However, considerable evidence indicates that Russia's human capital base is rapidly eroding. Trained scientist and engineers, lacking access to modern commercially viable technology and market infrastructure, are earning higher wages as taxi drivers, kiosk clerks and maids than in their areas of expertise. Many of Russia's brightest stars have emigrated in search of better lives. Young people, observing the poor earnings of the educated and confronting an education system designed by the Soviet regime which is badly out of sync with the economy's current and future needs, are naturally investing very lightly in their own education.

Educational attainment has a strong tendency to perpetuate itself within families and societies. For example, well-educated parents are generally much more successful in educating their children than are poorly educated parents. Thus, the creation, currently rather advanced, of a "lost generation" of poorly educated adults creates a persistent drag that will hinder Russian economic development for years to come. Russia's foundation for future prosperity is quickly eroding.

The task of rebuilding Russia's human capital, after a serious deterioration, would last several generations and be very costly. Fortunately, relatively moderate investment in maintaining and transforming Russia's human capital can prevent and reverse the deterioration under way. This follows from the tendency for a society's human capital to persist combined with the fact that Russia is still a well-educated nation. The key to this program is a major restructuring of the country's education system, along lines already proposed by the World Bank. By making the education system into an effective instrument for individual investments in commercially valued human capital, Russia can preserve the continuity of its intellectual traditions and lay a solid foundation for development of its economy. On the other hand, ignoring this problem will lead to Russian impoverishment.

Because Russia is experiencing severe economic hardship, it is difficult to find the internal political will for the allocation of adequate funding for educational reform and human capital maintenance. The climate of intense political instability and widespread poverty makes investments which promise results only over a relatively long time horizon unattractive to a government concerned with maximizing its prospects of maintaining power in the short run. This is why western governments and agencies, which enjoy the political stability and resources to consider projects which bring about results over the longer term, are likely to be the only sources of funding able to finance this crucial aspect of Russia's economic transformation.