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.