ECONOMIC PROSPERITY | HUMAN CAPITAL | LITERATURE REVIEW

CHAPTER TWO
LITERATURE  REVIEW

2.1    Theoretical   Literature
The economic prosperity and functioning of a nation depends on its physical and human capital stock. Whereas the former has traditionally been the enhancement of human skills and talents are increasingly figuring in the research of social and behavioural sciences. In general terms human capital represents the investment people make in themselves that enhance  their economic productivity . The theoretical framework, most responsible for the wholesome adoption of education and development polices has come to be known as human capital theory. Based upon the work of schultz [1971] , sakamota and powers [1995], psacharopoulos and woodhall  [1997], human capital theory rest on the assumption that formal education is highly instrumental and even necessary to improve production capacity of a population.
                                                             
In short ,the human capital theorists argue that '' an educated population is a productive population.'' Human capital theory emphasizes how education increases the productivity and efficiency of workers by increasing the level of cognitive stock of economically   productive human capability which is product of innate abilities and investment in human beings. The provision of formal education is seen as a productive investment in human capital, which the proponents of the theory have considered equally or even more equally worthwhile than  that of physical capital 
According to Babalola [2003], the rationality being investment in human capital is based on three arguments;  I that the new generation must be given the appropriate parts of the knoeledge which has already been accumulated by previous generation.                                                    
ii   that new generation should be taught how existing knowledge should be used to develop new product, to introduce new processes and production methods and social services.            
iii  that people must be encouraged to develop entirely new ideas, products, processes and methods through creative approches.                                                                                            
according to Fagerlind and Saha ,[1997]  human capital theory provide a basic justification for legal public expenditure on education both in developing and developed nations. the theory was consistent with ideologies of democracy and liberal progression found in most western societies. its appeal was based upon the presumed economic return of investment  on education both at the micro and macro levels.  Efforts to promote investment in human capital were seen to result in rapid economic growth for society. For individuals , such investment was seen to provide returns in the form of individual economic success and achievement.                                                                               
Most economists agreed that it is human resources of nation , not  its capital nor material resources that ultimately determine the character and pace of its economic and social development Psacharopoulos and Woodhall [1997] assert that ; human resources constitute the ultimate basis of wealth of nation .                                                                                                                
Capital and natural resources are passive factors of production ,human being are the active agencies who accumulate capital, exploit natural resources, build social, economic, and political organization , and carry forward natural development . The main issues analyzed are whether higher levels of education or greater improvements in education are associated with faster output growth. overall, the cross country evidence is mixed on both counts [withstanding the emphasis on human capital in new growth theories and recent neoclassical growth theories]. In any case a significantly positive correlation between  education and output growth does not implies that education affects growth. Instead, both education and output could be driven by an omitted variable, total factors  productivity growth for example, Bills and Klenowe,[2000].                                                                                    
One way to progress in our understanding of the efforts of human capital on growth is to focus on channels through which such efforts could work . It is often argued that high levels of human capital facilitate technology adoption [ e .g. Nelson and Phelps,1996; Barro,1991 Benhabib and Spiegel,1994,  2002; Acemoglu, 2003a; Caselli and Coleman, 2005]. There is a consensus that new technologies becoming available since 1970's  tended to be more killed labour augmenting that the technologies of the 1950's and 1960's [e.g. Autor, Katz, and Krueger, 1998; Berman, Bound, Machin, 1998; Berman and Machin, 2002; [Acelli and  Coleman ,2007] The defining characteristic of increase the productive efficiency of skilled relative to unskilled workers. Skilled labour augmenting technologies therefore result in faster total factor productivity [TFP] growth in human capital intensive industries [ e.g. Kalm and Linn, 1998; Klenow, 1998]. As a result , countries adopting  new technologies quickly should experience fast output growth in human capital intensive  industries should be faster in economics with high levels of human capital We therefore test whether countries with higher education levels experienced faster growth in more compared to less schooling-intensive  industries in the 1980's. theories of international specialization point to human capital accumulation as another important determinant growth in human capital intensive industries [ e.g. Ventura, 1997 , 2005 , Romalis 2004]. Hence, we also examine the link between  improvement in education and growth in education -intensive industries.                                                                      
One of these studies incorporates the contributions of human capital to income growth. It was the late 1980's and early 1990's, that economists began to place greater emphasis on human capital as determinant of productivity and growth. Yet most economists argued that it is the human resources of a nation and not its physical character or its natural resources that ultimately determines the character and pace of its economic and social development. The idea is stressed succinctly by Professor Fredrick Harbison [1973 ]. In Todarro [2000;236].  '' human resources constitute the basis for the wealth of nation                                                                                                      
Less developed countries are characterized with economic backwardness which manifests itself in low labour efficiency, factor  immobility, and limited specialization in occupations and in trade ., a deficient supply of entrepreneurship and customary values and traditional and social instructions that minimize the intensive for economic change. The slow growth in knowledge is severe constraint on when there is little knowledge of the available natural resources, the alternative production techniques that are possible, the necessary skills required, the existing market condition and opportunities. To remove economic backwardness and instill the capacities and motivations to economic progress, it is necessary to increase the knowledge and skills of the people. In fact, without improvement in the quality of human factors, no progress can be possible in any developing country. in the understanding the role of human capital as for and development . it is necessary to consider the possible link between human capital, other forms of capital, income and growth While it is true for every country, for which there is data that more educated people earn more than less educated ones it does follow that there is a simple relationship between investing in people and countries becoming richer.  Human and certain forms of physical capital may be complementary . The problem in investing is to match skills with machines. it is not a question of either investing in people or investing in machines. both are necessary .Even more important is issue of how much to invest in alternative forms of capital equipment and skilled labour .  The answer to that questions is unlikely to be the same for all countries or to remain unchanged over time.                                            Health and education are both components of human capital and contributors to human welfare. About ten years ago, endogenous growth theories were advocated as a major improvement compared to the traditional neoclassical growth model as invested by Solow [1956]. with some justifications, the neoclassical model said to be not overly illuminating on the causes of persistent economic growth Today, what comes as a surprised is that the advances in growth theory have not been matched by similar advances in empirical research based on the new theories. That is whenever it comes to the empires of economic growth ,the basic neoclassical model still seems to be a good choice to begin with. The reason is that despite its simplicity, the Solow [1956], model has many predictions with regard to the international variation in income per person . And these prediction are broadly consistent with data on factor prices given the assumption that factor of production earn their marginal products. For instance, the simplest Solow model predicts that in the steady state the marginal product of labour grows at the rate of technological change. Furthermore, income per person should also grow with the rate of technological change These predication are by end large confirmed for the untied  states, where the long-run growth rate of income per person equals the growth rate of real wages and the profit rate of exhibits little trend. But not all is well with the basic Solow model of economic growth. Its main weakness is that it does not consider human capital formation as a separate factor of production like physical capital and labour. Augmenting the basic model by explicit consideration of a human capital variable [Mankiw et al  1992] substantially expands its scope and of people through the process of human  capital formation. Thus, human capital development is people centred strategy and not goods centred or production centred strategy of development. People are assets. it is essential to human development that these assets [ People ] be developed sensibly. it is not enough to use existing resources through investment in human capital development for economic growth to be achieved. The National Economic Empowerment and Development strategy [ NEEDs ], recognizes the centrally of human capital development in achieving economic growth  and therefore, described human capital development as a vital transformation tool for economic growth and development.                      
it has been stressed that the differences in the levels of social economic development across nation is attributed not so much to the national resources endowment and the stock of physical capital, but to the quality and quantity of human resources. According to Oladeji and Adebayo [1996 ], human capital is a critical variable in the growth process and worthy of development. They are not only means but ,more importantly, the ends that must be served to achieve economic progress. This is underscored by Harbinson 1973, who opined that ''human resources are passive factors of production. Human beings are the active agents who accumulate capital exploit natural resources, built social, forward national development. Clearly, ''a country which is unable to develop the skills and knowledge of its people and to utilize them effectively in the national economy will be develop  anything else.    

In the 1980's seminal works of Romer [1986 ] and Lucas [1988 ] revolutionize the neoclassical theory of economic growth by introducing endogenous growth models. The new neoclassical theories put growth, the basic neoclassical model still seems to be a good choice to begin with. The reason is that despite its simplicity the Solow [ 1985 ] income per person. And these predictions are broadly considered with data on factor prices given the assumption that factor the of production earn their marginal products For instance; the simplest Solow model predicts that in the steady state the marginal product of labour grows at the rate of technological change. Furthermore, income per person should also grow with the rate of technological change. These predication are by end large confirmed for the untied states , where the long-run growth rate of income per person equals the growth rate of real wages and the profit rate exhibits little trend. But not all is well with the basic Solow model of economic growth. its main weakness is that it does not consider human capital formation as a separate factor of production like physical capital and labour. Augmenting the basic model by explicit consideration of a human capital variable  [Mankiw et al 1992 ] substantially expands its scope and of people through the process of human capital formation Thus, human capital development is people centred strategy and not goods centred or production centred strategy of development . People are assets. it is essential to human development  that these assets [ People ] be developed sensibly. it is not enough to use existing resources through investment in human capital development for emphasis not a direct sources  of economic growth but on mechanisms and in centives linked to dynamic of the growth itself. This new methodology set human capital as a critical factor to generate technological progress and, as a consequence steady state economic growth. Economic growth according to [Thingem  2006;  1061 ] , is a quantitative sustained increase in the country 's per capital output or income accompanied by output or by expansion in its labour force,  consumption, capital and volume of trade. Among the notable macroeconomic objectives economic growth has been one of the most important for a long time in Nigeria because, it is the key to high standard of living, it is also brings increasing revenue , which means more and better physical and social services. The neoclassical theory developed by Solow and Swan [1956 ] centred macroeconomics attention throughout 1060s and 1970s on tangible [ physical ] capital formation as the of economic growth. 

 However, the theory showed that, because of decreasing marginal returns in substituting physical for labour, the accumulation of capital would not indefinitely  support a steady rate of growth in labour productivity. The recent literature ''endogenous economic growth'' emerge primarily in an attempt to encompass the source 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 district explanation of the process of economic growth, each of which carries particular empirical and policy implications.

Romer’s[1986] ''AK  model 'generate sustained growth by assuming that technological change is the unintended result of specializing firms investment. creation of capacity to produce more and more to produce or specialized intermediate product is assumed to like 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 posted. This externalities imply that the competitive equilibrium does not coincide with that which could be achieved in an optimally planned economy  The later conclusion was reached by virtually all the theoretical analysis based upon successive formulations that belong to the family of endogenous growth model ''. it carries the implication that growth performances might be improved by public policy action. Subsequent endogenous growth model have fleshed out the   process of technological changes through the explicit introduction of human capital and/or   knowledge.
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