Human Capital

Human capital, in its broader sense, has become an important driving force behind economic development and income distribution. It is also widely accepted that endogenous growth theory has considered human capital as the major determinant of economic growth. In fact, it is the role of human capital that prevents the marginal product of capital from falling and thereby countries get richer (Lucas,

136 1988). However, right up until the second half of the 1990s, the role of human capital was, in the main, linked to education, although a few authors had already recognized the importance of other factors such as health. Mankiw, Romer, and Weil (1992) first considered not only education but also health in a broader analysis of human capital. Thus, human capital in this study refers both education and health and the link between education and economic growth per capita as well as the link between health and economic growth per capita will be discussed in detail as follows.

6.1.5. 1. Education.

“If you plan for a year, plant a seed. If for ten years, plant a tree. If for a hundred years, teach the people. When you sow a seed once, you will reap a single harvest. When you teach the people, you will reap a hundred harvests” (K‟uan-tzu, 551-470BC).

Human capital, particularly that attained through education, has been emphasized as a critical determinant of economic progress (Barro and Lee, 2001:541); and „growth rates‟ are affected by ideas and invention, which in turn are related to the stock of human capital either through research and development activities or through adoption behavior. However, it should be recognized that developing domestic human resources through education and training is a long-term process to increase the innovative capacity of an economy. It is worthwhile to mention the remark of Lee Kwan Yew, founding father of Singapore (1959-1991), which is quite relevant here as follows:

“I thought then that wealth depended mainly on the possession of territory and natural resources, whether fertile land, or valuable minerals, or oil and gas. It was only after I had been in office for some years that I recognized that the decisive factors were the people, their natural abilities, education and training.”

According to Habiyaremye and Ziesemer (2006), when educational attainment is used as a proxy for human capital, there are three main views that attempt to explain how education affects the production process and contributes to economic performance. The first view considers education as having the effect of increasing the labor “efficiency units,” making an educated worker represent more labor units than an uneducated one. The second view is that educated workers are able to perform complex tasks and are therefore not substitutable by unskilled workers. The third view associates education and skills of workers with learning and creation of new technologies that generate more output, keeping the level of inputs constant. Applied to the case of developing countries, this view suggests that educated workers help the country to absorb, implement and diffuse foreign technology, and thereby generate more growth.

137 Similarly, the World Bank (1993) found that a 10% increase in the school enrollment ratio in primary and secondary education would lead to a 0.3 % increase in the growth rate of per capita GDP. In line with this, Dollar et al (1988) point out that trade in general and export diversification in particular can serve as conduits for flows of knowledge which act to raise the productiveness of physical capital and labor and ultimately have the potential to increase the growth rate of per capita income. Abramovitz (1986) shows the realization of technological improvements in developing countries is closely related to their level of human capital, such that the type of technology a country can adopt and efficiently utilize very much depends on the supply of technical and managerial skills available in that country. This implies that development policy targeting technology acquisition and the reduction of the technology gap must be aimed at facilitating the interaction between technology flows and human skills. That was why some developing countries in East Asia and Latin America have been successful in narrowing the technology gap in a few decades, and their educational attainment is credited for much of this achievement (Lall, 1992). According to Nelson and Phelps (1966), a large stock of human capital makes it easier for a country to absorb the new products or ideas that have been discovered elsewhere.

Therefore, a follower country with more human capital tends to grow faster because it catches up more rapidly with the technological leader. Furthermore, Levine and Renelt (1992) show that the level of human capital (as measured by secondary school enrollment), the investment-GDP ratio, and the initial levels of per capita income are robust determinants of economic growth.

6.1.5. 2. Health

Health, as a form of human capital, should be envisaged as a property that may be improved through investment in resources. It is within this framework that the mechanisms affecting the way in which health investment dictates the future incomes of individuals should be studied. Fogel (1994), and Barro and Sala-i-Martin (2004) were among the first to examine the relationship between economic growth and health and confirm that good health is a crucial component of overall well-being. This view is also shared by Savedoff and Schultz (2000) who explains the idea that healthier individuals are more productive, supported by a microeconomic view point.

Similarly, Lopez-Casasnovas, Rivera, and Currais (2005) argue that good health raises levels of human capital, and this has a positive effect on individual productivity and on economic growth rates.

Better health increases workforce productivity by reducing incapacity, debility, and the number of days lost to sick leave, and increases the opportunities an individual has of obtaining better paid work. Further, good health helps to forge improved levels of education by increasing levels of schooling and scholastic performance. Health also affects output, income productivity, and ultimately economic growth.

Citizens who expect to live long after retirement tend to have a strong incentive, to save and invest and this is known as life-cycle savings. If life expectancy happens to be short, people don‟t expect to live in many years in retirement and, as a result, their incentives to save are greatly reduced. Thus,

138 through its adverse effects on life expectancy, poor health will tend to reduce national savings and investment, and thereby economic growth (Sala-i-Martin, 2005). Furthermore, Schultz and Tansel (1997), and Thomas and Strauss (1997), confirm the idea that health is a form of human capital that influences individual wage levels and thus their capacity to generate a sustained income that increases over time. This implies positive consequences in terms of spending power and the standard of living for all of those in the household.

The links between health and growth can also be indirect, emerging, for instance, through demographic or geographic variables. For example, health improvements influence economic growth through their impact on demography: improvements in health lead to a decline in infant and child mortality which induces changes in the composition of the population and eventually causes an increase in the proportion of working-age adults. In Asia, such demographic changes may have contributed significantly to the “economic miracle” of the 1965-1990 periods (Bloom and Williamson, 1998). As Sen (1998) points out, life expectancy has an intrinsic capability on which personal welfare depends.

Generally, for LDCs, investing in health often provides a means of escaping from the poverty trap. Thus, the health variable is often captured by a “life expectancy” indicator.