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 To learn more about this author, visit African Development Bank's Website.

Like this article? Share it with your friends

E-Mail | Print | More

Related Articles
Introduction: Human Capital and Economic Development
	Health and education are both components of human capital and contributors to human welfare. One index of human welfare, which incorporates income, education and health, shows that Africa’s level of ‘human develop...
Human and Physical Capital: The Effects of Human Capital on Economic Development
	Human capital is a broad concept which identifies human characteristics which can be acquired and which increase income. It is commonly taken to include peoples’ knowledge and skills, acquired partly through educa...
Expenditure Composition and Growth
	Allocating a higher share of public spending to physical and human capital formation can also promote growth.
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 m...
Conclusion: Human Capital and Economic Development
	Africa has made large strides in raising literacy and school enrolments and improving health. However, in the case of both education and health these gains are lower than those in other developing countries.

---

Related Forum Posts
	Raising $5-$10 Million
	New Small Business Topic
	Del Castienne - International Business and Project Brokers
	Do Entrepreneurs need HR resources?
	Re: Make sure you're a corporation
	Book: The Essentials of Entrepreneurship: What it takes to c
	Seek Venture Capital & Funding
	What Holds Women Back