People compete for fewer jobs, driving wages down and inequality up. The gig economy increases, with more people working multiple part-time, low-paying jobs. The perceived or actual wealth divide increases.

At the same time, even though the consequences of climate change are of course more expensive, the cost of the radical measures that need to be adopted in order to achieve targets and a climate-resilient world is more salient in the short-term. Climate change may be on the agenda of the ‘comfortable’ end of society and business, but potentially not the portion of the public that is concerned about meeting the costs of their day-to-day. The social divide within countries and communities increases.

But of course, without radical action being taken, social migration on the global stage will increase as climate-related issues (water and food scarcity, natural disasters, temperature change) impact on livelihoods. Human capital flight places further pressure on social and economic systems. And the cycle continues.

Why does that matter?
This is not a particularly optimistic view of the world, and even if it eventuates, it would mean different things to different countries. My point is not to scare-monger, but highlight the importance of understanding not just the market, but the nuance (and value) of the individual within it.

Why? Here are just three examples of how this could play out:

  1. Labour supply: geopolitics fuels a high risk of both under and oversupply, between and within markets. The supply and demand for talent and labour will shift as a result of ‘country-first’ trade and immigration policies, including localisation of production. Increased cost of and friction in the movement of labour will likely lead to more complex working arrangements, where highly skilled jobs may become more flexible than the movement of labour (i.e. the job moves to the person, not the person to the job).
  2. Redefining the ‘S’ of ESG: relatedly, ‘social’ responsibility will expand beyond metrics such as diversity, inclusion, and modern slavery, to include the consequences of Industry 4.0 and technology displacement on local communities. Whilst new roles should offset the decrease in demand for others, ‘Industry 4.0’ will require a significant transition as the demand for certain skillsets, industries and markets fundamentally change. The potential reputational backlash for those companies adopting a ‘fire and hire’ model may be significant, and investors, employees and the public will increasingly turn to business to ‘solve’ the problem. Reskilling may offer a significant opportunity with respect to brand, supply and revenue growth.
  3. Customer profile and reputation management: depending on your market profile, increased levels of inequality and resultant divergences in public sentiment may lead to further splintering of within-country consumer personas. Brand perceptions will change very quickly and more importantly, in unexpected ways. For example, although ‘ESG’-aligned businesses are highly valued by both talent and consumers in most developed economies, there may be backlash in parts of society where an ESG-driven change is perceived to come at a cost to the lower socioeconomic consumer.

So whilst the value of human capital may arguably be declining in the face of technological change, those that may not have previously factored into your business model may still hold the key to your continued success (or existential survival).