The
neoclassical theory of growth developed by Solow and Swan centred
macroeconomists’ attention throughout the 1960’s and 1970’s on tangible
(physical) capital formation as the driver of economic growth. However, the
theory showed that, because of decreasing marginal returns in substituting
physical capital for labour, the accumulation of capital would not indefinitely
support a steady rate of growth in labour productivity. The
recent literature on “endogenous economic growth” emerged primarily as an
attempt to encompass the sources of technological progress and hence of sustained
productivity growth within the general equilibrium framework of neoclassical
growth theory. This literature has evolved to provide several distinct
explanations of the process of economic growth, each of which carried
particular empirical and policy implications:
- Romer’s so-called “AK model” generates sustained growth by assuming that technological change is the unintended result of specializing firm’s investments, creation of capacity to produce more and more specialized intermediate products is assumed to work like Adam Smith’s division of labour principle, but at the aggregate level.
- The resulting externalities yield increasing returns to cumulative investment, and thus the production of goods can avoid the decreasing returns to rising capital-intensity that the neoclassical model posited.
- These externalities imply that the competitive equilibrium growth path does not coincide with which could be achieved in an optimally planned economy.
The latter conclusion was
reached by virtually all the theoretical analyses based upon successive
formulations that belong to the family of “endogenous growth models”. It
carries the implication that growth performance might be improved by public
policy action.
Subsequent endogenous
growth models have fleshed out the process of technological change through the
explicit introduction of human capital and/or knowledge:
- Lucas (1988) considers human capital to be another input in the production function, not fundamentally different from physical capital, but only formed by workers through certain activities (principally education or on-the-job training). By assuming constant returns to human capital formation – on the argument that worker’s knowledge “Spills over”- the model can achieve a positive steady state rate of growth rate in labour productivity.
- A second line of analysis shifts attention away from treating human capital as a direct input to the production of goods; instead, it focuses upon modelling other important activities pursued by skilled labour, especially innovation. Technological change resulting from research and development investment that creates a greater variety of goods, or improved the quality of existing is the main form of innovation recognised by he endogenous growth literature following Romer (1986, 1990)
This latter line of analysis brought
out the significant point that when human capital is modelled as a factor
affecting innovation, the long-run rate of productivity growth is positively
affected by the human capital stock’s level: whereas, in the Lucas (1988)
model, the rate at which human capital is being accumulated, relative to the
existing stock, was seen as the critical determinant of productivity growth.
The early growth models (Harrod, 1939, (Domar, 1946) and (Solow, 1996)
explained the long-run growth path of advanced capitalist economies in terms of
accumulation of capital and technological progress. The sole concern was the
growth in income. From a developing country perspective, the relevance of the
model is limited to the extent that increase accumulation of capital is basic
condition for the growth of economies.
The
early development theories accepted the importance of structural transformation
in the process of economic development, (Lewis, 1956, Fei and Ranis, 1996).
These models through stylized facts of development also explained the
importance of attaining structural transformation in the developing economies.
The
development economies received as added thrust with the publication of Sen
(1973, 1984, 1985). Sen divided the whole concept of development in terms of
commodities and capabilities. He emphasized the importance of capabilities over
commodity approach. He admits that GNP is a measure of the amount of the means
of well being that people have, but it doesn’t tell us what people involved are
doing to succeed in getting out of their means, to their ends. From the writing
of Sen, one can really make the case that development achievement cannot be a
matter only of quantification of the income alone, but also to incorporate the
actual achievement themselves.
The
recent developments in the growth theory (Romer, 1982) try to incorporate some
of the development variables like human capital, into the growth framework. Thus,
the growth theorists’ started acknowledging the importance of development variables.
Recent empirical cross country studies (Young, 1994) also acknowledges the
importance of increased labour force participation, improvement in education
and inter-sector transfer of labour from agriculture, which were earlier part
of development thinking. Thus, there has been an increase tendency of
convergence between growth economies and development economies.
There
have also been attempts to empirically relate these two concepts of economic
growth and human capital development. (Gustave Ranis and Frances Stewart,
2001). This study focuses on the two-way relationship between economic growth
(EG) and human capital development (HCD). The study views HCD as the central objective
of human activity and EG as potentially very important instrument for advancing
it. At the same time, achievements in HCD themselves can make a critical
contribution to EG. There are thus two distinct casual chains examined, one
runs from EG to HCD, as the resources from national income are allocated to
activities contributing to HCD, the other runs from HCD to EG indicating how,
in addition to being an end in itself human capital development helps increase
national income. This type of framework will act as an analytical base for this
paper. However, this paper will be examining only one chain, which runs from
HCD to Eg. The investigation will focus on whether HCD via increased public
expenditure on social sector activities, gross capital formation and enrolments
into primary, post-primary and tertiary institutions leads to higher EG.