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Prejudice Harms Economic Growth by Impeding Human Capital Development

By Melissa J. Anderson

What’s one of the biggest threats to economic growth in the 21st century? According to a new report published by UBS, the answer is prejudice.

The new report, which is based on data from the World Economic Forum’s global competitiveness

indicator and its aggregate development level assessment, as well as data from the World Values Survey Group, shows that not only is societal prejudice a result of economic hardship, but it is also a cause of it.

According to UBS, prejudice harms the global economy on the macro level as well as corporations and firms on a micro level. When people can’t perform, produce, and innovate at their highest potential, the impact is severe – and given the current economic climate the effects could be magnified.

The report says:

“…we argue that by damaging human capital, prejudice is hitting the one thing that can really help economies to recover in the aftermath of a financial credit crunch. Now is the worst possible time to be prejudiced. This is a potential vicious spiral: the financial credit crunch risks making prejudice worse, and this worsening prejudice risks making a strong recovery from the financial credit crunch more difficult to achieve.”

Leveraging All Resources

According to Paul Donovan, Managing Director, Global Economics at UBS Investment Bank, the study is part of an effort by the bank to highlight the larger role political economy is playing today. He said, “For us, the twenty-first century is when everything changes.”

Donovan explained that the environmental credit crunch as well as resource constraints mean companies can no longer afford to throw resources at problems. “We need to do more with less if we’re going to increase or maintain our standard of operation,” he said.

That means ensuring human capital is performing at its highest capacity. And companies can’t very well do this if part of the workforce is being discounted, overlooked, or bullied. He said, “Prejudice is a huge waste for human capital and human potential.”

Correlation and Causation

The report looked at four measures of prejudice: racism, xenophobia, religious persecution, and homophobia. Generally speaking, what the researchers found was that less developed economies will tend to be more prejudiced. Richer economies tend to be less prejudiced – in fact, the report revealed, “Racist sentiment is expressed by less than 10% of the population for the most competitive economies.”

The report explained, “If a social majority perceive a minority as threatening their way of life, they respond to it with prejudice. The less one has in terms of economic resources (the poorer an economy is) the more likely it is that one will feel (economically) insecure.”

This was an expected outcome, and Donovan remarked, the really interesting implication of the report was not just that underdeveloped economies tended to be more prejudiced, but that prejudice can cause economies to falter.

According to the report, “If someone with ability is prevented from using that ability, economic welfare as a whole will suffer. This is because either there are constraints on skilled labour supply, or skilled labour is more expensive than it needs to be.”

It continues, “What applies at a macroeconomic level also applies at a microeconomic level. A company that is prejudiced in its treatment of its staff is potentially denying itself the ability to grow to its full potential.”

In order to change prejudiced behavior and attitudes, Donovan explained, “It probably requires a broad approach. Society needs to change – for example, education starts before anyone has gone anywhere near a workplace.”

As far as the macro level goes, he continued, “The workplace itself needs to change – we are seeing the corporate sector embracing the idea of tolerance more and more.”

And, the reason may be purely economic – companies are learning that when corporate cultures don’t encourage a broad range of people to contribute at their fullest potential, they are missing out on valuable skills, knowledge, and ideas.

According to Donovan, prejudice means more than overt bullying or name-calling. It can also mean “the psychological stress associated not with overt prejudice but with the fear of prejudice.” Companies must work to turn around cultures of fear or intolerance that can hold employees back.

Emerging Economies

Unexpectedly, and bucking the trend that the most underdeveloped economies tended toward more prejudiced attitudes was the data on xenophobia.

According to the study, the least developed economies tended to view outsiders more positively than mid-level economies. It says, “The least competitive economies are very tolerant of migrants. This may well be because immigrants are associated with expertise and aid in very under-developed markets.” Outsiders tend to be aid workers or people bringing economic development programs to the area, so rather than being seen as a threat to economic security, they are viewed positively.

Donovan was quick to point out that these economies are not what we would typically refer to as “emerging markets.” This level of economic development can be found in impoverished areas like Sub-Saharan Africa, he explained, rather than those around the economic development level of the BRIC countries or in the Middle East.

In fact, he explained, economies in this mid-level of development tend to be more xenophobic than anywhere else. “If we go to the next level of development, [individuals] will generally exhibit more hostility to migrant workers.” Donovan explained that people in these areas tend to be more proud of the level of development they have achieved, and don’t want to risk losing jobs to those from outside.

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