by Benjamin Ritter
Investments in human capital; mainly healthcare and education, are important to positively influence social change in developing countries, and have been directly linked to economic growth. Human capital theory states that the higher the level of human capital is, the higher the level of performance (Barney, 1991), and entrepreneurial performance (Wu, 2013). Various investment strategies in human capital have proven to more effective than others. This paper will review the literature related to human capital, effective human capital investment strategies that result in economic growth, and suggest topics for further study.
Human Capital Development in Developing Countries
Economic productivity and growth depends on people (Schultz, 1961). The value of people to an economy is defined as human capital which has a positive impact on individual’s lifetime incomes, economic growth, and fostering economic development and poverty reduction (Anyanwu, & Erhijakpor, 2009). Research has indicated that it is not only essential to growth, but to freedom (Zhang, & Zhuang, 2011), and is a competitive advantage (Wu, 2013) within countries. Health and education are two critical dimensions of human capital. The basis of the value of human capital is that a healthy and more educated person can work more effectively, efficiently, and spend time on more productive activities (Baldacci, Clements, Gupta, & Cui, 2008), which leads to economic growth. Various human capital investment strategies have been found to be more effective than others, and are important when attempting to improve the economic situations of developing countries.
Human capital theory states that the level of human capital is directly related to the level of individual and economic performance (Wu, 2013). Human capital has various dimensions that if improved upon can greatly influence economic growth of developing countries.
A variety of policies currently promoted by the World Bank and other agencies focus on health and nutrition to develop human capital (Hanushek, 2013). Both education and health spending have a positive and significant direct impact on the accumulation of education and health capital (Baldacci et al, 2008). Developing countries require increases in human capital (health, education, and greater and sufficient basic skill development) in order to move to higher value added industries (Chu et al., 2016).
Research is complicated in measuring the effects of human capital spending since its dimensions are interconnected. For example, higher levels of education can increase public awareness and attention to personal health; and higher levels of health can allow for greater opportunities and application of education capital (Baldacci et al, 2008). Other issues involved in measuring human capital spending and related social indicators involve data availability, measurement difficulties, model design, and the spillover mentioned between the health and education dimensions. This leads to research sometimes underestimating and producing mixed results (Baldacci et al, 2008).
Measurement on the impact of education is more difficult than health. Previous research studies have mistakenly used improper variables for measurement. For example if you are attempting to measure human capital in terms of education using school attainment, you are assuming that a year of school in one country is the same as another which is unreasonable. More recent studies have chosen to measure cognitive skills in order to avoid this difficulty. Interventions on improving human capital are also difficult to measure due to the time it takes to fully affect social indicators and growth. Research indicates that increases in education spending do not fully affect social indicators and growth for 10-15 years (two-thirds of the effect occurring within 5 years), while the effects of increases in health spending are immediate (Baldacci et al., 2008).
Health interventions significantly increase individual’s earnings, and health status is a predictor of economic success. Improvements in health conditions that return one more year of life expectancy are associated with 4 percentage points of higher growth, and an increase in health spending resulted in an “increase of 0.6 percentage point in the under-5 child survival rate and a rise of 0.5 percentage point in annual per capita GDP growth” (Baldacci et al., 2008). Greater levels of education are also related to improvements in health, fertility, and the adoption of technology (Arora, 2012). Research indicates that there is a positive relationship between schooling and physical access to banks (Arora, 2012), and financial development. Research indicates that improvements in the cognitive skills measure of one standard deviation in performance create a two percent per year increase in the average annual GDP per capita (Hanushek, 2013). Another study indicates that an increase in education “spending of 1 percentage point of GDP is associated with 3 more years of schooling” and “raises the annual growth of GDP per capita by 1.4 percentage points in 15 years.” Multiple research studies indicate that human capital investment influences economic growth, but what type of spending is more or least effective?
Investment in human capital for developing countries is influenced by a variety of factors. In terms of education spending research indicates growth is positively affected by high performers, basic skill development (which has a significant and long term impact on wages, and job stability) (Chu et al., 2013), and school quality. A lack of growth and in some instances a negative effect is seen in a providing greater resources to schools to improve quality (Hanushek, 2013), and vocational only training (detracts from human capital) (Chu et al, 2013). Simple approaches such as providing greater resources, access to schools, a focus on tertiary schooling, and improving school attainment has no independent effect on growth (Hanushek, 2013). This brings up the question if education spending should be broadly distributed or if spending should focus on students and schools that are considered stronger than others (Hanushek, 2013). The research also indicates that the quality and type of government effects how much money is spent towards improving human capital as well as how the money is spent. Public education spending is effected by policies that have been in place (long term partisan imprints), while private spending is mainly effected by parties currently governing. For example, countries governed by Conservative parties show high levels of private education spending, while Leftist and Liberal governments do not, and Christian Democratic parties decrease private education spending (Wolf & Zohlnhofer, 2009).
Human capital investment is critical to developing countries. As indicated previously spending in the areas of health and education are directly related to economic growth. Research indicates that education spending should focus less on creating more schools, providing up to date schools through resource investment, vocational or tertiary schools, and instead focus on improving the quality of schools. School quality (not through resources) could include evaluating and structuring curriculums that focus on building and solidifying basic skills, utilizing the most effective tested learning theories and teaching methods, and improving teacher to pupil ratios. Investments in education take longer to effect economic growth than spending in health. A healthier population though is more capable of utilizing opportunities in education. Future studies should investigate what constitutes effective health spending, and how that can set up developing countries to take advantage of increases in education spending. It is important to note that a lack of governmental support can impede human capital investment which is a major issue for many developing countries. Ultimately investment in human capital can become negated if the government does not support the process.
Anyanwu, J. C., & Erhijakpor, A. E. O. (January 01, 2009). Health Expenditures and Health Outcomes in Africa*. African Development Review, 21, 2, 400-433.
Arora, R. U. (February 01, 2012). Financial Inclusion and Human Capital in Developing Asia: the Australian connection. Third World Quarterly, 33, 1, 177-197.
Baldacci, E., Clements, B., Gupta, S., & Cui, Q. (August 01, 2008). Social Spending, Human Capital, and Growth in Developing Countries. World Development, 36, 8, 1317-1341.
Chu, J., Huang, X., Loyalka, P., Shi, Y., Song, Y., Wei, J., Yi, H., Zhang, L. (January 01, 2016). The impact of vocational schooling on human capital development in developing countries: Evidence from china. World Bank Economic Review, 30, 1, 143-170.
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Wu, T. (April 01, 2013). Constraints to Human Capital Investment in Developing Countries: Using the Asian Financial Crisis in Indonesia as a Natural Experiment.Bulletin of Indonesian Economic Studies, 49, 1, 113-114.
Zhang, C., & Zhuang, L. (March 01, 2011). The composition of human capital and economic growth: Evidence from China using dynamic panel data analysis. China Economic Review, 22, 1, 165-171.