The neoclassical theory of growth
developed by Solow and Swan centred macro economist 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 on 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 specialist in firms investment creation of
capacity to produce more and more specialised intermediate products is assumed
to work like Adam Smith’s division of labour principle, but at the aggregate
level.
The
resulting externalities yield increasing return 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 that which could be achieved in an optimally planned economy.
The
latter conclusion was reached by virtually all the theoretical analyses based
upon successive formulation that belong to the family of “endogenous growth
model”. It carried the implication that growth performance might be improved of
public policy action.
Sequent
endogenous growth models have fleshed out the process of technological change
through the explicit introduction of human capital and/or knowledge.
Lucas
(1998) 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 the
investment that creates a greater variety of goods or improves the quality of
existing is the main form of innovation recognised by he endogenous growth
literature following Romer (1986,1990).
This
later line of analysis brought out the significant point that when human
capital is modelled as a factor affecting innovation, the long-run rate of
production growth is positively affected by the human capital stock’s level.
Whereas on 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 model (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 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 and added thrust with the publication of Sen
(1973, 1984, 1985) sen divided the whole concept of development in terms of
commodities and capabilities. He emphasised 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 has to incorporate the
actual achievement themselves.
The recent development in the growth
theory (Romer, 1982), try to incorporate some fo the development variable 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 acknowledge the importance of increase
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 attempt to empirically relate two concepts of economic growth
and human capital development (Gustav Ranis and Frances Stewart, 2001). This
study focuses of 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 causal chains examined, one
runs from EG to HCD, as the resources from national income are allocated to
achieves contributing to HCD, the other runs from HCD to EG indicating how, in
addition to being and end in itself human capital development helps increase
national income. This type of framework will act as an analytical base for
their paper. However this paper will be examining only on chain, which run 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
institution leads to high EG.
The
literature of endogenous growth theory has stimulated economists interest in
the empirical evidence available from cross-country comparisons bearing on the
main-level relationships between human capital formation and the growth rate of
real output. The growth model that view human capital as a simple input to production
predict that growth rates will be positively associated with changes in stock
of education, whereas model in which human capital has a role in the
development of innovation and its diffusion throughout the economy imply that
it is the stock (rather than flow) of human capital that affects the overall
productivity growth rate of the country.
Early
studies of the effects of human capital on growth, such as Mankiw, Romer, and Weil
(1992) and Barro (1991) were based on data sets pertaining to a very diverse
array of (more than 100) countries during the post- 1960. They used narrow flow
measures of human capital such as the school enrolment rates at the primary and
secondary levels, which were found to be positively associated with output
growth rate. Barro reported that the process of catching up was firmly linked
to human capital formation, only those poor countries with high level of human
capital formation relative to their GDP tended to catch up with the richer
countries.
Barro
and Sala-i-Martin (1995, ch 12) among many other, have also included life
expectancy and infant mortality in the growth regressions as a proxy of
tangible human capital, complementing the intangible human capital measures
derived from school inputs or cognitive tests considered, their finding is that
life expectancy has a strong, positive relation with growth.
A
recent survey by Kruger and Lindahl (1998) from the econometric studies of
cross-country growth equation shows more robust results. First changes in the
human capital stock do not seem to affect growth rates, as would be implied by
the model in Lucas (1988). This contracts with the robust evidence from the
micro literature of education on income. When allowances are made for
measurement errors, the change in stock measures of education is positively
correlated with economic growth.
Secondly,
the evidence with respect to the positive effect of the level of human capital
stock on growth rates is much stronger. But the size of this effect varies
across countries. Two other well established results that emerged from the cross-country
studies examined by Krueger and Lindahl are: (a) the greater effect of secondary
and higher education on growth, compared with primary education and (b) the
seemingly significant, or even negative, effect of female education on the
growth of output. With respect to the latter they follow Barro (1999) in
suggesting that the insignificant effect of female education may be a result of
gender discrimination in some countries labour markets. The argument is that
female received education in these countries but are discouraged from
participating in the labour market, and thus cannot contribute directly to the
growth of output. This may explain part of the problem, but it seem that other
mechanisms also are at work, in countries with high female labour market
participation, variation in the extent of female education have an
insignificantly small positive effect on output growth rates. While there is
persuasive evidence about the positive relation between initial human capital
levels and output growth and (weaker) empirical support for the relation
between changes in human capital and growth, it is not at all clear that this
implies a casual relationship running from human capital to growth. Motivated
by the fact that schooling has increased dramatically in the last 30 years at
the same time that the “productivity slow dosw” became manifest in many of the
higher income economies, Bils and Klenow (2000) suggest that the casual
direction may run from growth to schooling.
The
relationship would be predicted by a Mincerian model in which high anticipated growth
leads to lower discount rates in the population, and so to higher demand for schooling
of course both variables might be driven by other factor. From the results of
different empirical tests, Bil and Klenow conclude that the channel from
schooling to growth is twoo weak to explain the strong positive association
found by Barro (1991) and Barro and Ice (1995) as described above. But they
argue the “growth to schooling” connection is capable of generating a
coefficient of the magnitude reported by Barro Lucas (1988) include human
capital as an additional input in the production of goods, while retaining the
other features of the neoclassical growth model. In two model, the labour force
can accumulate human capital, which is then used together with physical capital
to generate the output of the economy. In one version of the model, human
capital is acquired through time spent in an (non-productive) educational process,
introducing a trade-off for workers between
employing time to provide output and using it to gain further human
capital that will increase their marginal productivity when working in
subsequent periods. In another version of the model, human capital is gained by
the workers through on-the-job training, and so the time employed working
increased their productivity later on. The accumulation of human capital
involves a sacrifice of current utility in the form of less current consumption
in the case of education, or a less desirable mix of current consumption goods
when on-th-job training is considered.
In the Slow-Swan and
Ramsey models, the equation describing physical capital accumulation is
sufficient to determine the dynamic evolution of output. To specify the growth
path when human capital when is included, it is necessary to consider an
additional sector where the growth of human capital take place. Given that physical
capital still has diminishing returns, the required assumption for the model to
exhibit a positive growth rate of output per worker in the steady state is that
the “technology” for generating human capital has constant returns. This means
that the growth of human capital is assumed to be the same for a given level of
effort whatever the level of human capital attained. With this assumption the
rate of output growth (per worker) is positive and increasing in the productivity
of education or on-the-job training in the creation of human capital