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 advanc
ing 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
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