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The role of human and physical capital in growth: The Effects of Human Capital on Economic Development

Written by: African Development Bank

Article Overview: We begin by a consideration of the links by which investment may affect the growth of output. Both physical and human capital directly impact on the productive capacity of an economy. However such direct effects may not be the most important.

The role of human and physical capital in growth: The Effects of Human Capital on Economic Development

We begin by a consideration of the links by which investment may affect the growth of output. Both
physical and human capital directly impact on the productive capacity of an economy. However such
direct effects may not be the most important. More human capital may itself affect the rate of growth of
physical capital. If human and physical capital are complements then increasing human capital raises the
rate of return on physical capital. The underlying rate of technical progress in an economy, by which is
meant the increase in output due to factors other than measured inputs, may depend on how much
educated labour there is in the economy. Rates of return on investment must consider both the direct
and indirect effects of such investment. In assessing the effects of human capital on output we have both
macro and micro evidence. We present both in the following sections.
To place the problem in context it is useful to set out how the stock of both human and physical
capital in Africa compares with non-African countries. The comparative data set for human capital
available from Barro and Lee (1994) was used in Table 2 above. In Table 4 the figures for physical
capital are also presented. The data is drawn from the PENN world tables (Summers and Heston,
1991). The physical capital stock is a measure of the non-residential capital stock per worker.
Table 5 presents the growth rates, over the period 1965 to 1990, for income per worker and for
human and physical capital investment that can be computed from Tables 2 and 4. The growth rate for
the average of primary and secondary school completion in Africa is half that for South Asia, as is the
growth rate of income. In Figure 2 the data from Table 5 is presented as a chart. The growth rate for
human capital is a weighted average of the growth rates for primary and secondary school completion
rates with the weights taken from 1980. While the averaged growth of education in Africa is lower than
both East Asia and South-East Asia the gap is small relative to the differences in the growth rate of
physical capital. It is at the secondary level where Africa’s growth rate is far below that of any other
developing region. At this level the gap between Africa and other developing regions has widened
substantially. There is evidence that it is education at the secondary level which is important for increasing
productivity in manufacturing. This poor performance may have serious implications for Africa’s ability
to compete in a global market place. Box 2 discusses some of the issues raised by globalisation and the
rise of new technologies.
The gap between Africa and the rest of the developing world also widened in the case of the
physical capital stock. Table 5 shows that the growth rate of the physical capital stock in Africa,
at 1 per cent per annum, was far below that of any other region. The comparable figures for other
regions are: 3.6 in South Asia, 7.9 in East Asia, 3.4 in South-East Asia, and 2.5 in South America.
In 1965 Africa’s physical capital stock was 34 per cent of that of East Asia; in 1990 it was 6 per cent.
While this is an extreme figure it dramatises the point that there is a widening gap between Africa and
other developing regions for physical capital and some dimensions of human capital.
There is research suggesting that the level of education as well as its growth rate may be
important:
“Given the initial level of per capita GDP, the growth rate is substantially positively related to
the starting amount of human capital. Thus poor countries tend to catch up with rich countries
if the poor countries have high human capital per person (in relation to their level of per capita
GDP), but not otherwise. As a related matter, countries with high human capital have low
fertility rates and high ratios of physical investment to GDP.” (Barro, 1991, p.437).

If this view is correct then it is the high levels of secondary and primary school completion in 1965,
rather than the changes since then, which are important for explaining the differences across the countries.
Why might the level of education be important? One effect of low levels of the human capital may be to
lower the ability of the economy to absorb information. Indeed
One of the great virtues of education, which has been shown in many micro studies, is that it
makes workers more flexible. It may be the case that levels matter as well as changes in those levels.
Even by 1990 the stock of human capital in Africa was far below its level in East Asia in 1965.
However, in 1965 Africa was marginally ahead of South Asia. While this region has not experienced
the dramatic growth of East Asia, it has outperformed Africa. It is clear from the above that while
human capital may have an important role to play this role will be vitiated unless policies ensure rapid
investment in other forms of capital. The problems associated with this were covered in the African
Development Report for last year.
Macroeconomic data allow the performance of African economies in the area of human and
physical capital to be seen in context. The data presented does not allow us to directly answer the
question as to the rate of return on investment in education of different levels. We now turn to
micro data which allows that question to be addressed.

Human Capital and Economic Development
Simon Appleton and Francis Teal

Related Articles
  Introduction: Human Capital and Economic Development
  Human and Physical Capital: The Effects of Human Capital on Economic Development
  Expenditure Composition and Growth
  Conclusion: Human Capital and Economic Development
  HUMAN RESOURCE DEVELOPMENT AND ATTRACTING INWARD FDI

Article Tags: african countries, barro, capital investment, capital stock, comparative data, completion rates, economy rates, education in africa, heston, indirect effects, penn world tables, productive capacity, rate of return, return on investment, secondary school completion, south asia, south east asia, technical progress, weighted average, weights



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