Human Capital and Economic Growth

2006. 7

Lee Young Youn

Kangwon National UniversityDivision of Economics and Tradea

I. Long-term Growth Trends

Economic growth in the past decade was fastest in the developing economies of East Asia and Pacific (averaging 6.7 percent a year) and South Asia (5.5 percent). Leading this growth were China and India, accounting for more than 70 percent of its region’s output. The two regions continued to do well in 2003, with East Asia registering 8.1 percent growth and South Asia recording 7.5 percent growth.

Economic growth varies greatly according to

regions (World Development Indicators,2005)

Economic Growth by Region(%)

Gross Domestic Product(2000 US$ billion)

Income Disparities among Countries

There are large disparities in average living standards.

Most of large developing countries roughly maintained their positions relative to the USA between 1960 and 1990

There does not appear to be an absolute poverty trap.

There is no general tendency for countries to converge to common level of per capita income

Economic Growth in Selected Countries(1960-2000)

　 GDP per Capita Average Annual GDP Growth per Capita

　 1960 2000

2000/ 1960 1970 1980 1990 1960 1970

1960　 -1970 -1980 -1990 -2000 -2000 -2000

Korea 1,495 15,881 10.62 5.97 5.68 7.32 4.67 5.91 5.89

Japan 4,545 24,672 5.43 9.27 3.09 3.53 1.05 4.23 2.55

USA 12,273 33,308 2.71 2.87 2.66 2.16 2.3 2.5 2.37

Finland 7,491 23,792 3.18 4.21 3.09 2.65 1.6 2.89 5.09

China 682 3,747 5.5 1.79 2.72 5.14 7.41 4.26 4.7

Malaysia 2,119 9,937 4.69 3.08 5.26 2.92 4.191 3.86 4.12

Philippines

2,015 3,424 1.7 1.73 3.17 -0.89 1.3 1.33 1.19

Singapore

2,161 27,186 12.58 8.93 7.76 4.48 4.16 6.33 5.47

Taiwan 1,430 18,718 13.09 6.68 7.44 6.27 5.36 6.44 6.35

Argentina

7,371 10,995 1.49 2.29 1.38 -3.87 4.22 1 0.57

Brazil 2,371 7,185 3.03 4.23 5.67 -0.26 1.46 2.77 2.29

Chile 3,853 9,920 2.57 2.19 1.22 1.28 4.79 2.37 2.43

* PPP adjusted Prices of 1996. Source: Hetson, Summers, Aten(2002)

GDP Relative to the US , Selected countries, 1960 and 1990

Population proportion of US per capita (PPP) 2004 1960 1990 2004

Nigeria 127m 0.05 0.05 0.03India 1,081m 0.07 0.07 0.08China 1,313m 0.05 0.07 0.14Bangladesh 150m 0.09 0.08 0.05Pakistan 157m 0.07 0.08 0.06Philippines 81m 0.12 0.10 0.12Indonesia 223m 0.06 0.11 0.09Thailand 64m 0.10 0.20 0.20Brazil 181m 0.18 0.22 0.21Argentina 39m 0.44 0.25 0.32Korea 48m 0.09 0.38 0.54Japan 128m 0.30 0.81 0.76

Growth Miracles and Disasters, 1960-1990Annual Growth Rates of Output per Worker

Miracles Growth Disasters Growth

Korea 6.1 Ghana -0.3 Botswana 5.9 Venezuela -0.5Hong Kong 5.8 Mozambique -0.7Taiwan 5.8 Nicaragua -0.7Singapore 5.4 Mauritania -0.8Japan 5.2 Zambia -0.8Malta 4.8 Mali -1.0Cyprus 4.4 Madagascar -1.3Seychelles 4.4 Chad -1.7Lesotho 4.4 Guyana -2.1

The Proximate Sources of Growth

Investment in Physical Capital Labor Forces (Population Growth) Natural Resources Human Capital Accumulation Research and Development Trade Policies Financial Markets Social and Political Factors

Over the last 40 Years

Output growth: 3.5% a year Productivity of Labor growth:2.4% - The contribution of Education:13~30%

* Human Capital will become more important in Knowledge-based economy.

Why might a more highly educated workforce increase economic growth?

More mobile and adaptable Can learn new tasks and new skills more easily Can use a wider range of technologies and

sophisticated equipments Needs less supervision More creative in thinking Produce a less crime-ridden and healthier

environment

Human Capital and the Quality of Growth

Sustainable growth is the result in part of positive externalities generated by education, an important form of human capital

Human capital is an outcome of as well as an input to the quality of growth

Human capital has to accumulated and maintained by its owners, may well be distributed unequally, and has value may not be realized in the absence of appropriate markets and institutions.

Flow Diagram of Education

Increased Investment in Increased Saving Human Capital Increased Physical InvestmentIncreased Increased (+)

Educational Stock of (+)Gross Domestic Increased Attainment Human Capital Product Income Decreased Labor ------- (-) Force while in school

* Eventually , Positive effects outweigh negative effects on GDP

Three Issues of human capital as a productive asset

The Distribution Issue - Children from poor families benefit little from public

spending on schooling. The Demand Issue - What does determine how much household invest

privately and societies invest collectively in their children’s education and health and in other form of human capital?

- parent’s education and income, capital market, expected income, quality of public school, resources abundance, market openness, democracy.

Education and expenditure Inequality in India,2000

Inequality of Education and Income

Three Issues of human capital as a productive asset (continued)

The problem of other distortions - Human capital value depends on its owner’s ability to

deploy it in a competitive markets in which the rule of game reward innovation, entrepreneurship, and higher productivity

- Education really seems to payoff in more open economies.

Education, Openness, and Economic rates of Return

Growth According to Trade Orientation (1963-1998)

-0.2-0.11.6Strongly Inward

-0.11.7 4Moderately Inward

2.41.64.9Moderately Outward

6.80%5.90%6.90%Strongly Outward

1985-19981973-19851963-1973

Average Yearly Growth Rates (41 developing countries)

Trade Orientation

Source: Dominick Salvatore, International Economics, 7th Edition. John Wiley & Sons .PP381

Global Competitiveness Index(2005)

4 23 17 1 42 25 33 50 64 58 105

5 18 26 4 14 42 56 52 89 91 93

2 1 3 10 8 7 64 55 66 73 81

1 2 5 6 12 17 49 50 74 75 96

FinlandUSATaiwanSingaporeJapanS. KoreaChinaIndiaIndonesiaRussiaMongolia

MacroeconomicEnvironmentIndex Rank

Public InstitutionsIndex Rank

Technology IndexRank

GCI RankCountry

Top performers in the nine pillars of the Global Index

Education and the extent to which countries are able to upgrade the skills and training of the labor forces have acquired growing importance as indicators of a country’s future growth potential.

1 5 9 69 8 2 1 16 23 3 27 34 1 25 42 26 9 93 1 16 3 10 10 10 1 16 8 62 47 2

SingaporeDenmarkChileJapanFinlandUSA

Institution Infrastructure Macro-economy Health Higher and primary education education and Training

Country

Top performers in the nine pillars of the Global Index (continued)

Country Market Technological Businessefficiency Readiness sophistication Innovation

SingaporeDenmarkChileJapanFinlandUSA

4 1 20 9 5 2 4 10 24 36 31 41 16 17 1 2 12 12 12 4 1 5 3 1

Global Business Competitiveness Index(2005)

2 1 5 10 15 24 58 31 59 70 102

1 9 14 3 13 17 53 30 50 77 98

1 2 5 8 14 24 57 31 59 74 104

FinlandUSATaiwanSingaporeJapanS. KoreaChinaIndiaIndonesiaRussiaMongolia

Quality of the nationalbusiness environment

ranking

Company operating andstrategy ranking

BCI RankCountry

Governance Indicators (2004)

-1.46(-0.31)-1.15(-1.04)-2.05(-2.43)-1.68(-1.30)-0.67(-1.20)-2.05(-1.84)N. Korea

-0.51(0.37) 0.18(0.48) 0.18(-0.57)-0.46(-0.27)0.48(0.80) 0.45(0.38)Mongolia

-0.72(-0.74)-0.70(-0.84)-0.51(-0.41)-0.21(-0.50)-0.85(-0.93)-0.81(-0.36)Russia

-0.90(-0.47)-0.91(-0.36)-0.42(0.27)-0.36(0.18)-1.38(-0.45)-0.44(-1.15)Indonesia

-0.31(-0.31)-0.09(-0.01)-0.59(-0.09)-0.04(-0.14)0.81(-0.77) 0.27(0.28)India

-0.51(-0.01)-0.47(-0.45)-0.45(-0.06) 0.11(0.18)-0.07(0.12)-1.54(-1.29)China

 0.17(0.54) 0.67(0.81) 0.69(0.69) 0.95(0.64)0.45(0.16) 0.73(0.71)S. Korea

 0.64(0.74) 0.83(1.02) 1.29(1.17) 1.15(1.42)0.52(1.01) 0.95(0.55)Taiwan

 1.19(1.22) 1.39(1.60) 1.04(0.84) 1.21(1.36)0.99(1.08) 0.98(1.08)Japan

 2.44(2.50) 1.82(2.13) 1.87(2.29) 2.25(2.51)1.48(1.39)-0.13(0.40)Singapore

 1.83(1.71) 1.58(1.79) 1.22(1.56) 1.80(2.02)0.47(1.06)1.21(1.53)USA

 2.53(2.23) 1.97(2.08) 1.79(1.50) 2.06(1.89)1.65(1.45)1.50(1.71)Finland

Control of Corruption

Rule of LawRegulation Quality

Government Effectiveness

Political Stability

Voice and Accountability

Country

( ) 은 1996 년 추정치를 나타냄 .Source: Daniel Kaufman, Aart Kraay, and Massimo Mastruzzi, "Governance Matters IV: Governance Indicators for 1996-2004, Policy Research Working Paper, No.3630, World Bank, may 2005.

Corruption Perception Index(2005)

Country Rank

Country 2005 CPIScore

CountryRank

Country 2005 CPIScore

1 Iceland 9.7 59 Thailand 3.8

2 Finland 9.6 78 China 3.2

5 Singapore 9.4 85 Mongolia 3

15 Hong Kong 8.3 88 India 2.9

17 USA 7.6 107 Vietnam 2.6

21 Japan 7.3 117 Philippines 2.5

32 Taiwan 5.9 126 Russia 2.4

39 Malaysia 5.1 137 Indonesia 2.2

40 S. Korea 5 159 Bangladesh 1.7

Sources: Transparency International, Corruption Perceptions Index 2005.

Bribe Payers Index(2002)

　　　5.8Spain 11

3.2Russia216.3Germany10

3.5People’s Republic of China206.3Singapore9

3.8Taiwan196.9United Kingdom8

3.9South Korea187.8Belgium7

4.1Italy177.8Netherlands6

4.3Hong Kong168.1Canada5

4.3Malaysia158.2Austria4

5.3Japan148.4Switzerland3

5.3United States138.4Sweden2

5.5France128.5Australia1

Score　 Rank

Score　Rank

Sources: Transparency International , Bribe Payer Index 2002.

The Opacity Index(2004)

5.64463140394478Russia

6.09484630494474India

6.49504356393974China

3.52373730223561Korea

1.51282222312438Japan

0.65241050251915Singapore

0 211020271928USA

-1.831391723113Finland

Discount(%) REG ACC ENF LEG COR

Opacity Premium/ OPA

CategoryCountry

sources: The Kurtzman Group, The Global Cost of Opacity: The Opacity Index 2004, MIT Sloan Management Review, October 2004.

Complementary Categories ofSocial Capital

sources: Norman Uphoff, "Understanding social capital: learning from the analysis and experience of participation." in Social Capital, edited by Partha Dasgupta and Ismail Serageldin, World Bank. 2000.

　

　　　

Common elements

　Expectation that lead to cooperative behavior, which produces mutual benefits

　

Civic cultureTrust,solidarity, cooperation,Generosity

Social OrganizationHorizontal linkagesVertical linkages

DomainsDynamic factors

Networks and other interpersonal relationships

Procedures and Precedents

NormsValuesAttitudesBeliefs

Roles and rulesSources andManifestations

cognitivestructural　

Conclusion

1.The new paradigm will concentrate on sustainable and qualitative growth to reach an advanced state of economic development.

2.The economic operating mechanism of the government should move from the centralized management system to a decentralized on through democratization, privatization and liberalization in such a way to improve both economic efficiency and equity.

3. Equity and welfare-oriented development principles should replace the growth-first principle.

4. Development should be directed toward the establishment of human capital-oriented, and knowledge/information-oriented society, which will definitely improve economic efficiency and equity at the same time.

5. Government should concentrate on its original role for the supply of public goods, correction of government failure and embodiment of the welfare state

6. The role of government needs adjustment depending on the development stages of nation, but should not be given up. An active role of government is indispensable for developing countries to move toward an advanced countries.

Thank You