lisbon council european human capital index cee

8/8/2019 Lisbon Council European Human Capital Index Cee

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Policy Brief

The European Human Capital Index:The Challenge of Central and Eastern EuropeBy Peer Ederer, Philipp Schuler and Stephan Willms


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Peer Ederer is director, human capital project of the Lisbon Council. Philipp Schuller and Stephan Willmsare co-directors of the human capital project and fellows of the Lisbon Council.

The opinions expressed in this paper are those of the authors alone, and do not necessarily reflect the viewsof the Lisbon Council or any of its associates.

The European Human Capital Index is part of the Lisbon Councils human capital project a multi-yeareffort to define and measure the role of human capital in economic growth and social prosperity.The analysis focuses on long-term economic and social trends and devises policy recommendationson that basis. Future editions of this study will look at the way individual countries, regions, corporationsand small businesses manage and develop their human capital potential.

The Lisbon Council is grateful to the European Commissions Education, Audiovisual and Culture Executive

Agency for its generous support. With the support of the European Union: Support for bodies that areactive at the European level in the field of active European citizenship.

Lisbon Council Policy Brief

The European Human Capital Index:The Challenge of Central and Eastern EuropeBy Peer Ederer, Philipp Schuller and Stephan Willms

Left to right,Schuller, Ederer and Willms


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2 Lisbon Council Policy Brief: European Human Capital Index, Central and Eastern Europe

Nowhere in Europe has economic growthbeen as impressive and durable as in thecountries of Central and Eastern Europe.These countries, many of which accededto the European Union in 2004, have been

the engine of dynamism, mobility andflexibility that were often blatantly absentfrom the EU-15. Their extraordinary turnaround moving from state-controlledeconomies and political dictatorships tosocial-market economies and pluralisticdemocracies has been a boon to Europeat large, providing a much-neededeconomic stimulus to the EU-15. Indeed,the addition of 10 Central and EasternEuropean countries plus Cyprus and Malta

to the EU has helped to elevate andreposition Europe itself, creating an attractivemarket of some 493 million consumersand giving greater heft to Europes economicand political ambitions in the world.

However, a continuation of the goodeconomic performance and rise inprosperity in Central and Eastern Europe isnot to be taken for granted. To the contrary,adverse demographic developments andunder-utilisation of human capital, as well

as a persistent brain-drain and inadequateinvestment in education and skills, arestarting to threaten the prospects of theregion. These looming problems could leadto spill-over effects on Western Europe and

Europes position in the global economy,if urgent measures are not taken today.There is a very real risk that in comingdecades Central and Eastern Europe couldbecome a sparsely-populated area with adeclining workforce that will have to shoulderthe burden of a population set to experienceunprecedented levels of ageing and decline.

At stake is nothing less than the long-termsustainability of these remarkable countries,

which have added so much to Europes

history, economy and diversity.In 2006, the Lisbon Council set out todefine and measure human capital, seekingto quantify numerically the way humancapital is developed over the course of a persons lifetime in different countries.

1

The project was undertaken to shedimportant public-policy light on the many economic and social tradeoffs which go intodeveloping human capital ranging fromthe amount of time a parent spends with

A special case: Turkey In the second edition of the European Human Capital Index ranking,Turkey achieves overall second position due to its vastly brighter demographicprospects compared to other Central and East European countries. This is a realadvantage not a statistical outlier. Turkey can count on a youthful working-agepopulation and need not fear failing retirement systems. Its working-age populationin the year 2050 will be almost as large as all other Mediterranean countriestaken together along with the political and economic clout that comes withsuch a position. Without the demographic component, Turkey would rank No. 9 on the list.

1 See Peer Ederer, The European Human Capital Index (Brussels: The Lisbon Council, 2006).2 The analysis was conducted for 13 countries, made up of the EU-15 minus Greece and Luxembourg. The 13 countries were Austria, Belgium, Denmark,

Finland, France, Germany, Ireland, Italy, Netherlands, Portugal, Spain, Sweden and United Kingdom. Greece had to be excluded since there are too fewhistorical data points available to make any meaningful statement. Luxembourg was excluded because its economy is so interdependent with itsneighbours that the historical data provides an insufficient picture of the domestic interaction between human capital and economic development.

Nowhere in Europe has economicgrowth been as impressive anddurable as in the countries ofCentral and Eastern Europe.


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3Lisbon Council Policy Brief: European Human Capital Index, Central and Eastern Europe

a child to the long-term costs of high levelsof workforce exclusion to the devastatingeffects of a declining population on acountrys human capital standing. In theend, the European Human Capital Index

assigned countries a specific score basedon their ability to develop and sustain theirhuman capital, then ranked those countriesaccording to their performance.2Specifically, it looked at countries ability to develop and nurture their human capitalin four separate categories human capitalstock, human capital utilisation, humancapital productivity and demographicoutlook, assigning a score to each country in each category. Then, it brought those

scores together to form a compositeranking, allowing us to compare andcontrast human capital developmentstrategies across countries and regions.Given the vital role that human capitalplays in a countrys long-term economic

prospects, the analysis shed much usefullight on future sustainability of thesurveyed countries way of life and socialsystem and contained valuable lessonsregarding the levers policy makers could

reach for if they want to increase andexpand their nations human capital.

In this study the second volume of The European Human Capital Index

we seek to deepen and extend the analysis most notably by looking for the first timeat the human-capital situation in Centraland Eastern Europe. In particular, the study profiles 10 of the 12 new EU memberstates3 plus Croatia and Turkey, assigning

each country a human capital score basedon the four criteria described above.For benchmarking purposes, it also includesthe EU-14 (i.e. the weighted averageof the 13 countries survey in 2006 plusSwitzerland). Croatia and Turkey were

3 The 10 Central and Eastern European countries surveyed in this study are Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania,Slovakia and Slovenia. Cyprus and Malta which joined the EU in 2004 were not included for reasons of data availability problems and datainconclusiveness, respectively.

SloveniaTurkey

Lithuania

Czech Republic

Estonia

Latvia

Romania

Hungary

Slovakia

Bulgaria

Poland

Croatia

Rank Country Score

25.6

26.3

26.8

28.2

29.9

30.6

31.7

32.7

34.0

35.0

12

3

4

5

6

7

8

9

10

11

12

22.324.9

Table 1: The European Human Capital Index for Central and Eastern EuropeSlovenia and Turkey lead the ranking but for very different reasons. The overall ranking is based on each country'sscores in each of four individual human capital categories. Zero is the best possible score; 48 is the worst.

Table 1. Source: Lisbon Council


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chosen because both of these countriesstand a reasonable chance of joiningthe EU in coming decades, and bothhave important lessons for Europes humancapital standing. Turkey proved especially

interesting, because uniquely amongthe 12 countries surveyed, it boastsa positive demographic outlook (for more, see the box on page 2).

The study produces several importantresults. Some countries such as CzechRepublic, Estonia, Slovenia havealready caught up to or even surpassedthe living standards of some EU-15regions.4 But there remains a glaring

challenge over the next two decades forall Central and Eastern European countriesto master: to close a yearning and wideninggap with the rest of the world including

Western Europe in human capitalinvestment and human capital utilisation.The gap is widening due to threecircumstances:

1) All of the countries surveyed (withthe notable exception of Turkey)have very low birth rates, thus shrinking

working age populations, with farreaching consequences on the labourmarket and society;

2) All of the countries surveyed aresuffering from an exodus of their youngand skilled to better pastures within theEuropean Union or beyond while it isunclear how these same countries couldbe attractive for either immigrationor return of former emigrants;

3) All of the countries surveyed (evenEstonia, the relative leader in this

category), risk landing on the wrongside of the digital divide and thusprecluding their citizenship fromaccessing future channels of knowledgedissemination.

Whats more, the countries we surveyedmust address these human capital challengesin the face of stiffening competitionfor talent and skills from all cornersof the world. These days, China andIndia are engaging Europe not in a raceto the bottom, but in a race to the top

where the goal is to become the fastestadopters of innovative technology and processes. Africa is awakening,

Latin America is shedding its past poormanagement of the economy and theestablished innovation power houses in the

Asian Far East, Western Europe and North America are likewise seeking to expandtheir standards of living through innovation,driven by technology and skills.

This raises the stakes higher for thecountries of Central and Eastern Europe.They can no longer limit themselvesto the goal of simply catching up

with the West in economic terms.Instead, they must focus on competingglobally and citizens are expectingresults. They want policy makersto implement measures to keep up withthe global pace even as they continue

working to shake off the legacy of economicautocracy. Being able to find the rightanswers to these challenges will determinethe future of Central and Eastern Europemore than anything else and with it theprosperity and social peace of all of Europe.

A continuation of the goodeconomic performance andrise in prosperity in Central andEastern Europe is not to be takenfor granted.

4 According to Eurostat, Prague has surpassed Communidad de Madrid in terms of purchasing-power adjusted GDP per capita, and is closing in onthe Ile- de-France. Slovenia is on par with Languedoc or Nord-Pas de Calais in France; Estonia is on par with Northern Greece, Southern Italy, SpanishExtremadura and most of Portugal. See Eurostat, Regional Gross Domestic Product in the European Union 2004 , Statistics in Focus 104/2007.


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For the countries that did well in theEuropean Human Capital Index, Volume II namely, Czech Republic, Estonia,Lithuania and Slovenia there beckonsthe realistic chance of fully achieving

West European standards of living withinthe next two decades if the societalconsensus for sound macroeconomicmanagement and continuing orientationtowards rapidly developing human capitalis maintained. For the countries that scoredpoorly namely, Bulgaria, Croatia andPoland there is a realistic chance of beingstuck in relative poverty to the Europeanaverage since no other resourcebut human capital can lift them out

of the situation they are in today.Components of the EuropeanHuman Capital Index The term human capital is wellunderstood in economic circles, butit fares less well in policy circles, wheresome analysts believe it looks too rigidly at the inherently dynamic processof innovation in a modern economy.However, the fact that the decisiveeconomic resources of the future willbe knowledge and education is widely understood and broadly accepted in mostpolicy-making circles.5 In using the termhuman capital, this paper aims to developan analytical framework allowingthe measurement and comparisonof investment in knowledge andeducation between countries.

Specifically, the index identifies and definesfour types of human capital and analysesthe way those types of human capital

collectively contribute to the wealthof European citizens:

1) Human capital endowment. Thisfigure measures the cost of all types

of education and training per personactive in the labour force.2) Human capital utilisation. This figure

looks at how much of a countrys humancapital stock is actually deployed.

3) Human capital productivity. This figuremeasures the productivity of humancapital by dividing a countrys overallconsumption by all of the humancapital employed in that country.

4) Human capital demography

and employment. This figure looksat existing economic, demographicand migratory trends to estimatethe number of people who willbe employed in 2035.6

We chose these four componentsfor the European Human Capital Indexbecause they each represent one aspectof how human capital contributesto the generation of economic activity.7In subsequent pages, each component

will be analysed in detail. To compilethe ranking, we first scored 10 of the 12new EU member states plus Croatiaand Turkey in each of these four areas.Then, we compiled the four scores intoa single composite index giving eachcountry a relative score for its currentability and future outlook in developingand deploying human capital (See Table 1on page 3). The result gives a figure whichis indicative of these countries long-termeconomic potential relative to one another.

5 See Andreas Schleicher, The Economics of Knowledge: Why Education is Key to Europes Success (Brussels: The Lisbon Council, 2006).6 For more on the methodology and data assumptions, see page 22.7 Each category represents one term of a conceptual mathematical formula to forecast economic potential: (The amount of human capital

per capita available) x (how much of that human capital is utilised for the economy) x (how productively the human capital can be deployed)x (the growth or decline of working age population in a country) = forecast total economic activity of that country.

The countries of Central and Eastern Europelag Western Europe considerably in human-capital acquisition or deployment and evenworse given Central and Eastern Europesstagnation in these areas that gap standsto widen over time.


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For comparison, we have includeda calculation and comparative rankingof the EU-14 in each of the four categories.It should be noted in passing that only twocountries ever surpass the West European

average in this survey Slovenia in humancapital endowment and Turkey indemography. The countries of Centraland Eastern Europe lag Western Europeconsiderably in human-capital acquisitionor deployment and even worse givenCentral and Eastern Europes stagnationin these areas that gap stands to widenover time. Already, in most cases, the gapbetween the leading country in a category and the EU-14 weighted average is greater

than the gap between the best and worstperforming Central and Eastern Europeancountry in that category, meaningthe region as a whole has a much harderchallenge in catching up with WesternEurope than the winners and losersin the region face in catching up witheach other.

As economists have shown, wealth is theresult of several things natural, financialand human capital and the productivity (or efficiency) with which these inputsare used, including innovation. The rolefinancial capital can play in stimulatinggrowth rates is well documented. Irelandand Estonia, for example, have demonstrated

well how countries can grow richer by attracting high levels of inward financialcapital investment.

But the development of the internal market,the adoption of the euro, the accessionof 10 Central and Eastern European

countries to the EU and the implementationof other measures to lift barriers to cross-border commerce have made financialcapital more or less freely availableon equal terms throughout Europe. Financial

capital can and does flow to the places where the prospect of returns is largest.

Most Central and Eastern Europeancountries have taken advantage of this fact and, by providing solid macroeconomicperformance and beneficial taxationschemes, they have attracted large amountsof capital which has in turn given thema rising standard of living (see Figure 1on page 7 for an illustration of countries

relative performance on growth and fiscalconsolidation). The problem is, these leversare no longer available to these countriesto secure future growth. Instead, the largestlever for Central and Eastern Europeancountries to pull for further economicadvancement is to focus on investmentin and deployment of human capital.In an era of globalisation, financialcapital can and will go the places wheremacroeconomic conditions and human-capital development have created attractiveopportunities for investment. Havingmastered the art of attracting resources,and thereby having moved beyond beingessentially factor-driven economies, Centraland Eastern European countries are now faced with the task of mobilising anddeploying the remaining resources they have.The task is, how to evolve from boastingmerely efficiency-driven growth towardsbeing genuinely innovation-driveneconomies (see Figure 2 on page 7for more).

The task is how to evolve fromboasting merely efficiency-drivengrowth towards being genuinelyinnovation-driven economies.


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Figure 1: On the whole, Central and Eastern European countries show vigorous macroeconomicperformanceGDP real growth rates and public debt/GDP 2006, in percentages

0

10

20

3040

50

60

70

80

0 1 2 3 4 5 6 7 8 9 10

P u b l i c d e b

t

a s p e r c e n t a g e o

f G D P

Latvia

SlovakiaCroatia

Poland

Bulgaria

TurkeyHungary

RomaniaLithuania

Estonia

Slovenia CZ

EU 15

Real GDP growth in percent

Figure 2: The key to an innovation-driven economy is re-enforcing and cross-leveraging locallyavailable human capital towards competitive advantageFramework for linking human capital utilisation and productivity to innovation and growth

I. Attract resourcesFactor-driveneconomy

Efficiency-driveneconomy

Innovation-driveneconomyII. Cross-leverage resources

Human capital utilisation

H u m a n c a p

i t a l p r o

d u c t

i v i t y

Figure 1. Source: EurostatFigure 2. Source: Lisbon CouncilFigure 3. Sources: Eurostat; Altinok, Murseli (2007): International Database on Human Capital Quality, UNDP

Figure 3: Secondary schooling in Central and Eastern Europe is on par with or better than manyWest European countriesQuality of secondary schooling education as derived from international comparison tests (Pisa, Timms)Composite indexed for most recent year; education spending in percent of GDP (2002-2004)

I r e l a n d

H u n g a r y

K o r e a

F i n l a n d

J a p a n

S w e d e n

D e n m a r k

B u l g a r i a

P o r t u g a l

T u r k e y

A u s t r a l i a

L i t h u a n i a

U K

U S A I t a

l y

S p a i n

G r e e c e

R o m a n i a

G e r m a n y

P o l a n d

L a t v i a

S l o v a k i a

B e l g i u m

L u x e m b o u r g

S l o v e n i a

F r a n c e

N e t h e

r l a n d s

E s t o n i a

C z e c h R e p u b l i c

70

75

80

85

90

95

100

E d u c a

t i o n q u a l

i t y

3.7

5.9

3 . 6

4 . 3

4 . 5

4 . 9

4 . 2

8.4

6.0

3 . 0

6.2

4 . 4

5 . 4

5.8

4 . 8

6.05.9

4 . 6

6 . 5

3 . 7

5 . 3

5 . 7

4 . 6

7.0

4 . 3

6 . 0

5 . 5

5 . 2

5 . 5

Black bullets indicate education spending in percent


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I. Human capital endowment Human capital endowment measuresthe cost of all types of education andtraining a person receives. The humancapital stock of an economy is made

up of the human capital endowmentof an average person multiplied by the number of individuals participatingin the economy. In this study, the averagehuman capital endowment per capitais measured by calculating the levelof investment in five different kinds of investment in skills used in the economy:

1) Informal parental education: Generalskills and cultural adaptation taught

by parents;2) Formal school education: Generalskills which children learn mostly up to secondary school;

3) Formal university and higher education:Specific skills that students learn inuniversity and upper vocational traininginstitutions;

4) Formal and informal adult education:Skills which adults acquire outside of their daily work environment, which arenevertheless either directly or indirectly

job-related such as management training;5) Informal learning on the job: Skills

acquired incidentally as part of the daily job activity and continuous adaptationto new requirements.

The figure is subsequently depreciatedto account for obsolescence in the existingknowledge base and some level of forgetting.

As the direct cost and opportunity costof creating this human capital is dependenton a countrys wage levels, economies

that have been wealthy for longer tendto have higher human capital endowmentsthan countries that were poorer.In terms of human capital endowment, the12 countries surveyed can be easily grouped

into four categories of performers:a) Slovenia towers above the others and,

in terms of human capital accumulation,is approaching the levels of Greece, Italy and Portugal in both the quantity and structure of its human capital;

b) The Czech Republic, Estonia, Hungary and Lithuania are runners-up in theamounts of human capital they havebeen able to accumulate among their

employed work force; they still lag Western European levels, but together with Slovenia lead the pack;

c) Croatia, Poland and Latvia occupy the middle ground;

d) Bulgaria, Romania, Slovakia and Turkey trail behind. Their low public investmentsin education and consistently poorshowing on international educationalachievement comparisons suggestthat they wont be showing improvementin this area in the near future(see Figure 3 on page 7 for more).

And yet the data also reveals certaininteresting anomalies among the countriessurveyed. For starters, most of the humancapital endowment in Central and EasternEuropean countries has been createdthrough their schooling systemsand in parental education at home(see Figure 4 on page 9). By contrast,many decades of substandard technology deployment and low economic development


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Figure 4: School education is the primary component of human capital in Central and EasternEuropean countriesComposition of human capital endowment per average employed person by type of education received (2006)in thousands of dollars, purchasing power adjusted

Parent Schooling Tertiary Adult On the job

T h o u s a n

d s o

f d o

l l a r s ,

p u r c h a s

i n g p o w e r

a d j u s t e d ( b a s e

2 0 0 0 ) 175

150

125

100

75

50

25

0

S l o v e n i a

C z e c h R e

p .

E s t o n i a

H u n g a r y

L i t h u

a n i a

C r o a t i a

P o l a n d

L a t v i a

S l o v a k i a

B u l g a r i a

R o m a n i a

T u r k e y

EU max Denmark: 269EU-14: 234

Figure 5: A nation's standard of living and its human capital endowment are relatedHuman capital endowment (in thousands of dollars, adjusted for purchasing power) compared to consumptionper capita (in dollars, purchasing power adjusted)

0

25

50

75

100

125

150

175

H u m a n c a p

i t a l e n

d o w m e n

t

2,000

4,000

6,000

8,000

10,000

12,000

C o n s u m p

t i o n p e r c a p

i t a

H u n g a r y

B u l g a r i a

T u r k e y

L i t h u a n i a

R o m a n i a

P o l a n d

C r o a t i a

L a t v i a

S l o v a k i a

S l o v e n i a

E s t o n i a

C z e c h

R e p u b l i c

Consumption EU-14: $14,800Portugal: $10,700 UK: $18,800

Table 2. Source: Lisbon CouncilFigure 4. Source: Lisbon CouncilFigure 5. Sources: Eurostat, Lisbon Council

Table 2: Human capital endowment rankingAmount invested per average person employed in dollars, purchasing power adjusted (2006)

Slovenia

Czech Republic

EstoniaHungary

Lithuania

Croatia

Poland

Latvia

Slovakia

Bulgaria

Romania

Turkey

EU-14 average

Rank Country Human capitalendowment

114,021113,888

113,566

96,465

95,338

93,463

75,468

69,443

64,379

61,375

242,772

1

2

34

5

6

7

8

9

10

11

12

156,081

122,263


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have left the working population bereftof the chance to build up human capitalon the job an important sourceof human capital developmentin West European countries.8 Since

investment in human capital has longpayback cycles of 20 to 30 years, the work-place investments in human capital whichCentral and Eastern Europe failed to makeduring the 20th century will be missedfor another two or three decades.Therefore, even if the schooling systemsin the countries surveyed are mostly on a good course, the legacy of the pastdictates that these countries must investmore in human capital and training among

the generation of people who are 35 yearsand older. For more on the relative standingof Central and Eastern European schoolsand the role of these schools in developinghuman capital, see Figure 3 on page 7.

One determinant of human capitalendowment is the amount parents investin their children by spending time withthem, which we calculate for purposes of this study through opportunity costs based

on missed wages. Because wages and wagelevels differ in different countries,the opportunity costs for time investedare higher in wealthier economies.The result is, in a calculation of this type,there is a clearly demonstrable relationshipbetween a countrys level of consumptionand its human capital accumulation.For more on the relationship betweenconsumption levels and human capitalaccumulation in the countries surveyed,

see Figure 5 on page 9.II. Human capital utilisationHuman capital utilisation looks at how much of a countrys human capital stock

Schooling in Central and Eastern EuropeIn a review of the secondary schooling systems of seven Central and East Europeancountries, Ludger Woessmann (2003) analysed data from the 1995 Trends in InternationalMathematics and Science Study (TIMSS) and clearly distinguished two groupsof countries within the region: One group had moved decisively towards the featuresof Western European countries while the other could not yet demonstrate successfulresults of transition. The more advanced group, consisting of the Czech Republic,Hungary, Slovakia and Slovenia, outperformed most EU countries and had many traits similar to West European schooling systems. The schooling systems of the lessadvanced group, including Latvia, Lithuania and Romania, still featured characteristicsof communist times and seemed not yet to educate a new generation to be competitivein EU labour markets. The results as measured in educational attainment betweenthese two groups were dramatic for the students in the 1990s. In the reformed groupof countries the students achieved TIMSS math scores ranging from 519 to 544, andTIMSS science scores ranging from 527 to 553. The unreformed group achieved mathscored between 454 and 477 and science scores between 441 and 469. For comparison:the West European average TIMSS math score was 505.

Many decades of substandard technologydeployment and low economic developmenthave left the working population bereftof the chance to build up human capitalon the job.

8 For more, see Ederer, The European Human Capital Index (2006).


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11Lisbon Council Policy Brief: European Human Capital Index, Central and Eastern EuropeFigure 6. Source: Lisbon CouncilFigure 7. Source: EurostatFigure 8. Source: Lisbon Council

Figure 7: Central and Eastern European countries lag behind in connecting their citizensto multimedia-communications networksInternet access of all private households and e-government availability of 20 basic services (2006) in percent


S l o v e n i a

E s t o n i a

L i t h u a n i a

S l o v a k i a

B u l g

a r i a L a t v i a

R o m a n i a

H u n g a r y

P o l a n d

Internet access E-government

0

25

50

75

100

Western Europe64% and 58%

Figure 6: Central and Eastern European human capital utilisation is lower than the EU averageand keeps stagnatingUtilisation of human capital stock (1995-2005) in percent

H u m a n c a p

i t a l u

t i l i s a t

i o n

SlovakiaCzech RepublicEU-14 averageNetherlands

CEE average

35%

40%

45%

50%

55%

60%

65%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Figure 8: High unemployment is one reason so many Central and Eastern European Countries havelow human capital utilisation ratesHuman capital utilisation compared to official unemployment rate (2006)

5.0

7.5

10.0

12.5

15.0

17.5

20.0

40% 42% 44% 46% 48% 50% 52% 54% 56%

U n e m p

l o y m e n

t r a

t e i n p e r c e n t


Bulgaria

Czech RepublicEstoniaHungary

LatviaLithuania

Slovakia

Turkey

Slovenia

Croatia

Poland

Romania


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is actually deployed. It differs from traditionalemployment ratios in that it measures humancapital as a proportion of the overallpopulation, and includes an inter-generational component to acknowledge

that different age groups may have differenthuman capital endowments.

The non-utilised portion of a countryshuman capital is comprised of childrenand university students, the unemployed,non-working housewives and retirees.Poor human capital utilisation hitsthe economy and the individualsexcluded from the workforce in two ways: it means that people

do not contribute to the outputof the economy and by dint of beingexcluded from the workforce are alsoshut out from the most effective meansof acquiring new human capital, whichis learning on the job. Bereft of thismost important source of acquiringand mastering the new skills requiredby continuous innovation, they willfind re-entry into the labour marketand participation in the benefits of modern society increasingly difficult.

Among the countries surveyed, theutilisation of human capital is exceptionally low; on average, it falls fully 7% lower thanthe EU-14 average. The spread betweensome of the worst performers in humancapital utilisation such as Croatia, Polandand Slovakia and Western Europesbest utilisers of human capital suchas Denmark and the Netherlands amounts to around 17 percentage points.The inability to integrate this invested

human capital into the value-creation cycleis a severe waste of economic developmentpotential in these countries.

The countries making best use of their

human capital in this survey are the threeBaltic states, the Czech Republic andSlovenia. By contrast, Croatia andSlovakia trail far behind the pack.

A key reason for the low human capitalutilisation in these countries is theirchronically high unemployment rates,

which prevents them from developingand adding to their human capital asquickly as countries with full employment(for more on this relationship, see Figure

9 on page 13). But even the leadingcountries in this survey have littleto cheer about: their human capitalutilisation levels do not even approach

West European averages. Moreover, West European countries are continuously increasing their utilisation, while the trendin most Central and Eastern Europeancountries is stagnation (see Figure 6on page 11).

The poor record of human capitalutilisation is mirrored in many countriesby their equally poor record of connectingthe citizenship to modern communicationtechnologies. This represents a waste of resources as access to multimedia networksallows more efficient processes to develop.It also makes advanced services andproducts impossible to disseminate widely.Central and Eastern European countriesthat lag in this area such as Bulgaria,Romania and Slovakia are in dangerof falling into a digital divide.


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13Lisbon Council Policy Brief: European Human Capital Index, Central and Eastern EuropeTable 3. Source: Lisbon CouncilFigure 9. Source: Lisbon CouncilFigure 10. Source: Lisbon Council

Figure 9: Countries with high levels of human capital endowment often utilise it better, tooHuman capital endowment and human capital utilisation (2006)

0

25

50

75

100

125

150

175

40% 42% 44% 46% 48% 50% 52% 54% 56%

H u m a n c a p

i t a l e n

d o w m e n

t


Hungary

Turkey

Croatia

Slovenia

Czech Rep.

Bulgaria

Lithuania

Slovakia

Romania

Latvia

Estonia

Table 3: Human capital utilisation rankingHuman capital utilisation as a percentage of human capital stock (2006)

Czech Republic

Slovenia

Estonia

Latvia

Lithuania

Romania

Hungary

Turkey

Bulgaria

Poland

Croatia

Slovakia

EU-14 average

Rank Country Human capitalutilisation

52.0%

50.5%

50.3%

48.5%

45.8%

45.8%

44.9%

44.2%

42.5%

42.0%

54.8%

1

2

3

4

5

6

7

8

9

10

11

12

55.2%

54.8%

Figure 10: High human capital utilisation leads to lower human capital productivity and vice versa,but some countries manage the trade-off better than othersPerformance in managing trade-off between human capital utilisation and human capital productivity (2006)

0.14

0.16

0.18

0.20

0.22

0.24

0.26

40% 42% 44% 46% 48% 50% 52% 54% 56%

H u m a n c a p

i t a l p r o

d u c t

i v i t y

Underperforming human capital managers

Well-performing human capital managers

Latvia

Slovakia

Croatia

Poland

Bulgaria

Turkey

Hungary

Romania

Lithuania

Estonia

SloveniaCZ



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Human capital endowment and humancapital utilisation are also intricately related,as is illustrated in Figure 9 on page 13.Countries with higher levels of humancapital endowment find it easier to provide

jobs and utilise their human capital better, which in turn helps those countriesdevelop even more human capitalto deploy. This is a clear indication

of the fact that the competitive advantageof Central and Eastern European countrieslabour forces is not anymore their low labour costs. Today, they must competein world markets on the basis of skills,talents and competences.

III. Human capital productivity Economic theory typically looks at labourproductivity as output per hour worked,

which has been increasing at a long-termpace of around 2% per year across mostof the industrialised world thanksto ongoing technological change andincreasingly available financial capital.9For Europe in the 1990s, the growth was

1.95% per year. Various studies show thatmuch of this increase in labour productivity is due to the improved quality of labour or put differently, that this labour hasbeen endowed with increasing amountsof human capital and therefore becameever more productive.

Central Europes fast-growing companiesThe Deloitte Technology Fast 500 EMEA Ranking lists the 500 public and privatetechnology, media and telecommunications companies based in Europe, the Middle Eastand Africa that have achieved the fastest rates of annual revenue growth during the pastfive years. Six of the countries surveyed in this study come out in the top 20-rankednations: Turkey at No. 9, Poland at No. 11, Czech Republic at No. 12, Slovakia atNo. 13, Russia at No. 14, Hungary at No. 15 and Latvia at No. 16. The fastest growingCentral and East European companies both came from within Poland: Blue Media Sp,a software maker which reported 7600% growth over five years (giving it an overallranking of No. 13 on the Fast 500 list) and Travelplanet.pl, an Internet company

with 7400% growth over the same five-year period (giving it the rank of No. 14). Among the top 100, five were Polish Internet, software or semiconductor companies,and two were Czech companies. The top three countries with the highest numberof Fast 500 companies per capita were Norway, Israel and Ireland, respectively.

9 See Robert J. Gordon, NBER Working Paper 7752 (2000): Interpreting the One Big Wave in US Long-Term Productivity Growth 1870 to 1995;also Paul Conway et al in Regulation, Competition and Productivity Convergence (Paris: OECD, 2006).

Table 4. Source: Lisbon Council

Table 4: Human capital productivity rankingConsumption per human capital employed in dollars, purchasing power adjusted (2006)

Slovakia

Bulgaria

Romania

Turkey

Latvia

Lithuania

Croatia

Poland

Hungary

Estonia

Slovenia

Czech Republic

EU-14 average

Rank Country Human capitalproductivity

0.23

0.21

0.21

0.20

0.20

0.19

0.19

0.18

0.15

0.15

0.14

1

2

3

4

5

6

7

8

9

10

11

12

0.25

0.25


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By contrast, our measure of human capitalproductivity compares the consumptionshare of gross domestic product (GDP)to each dollar of human capital invested(adjusted for purchasing power parity).Its growth rate is stable because it effectively incorporates the rate of change in technology.

By this measure, human capital productivity can be influenced in two ways:

1) Raising input efficiency: Improvingeducation and informal learningthat provides more readily employableskills for the economy.

2) Improving output efficiency: Increasingthe quality of a countrys institutionalframework to allow factors of production, e.g. human or financialcapital, to trade more efficiently

within the economy.

As a result, human capital utilisation andhuman capital productivity are closely linked.The higher a countrys human capitalutilisation, the more likely that it will haverelatively low human capital productivity,a relationship which conforms to the law of diminishing returns as the countries grow more and more prosperous. Nonetheless,some countries manage this trade-off betterthan others (see Figure 10 on page 13 fora comparison). For the average citizen, whatcounts is how much wealth he or she canconsume in other words, what is the level

of living standard that is available to them?For that reason, we take the consumptionshare of GDP into consideration whenmeasuring how productive the investmentof human capital is.

Among the countries of Central and EasternEurope, Bulgaria, Romania and Slovakia havethe highest human capital productivity, whileCzech Republic and Slovenia have the least.This is almost the reverse of the human

capital utilisation results. This is due to thefact that human capital deployment suffersfrom diminishing returns, and thus thereis an inherent trade-off between utilisingas much human capital as possible andderiving high productivity returns from it.This is one reason why Bulgaria, Romaniaand Slovakia while trailing in humancapital endowment do not fare so badly in the overall ranking. By contrast, Croatiaand Poland underperform in the trade-off between utilisation and productivity,meaning they get relatively poor resultsacross the board with the human capitalthat they have. This helps to drag thosetwo countries standing down to the bottomof the ranking.

The rate of R&D expenditure inan economy is also indicative of thedeployment rate of technology andthus of the opportunities for fully exploiting the productivity potentialof human capital. By this measure, most

Figure 11. Source: Lisbon Council


Figure 11: Human capital productivity is higher in some Central and Eastern European countriesthan among the EU-14Consumption share of GDP per employed human capital stock (1995-2005) in dollars, purchasing power adjusted

0.10

0.15

0.20

0.25

0.30

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

H u m a n c a p

i t a l p r o

d u c t

i v i t y

SlovaniaBulgariaEU-14 averageItaly

CEE average


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Figure 12: Central and Eastern European countries must increase investment in R&D and scienceR&D expenditure and patent applications in percentage of GDP (2000-2005) and 10 patents per one millioninhabitants (2000-2003)

R&D [2000-2005] 10 Patents [2000-2003]


S l o v e n i a

C r o a t i a

E s t o n i a

L i t h u a n i a

S l o v a k i

a

B u l g

a r i a

L a t v i a

R o m a n i a

T u r k e y

H u n g a r y

P o l a n d

0

1

2

3

4

5

Western Europe:2.2% and 20.3

Figure 13: Only thanks to Turkey will the working population of Europe grow slightly over the next30 yearsProjection of working age population (2005-2035)

0 10 20 30 40 50 60 70 80

2035

Cumulative working age population in millions

2005

TurkeySlovakia

PolandCroatia

RomaniaLithuania

Czech RepublicLatvia

BulgariaSlovenia

HungaryEstonia

Table 5: Human capital demography rankingProjected change in employed people (2005-2035) absolute percentage change

Turkey

Slovakia

Poland

Croatia

Lithuania

Hungary

Czech Republic

Estonia

Romania

Slovenia

Latvia

Bulgaria

EU-14 average

Rank Country Projected change2005-2035

-13.3%

-14.6%

-15.0%

-15.2%

-15.5%

-16.0%

-16.0%

-16.8%

-19.4%

-26.1%

-9.9%

1

2

3

4

5

6

7

8

9

10

11

12

37.3%

-13.0%

Table 5. Source: Lisbon CouncilFigure 12. Source: EurostatFigure 13. Source: Lisbon Council


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Central and Eastern European countriesare lagging far behind their Europeanpeers. As an urgent matter, they needto identify approaches to increasethe knowledge and research intensity

of their economies. Otherwise they risk not being able to close the technology and economic productivity gap they face

with Western Europe and with much of the rest of the world. For more on Centraland Eastern Europes relative standingin R&D spending, see Figure 12 on page 16.

IV. Human capital demography Human capital demography looksat existing economic, demographic

and migration trends to estimate thenumber of people who will be employed(or not employed) in the year 2035 in eachcountry. While human capital endowmentdescribes the various types of educationreceived by an average employed personin a particular country, human capital

demography looks at how many citizensand potential workforce participants there

will actually be in these countries and how old those people will be.

Central and Eastern European countriessuffer from a double handicap in theirdemographic outlook:

1) All of the countries surveyed (with theexception of Turkey) have very low birthrates; in fact theirs are among the lowestbirth rates in all of Europe;

2) Short of attractive employmentopportunities at home, many people

with easily mobile skills leave the

country and deploy their human capitalelsewhere.

Figure 13 on page 16 illustrates how demographic forces are reshaping Europe.The Central European and Baltic nations

who today make up 20% of the European

Emigration to Ireland and Sweden When 10 Central and Eastern European countries became member states of the EUin 2004, only Ireland, Sweden and the UK agreed to provide immediate full access to theirlabour markets for emigrants from these countries. The experience in Ireland and Sweden

with these flows is remarkably different. Immigration into Sweden has averaged around60,000 people per year since 1987. Historically around two-thirds of these have beenfrom outside the EU, with the remainder split between Swedish returnees and emigrantsfrom other EU countries. Emigrants from Central and Eastern Europe used to be five percentof the total, but the figure rose to nine percent after 2005. The three most popular industriesfor Central and Eastern European workers in Sweden are manufacturing, trade/communicationsand health care. Meanwhile, immigration into Ireland has risen to 60,000 people per year,up from around 20,000 people per year in 1987. Most of the rise since the year 2001 andespecially since 2005 can be attributed to emigrants from Central and Eastern Europeancountries, amounting to 26,000 net immigrants to Ireland in 2005. The three most populardestination industries are production industries, construction and hotels/restaurants.

A realistic opportunity for Europe, andin particular for Central and Eastern Europe,to compensate for its demographic shortfall isto enter into a close partnership with Turkey.


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No country in Central and EasternEurope can afford to leave anyof its citizens behind.

work force, will in 2050 only represent16%. In the meantime, Turkey whichtoday has 13% of the European workforce,

will in 2050 have 19% of Europeseligible workers. The other region

to lose demographic significance willbe the Mediterranean, whose share willdrop from 25% to 21% and Germany falling from 14% to 13%. UK/Ireland,France and Scandinavia will each gainup to 12%, 11% and 5%, respectively.Continent-wide the workforce will shrink from 319 million working age to 274million working age citizens, an overalldrop of 14%. The scramble for the heartsand minds of the skilled is about to begin.

In most Central European countries, the working age population is forecast to shrink by around 15%; in Bulgaria, it is projectedto shrink by 26%. It will be difficultfor these countries to reverse this decline,since the mothers who could have givenbirth to more children have themselvesnot been born. Furthermore, it is unlikely that these countries are interestingimmigration destinations. Central andEastern European countries are thereforealready sharing the fate of Germany, Italy and Spain of having to extend retirementages closer to 70 years old if they wantto maintain their living standardin the long term, let alone increase it.

A realistic opportunity for Europe,and in particular for Central and EasternEurope, to compensate for its demographicshortfall is to enter into a close partnership

with Turkey as it is the only country nearor far that has a strongly rising population

in combination with espousing and sharingmany elements of European cultureand history. The often feared sizeand cultural distance of this large nationare in fact one of the best opportunities

for economic growth, cultural diversity,creativity, and generational youthfrom which European nations wouldgreatly benefit.

Conclusions and policy recommendationsHuman capital is an organic entity,made up of a wide variety of components.

At its core are basic issues such as accessto education, workforce participation

and demography areas which are affectedby widely and broadly different policy areas.Using the European Human Capital Indexmethodology as a guide, this section putsforward concrete policy recommendationsthat could help Central and EasternEuropean countries better developand deploy their human capital.

1) Improve public investment in educationand skillsSome Central and Eastern Europeancountries have successfully revampedtheir secondary and tertiary educationsystems and are reaping the rewardsin terms of higher educational quality for their young generations. However,for those countries that are laggingbehind, they have no time to lose toredress their shortcomings in that area.Beyond educating the young generations,it is equally necessary and mandatory not to give up on the 35 year oldsand older for them too, even if they


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are already in their mid 50s, ways mustbe found to invest in and upgrade theirskills and competencies to integratethem more fully into the work and social reality of the 21st century.

2) Leave no socio-demographic groupbehindThe reasons for the poor utilisationrates differ a lot per country but are typically the result of highunemployment, overly protectedsegments of the labour market, early retirement due to lack of employableskills and excessive factor costs fora given level of productivity. Whatever

the reasons are, no country in Centraland Eastern Europe can afford to leaveany of its citizens behind. The low birthrate, and the brain drain that has already occurred, make it mandatory to expend

every possible effort to integrateeverybody into modern labour marketsand society. Any worker younger than65 is far too young to be ignoredor given up on and their human

capital is far too precious to Centraland Eastern European countries forthem to be simply retired early. Besidescreating incentives for mid- and late-lifeeducation, particular attention shouldbe given to providing multimedia accessto this generation via the Internet as thisis the main conduit for knowledgedissemination in the 21st century.

3) Link the economy to the knowledge

networks of the worldCentral and Eastern European countrieshave investment rates in technology development and knowledge creationthat are much too low. In order

Central and Eastern Europeancountries have investment ratesin technology developmentand knowledge creationthat are much too low.

Scanbalt: A competence cluster in life sciences around the BalticNetworks of networks are tying European regions into competence clusters thatare transcending national borders. These networks are an important entry pointand conduit for regional knowledge centres to link themselves into the global paceof technology progress. Scanbalt is such a network of networks in life sciences andbiotechnology in the Baltic Sea Region with vibrant participation from Eastern Europe.It facilitates and coordinates the work of all initiatives and networks to promote internalcollaboration, cooperation and development within the Nordic-Baltic area enabling theregion to compete with other global biotech and life science clusters, sharpen the regionscompetitive edge towards global markets, and fulfil the regions great potential as oneof Europes leading biotech megaclusters. The region boasts more than 60 universities andover 1000 life sciences or biotech companies. There are 24 regional bio-networksestablished in the region with nearly 40,000 employees and 1,920 PhDs in biotechcompanies. Members from Eastern Europe in Scanbalt are the Estonian Biotechnology

Association, Biomobil in Polish Gdansk, Sunrise Valley in Lithuania, and the GenomeDatabase Project of the Latvian Population.


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to jumpstart this process, governmentsshould be creative. They must supportthe participation of their universities,research institutions and R&Ddepartments of their companies in any

sort of technology and research networksthat are being created around Europeand in the world. For an exampleof a success story in this area, seethe box on Scanbalt on page 19.

4) Prepare for the ageing society Poor demographic prospects makeit nearly inevitable for every Centraland Eastern European country to deal

with a rapidly ageing society (among the

surveyed countries, Turkey is a notableexception). If preparations areundertaken now, then the impactof this demographic shift which willsee the starkest and most precipitousdrop in the percentage of workingpeople in the European population sincethe Black Death in the Middle Ages may be lessened, or even be reversed.However, ignoring the problem willnot make it go away. The key levers hereare to adjust retirement schemes towardslate exit, and to promote work insectors where older aged employeescan be cost and value competitivein the global environment.

Whither Central and EasternEurope?The various human capital challengesof Central and Eastern Europeancountries are not a matter which thosecountries can solve on their own.Investing in human capital endowment,

raising human capital utilisation,promoting human capital productivity and finding solutions to the demographicgap will require a pan-European mandate,if Central and Eastern Europe are

to continue the path of developmenton which they have begun.

This is not only for reasons of solidarity with Central and Eastern Europe becauseof its past. To the contrary, Europe musttake a leading role in the process becauseit wants and needs strong and vibrantmember nations in what constitutesthe European Union. The next 20 years

will be a critical juncture in the history

of this continent. They will determine whether the integration of Europes economicsystem, its socio-political fabric, and thepeaceful respect for preservation of localcustom and tradition can be cementedfor good or whether the forces of difference

will make these nations drift apart again.

Since the fall of the Iron Curtain, Centraland Eastern European countries haveessentially completed the political andeconomic transition towards pluralistic,market-oriented and self-confidentnationhood. But today the challenges aredifferent. More than EU budgetary funds,Central and Eastern European countriesneed for their markets, their labour forcesand their societies to be closely linked andintegrated with the more populous and

wealthier markets of the West, and in fact with the rest of the world. There is only one way to stem the tide of brain drain from theregion, which is to encourage capital of allkinds to flow freely and thus to encourage

Central and Eastern European countriesneed for their markets, their labour forcesand their societies to be closely linkedand integrated with the more populousand wealthier markets of the West.


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Human capital is an organic entity made upof a wide variety of components. At its coreare basic issues such as access to education,workforce participation and demography areas which are affected by widelyand broadly different policy areas.

companies and entrepreneurs to create anddevelop jobs that are relevant to the worldeconomy and fit the local profile rightat home. In the meantime, policy makers,businesses and citizens should focus on

developing and raising their human capitalin ways that will make it easier for businessesto offer ever higher value-added products atever more competitive prices and thereby unleash the power of innovation to raiseliving standards and create even more jobs.The EU should also continue helping poorercountries catch up with the richer ones.Its assistance is an important part of the process, and will continue to play a vital role in the months and years to come.

The reward for successful achievementof this vision will be full participationin the 21st century global economy and access to the wonders of productsand services which advanced technologiesare serving up such as quality-of-lifeimproving health care, amenities inhousing and transport, quality of foodand vacationing options. Innovation

works both ways it creates more wealth,and it creates new goods and serviceson which this wealth can be spent. The flipside of this is that for those countries thattire out in the race towards more prosperity,the innovations of the future will notbe readily available.

When looking at the human capitalinvestment and deployment ratesin Central and Eastern European countries,

what is at stake is the question of whetherthese countries will be prosperous,sustainable and socially-cohesive societies

in a position to take full advantageof the comforts of modern life or whether they will condemn futuregenerations to economic and socialstagnation, resulting in an ever lower

standard of living that will continuefalling relative to the rest of the world.Its a challenge for Western Europeas well, and one that we are best off facing together.


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A Note on Methodology Since the 2006 edition of EuropeanHuman Capital Index, two methodologicalchanges have been introduced. First,the currency now used is the dollar,

adjusted for purchasing power parity.Second, past human capital investmentis now calculated at replacement cost,rather than at historical cost. Both of thesechanges were introduced to facilitate globalcomparability of the data. We are gratefulfor the many comments we receivedon the methodology after the first edition,and in particular to participantsof the INES B network of the OECDseducation department, who made many

useful suggestions.The analytical model deployed in thispaper measures human capital in termsof the cost of its creation. Formal educationcan be measured directly in terms of theexpenditures incurred but informaleducation can only be indirectly inferred,in terms of the opportunity cost to theparent or the adult who is engagingin informal education. This is done by assuming an opportunity cost for the timespent corresponding to the average netsalary per hour received in that country in that time.

As in the previous edition, all data sourcesfor modelling human capital trends havebeen derived from international datasources such as Eurostat, ILO or OECD.

Within the 12 countries analysed, datacomparability is a significant problem.European data collection only beganto be harmonized in the 1990s, and

the process is still continuing. For instance,no officially agreed common definitionof historical GDP for European countriesexist for the time before 1995. The datafor expenditures for schooling, universities,

time usage and employment patternsall suffer from various compatibility issues.The European Human Capital Index wasbuilt on the best data available.

The human capital endowment referredto in this paper is the sum total of investmentin five types of human capital development,including not only formal educationbut also, quite prominently, informaleducation of both children and adults.

Each component is measured eitherin terms of direct expenditures or in termsof opportunity cost:

1) Parental education is measuredin opportunity cost (lost wages)to the parent. This is especially highin the early years before formal schoolingbut continues until the children leavehome. This type of education consistsof essential cultural skills like speaking,trust, empathy, languages, takingresponsibility, etc.

2) School education ranges from early childcare in formal settings suchas kindergarten through primary and secondary school and consistsof general skills such as reading, writing,quantitative reasoning, self-managementand basic factual knowledge relevantto the economic participation in society.It is measured with an algorithm takinginto account the output quality of education as measured by international


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comparative surveys related to the costof providing this education.

3) Investments in higher education referto university and other tertiary educationthat is measured in terms of input cost

at the university, and the opportunity earnings of the student. It consists of theacquisition of sector-specific knowledgeand skills that enable the student toparticipate in the discourse and modeof thinking of the chosen career.

4) Adult education is the formal andinformal learning by adults and includesactivities such as employer-sponsoredmanagement courses or the learningof a new software programme on ones

own time. It is measured primarily in opportunity cost of lost wages.Unfortunately, transparency of thiskind of human capital investmentis much lower than for the categorieslisted above although a numberof empirical studies exist.

5) Finally, adults re-invest in humancapital when they perform their work.Every new technology, every new marketrequires investment into skills thatmay later produce returns. This typeof human capital is also measuredin opportunity cost.

The five component types of humancapital differ in their respective longevity.

Whereas the skills learnt as a child at homeand in school can last a lifetime, thoselearnt on the job may become irrelevantafter only a few years. As with every investment, the cost of investmentmust therefore be depreciated over time.Depreciation can occur in two ways:

Either the skill has been forgottenover time, or it has become obsolete.In either case, its economic value hasdisappeared. The depreciation rates utilisedin this analysis differ by the type of

investment and are derived from empirically observed patterns of either forgetting skills,or the speed at which skills become obsoletein different industrial sectors.The maximum depreciation ratesare respectively: 0%, 30%, 67%, 67%and 50%. Depreciation periods forparental education, school education,tertiary education, adult educationand learning on the job are respectively:na, 30y, 20y, 10y and 10y.

For more on the methodology, contactPeer Ederer [email protected].

The reward for successful achievementof this vision will be full participation inthe 21st century global economy and accessto the wonders of products and serviceswhich advanced technologies are serving up.


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References and additional reading

Allen, Jim, and Andries de Grip.Skill Obsolescence, Lifelong Learning and Labour Market Participation,Paper to be presented at the SOLE/EALE Conference 2005, Research Centre for Education and theLabour Market (ROA), Maastricht University, Netherlands

Ammermueller, Andreas, Hans Heijke and Ludger Woessmann.Schooling Quality in Eastern Europe:

Educational Production During Transition (IZA Bonn, March 2003). Conway, Paul and Donato de Rosa, Giuseppe Nicoletti and Faye Steiner.Regulation, Competition and Productivity Convergence , OECD Working Paper 509 (Paris: OECD, 2006).

Doyle, Nikola, Gerard Hughes and Eskil Wadensj.Freedom of Movement for Workers from Central and Eastern Europe, Experiences in Ireland and Sweden (SIEPS, 2006).

Ederer, Peer. Innovation at Work: The European Human Capital Index (Brussels: The Lisbon Council, 2006). Ederer, Peer, Philipp Schuller and Stephan Willms.Geschftsplan Deutschland (Schaeffer-Pschel Stuttgart,

2008), forthcoming. Gordon, Robert J. Interpreting the One Big Wave in US Long-Term Productivity Growth 1870 to 1995

(NBER Working Paper 7752 (2000). De Grip, Andries. Evaluating Human Capital Obsolescence ROA-W-2006/2E, 2006. Hanushek, Eric A. and Ludger Woessmann.The Role of Educational Quality in Economic Growth (World

Bank Policy Research Working Paper 4122, February 2007). Johnson, Andreas.FDI Inflows to the Transition Economies in Eastern Europe , CESIS Working Paper Series

#59, 2006, data based on EBRD and UNCTAD. Krger, Andreas. Regional Gross Domestic Product in the European Union 2004, Statistics in Focus

104/2007 (Luxembourg: Eurostat, 2007). Organisation for Economic Co-Operation and Development. Education at a Glance 2007 (Paris:

OECD, 2007). Schleicher, Andreas.The Economics of Knowledge: Why Education is Key to Europes Success (Brussels:

The Lisbon Council, 2006).

AcknowledgementsThe authors would like to thank the European Commissions Education, Audiovisual and Culture Executive

Agency for helping to make this project possible. Special thanks as well to Paul Hofheinz and Ann Mettlerof the Lisbon Council for their useful comments on an early draft of this paper. Thanks to Felix Mannhardtand Jonas Flum for developing the software and integrating the data sources. The authors would also liketo thank Sebastian Herzig (project manager), Daniel Christel, Christoph Dbelt, Jessica Neumann, DavidPistor and Arne Warnke for their outstanding research assistance. Special thanks go to Bo Hansson, AndreasSchleicher and their colleagues and supporters in the INES B network of the education department at theOECD for their comments on methodology and data in developing our human capital evaluation approach.

Lisbon Council Policy Brief, Vol.2, No. 3 (2007).

Published on the editorial responsibility of the Lisbon Council asbl.The responsible editor is Paul Hofheinz, president, the Lisbon Council asbl.


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The Lisbon Council asbl

IPC Rsidence Palace155 rue de la Loi1040 Brussels, Belgium

T +32 2 647 95 75F +32 2 640 98 [email protected]

The Lisbon Council for EconomicCompetitiveness and Social Renewal asblis a Brussels-based think tank and policy network committed to making Europethe most competitive and dynamicknowledge-based economy in the world,capable of sustainable economic growth

with more and better jobs and greater

social cohesion, a goal which EuropeanUnion heads of state and governmentset in 2000. Established in 2003 as anon-profit, non-partisan association, thegroup is dedicated to making a positivecontribution by engaging politiciansand the public at large in a constructiveexchange about Europes economicand social future.

www.lisboncouncil.net

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