Long-Run Growth Effect of the Physical Capital-Human Capital Complementarity: An Approach by Time Series Techniques

Nejat ERK ukurova niversitesi, ktisat Blm, P.K. 393, 01330, Adana-TRKYE
erk@mail.cu.edu.tr

Sanl ATE ukurova niversitesi, ktisat Blm, P.K. 393, 01330, Adana-TRKYE
asanli@mail.cu.edu.tr

Uluslararas ODT Ekonomi Kongresi III 8-11 Eyll 1999 Ankara METU International Conference in Economics III September 8-11, 1999 Ankara

Long-Run Growth Effect of the Physical Capital-Human Capital Complementarity: An Approach by Time Series Techniques
Nejat ERK
ukurova University, Department of Economics, 01330 , Adana, Trkiye. E-mail: erk@mail.cu.edu.tr

Sanl ATE
ukurova University,Department of Economics, 01330, Adana, Trkiye.E-mail: asanli@mail.cu.edu.tr Abstract This paper aims to explore physical capital (K) and human capital (H) complementarity impact on long-run economic growth. It is hypothesized that in times of frequent innovations factor complementarity plays a more significant role in explaining GDP growth than factor substitutability adopted among neoclassical and endogenous growth models. VAR results confirm that physical capital and human capital accord showing complementarity is a good proxy in explaining GDP growth for selected developed countries. The estimates yield results showing very short term and stabilizing impacts on innovation for all tested countries.

1. Introduction
Economic growth theory had faced significant changes during the last fifty years. This in no way decreases the importance of different long term economic growth rates both for developed and developing countries. In fact, major economic literature concentrates on whether future growth rates will lead to a convergence or divergence of Per capita income which is an extension of catch-up thesis (Baumol, 1986; Barro, 1994; Jones, 1997). Besides these debates, consistency of low long-run growth rates of developed countries relative to developing countries needs to be explored to create rationale for the divergence or convergence of Per capita income among countries. Introduction of human capital factor to economic growth theory is not new. But as in the case of Ak type models, human capital has been added to the production, economic growth and to the Hamiltonian functions with the assumption that this independent factor does not need any concentration with other factors of production. To clarify the concentration of K/H (physical capital stock/human capital stock) concept, we should look into factors like technological absorption, diffusion, managerial applications, learning by doing and other endogenous factors, not reflected in traditional Ak type models. Existing technological level and improvements in it, needs similar improvements in human capital component in its broadest sense to stir up long term economic growth in all countries. Developed countries with

devastating technological improvements had not been able to capture high growth rates because of the relative inadequacy of human capital endowments. Thus, not the absolute sizes of K and H but their relative concentration values should be the key determinant of long term economic growth. We start with the historical developments in economic growth theory for the last decades. In the empirical section, to test our hypothesis, that for a given time interval higher K/H values will be represented by low growth rates which coincides with high per capita income countries will be tested using tests of VAR technique (Sims, 1980; Enders, 1995). The debate over complementarity and substitutability of inputs of output is not new. But in recent years economics of complementarity has been major area of research interest (Matsuyama, 1996; Young, 1993; Teulings, 1999). Thus, the economic history of economic growth, looks at the nature of inputs to be used, as well as the mathematical functional form in explaining GDP growth. In this respect, it is possible to categorize debates around complementarity of labor ( human capital ) and physical capital under three alternative approaches. One group of thought looks at widening Wageskilled and Wage unskilled differences and argues that aggregate technology is capital-skill complementary (Krusell et all, 1997; Goldin and Katz, 1996). Second approach looks at physical and human capital complimentarity within the scope of "creative destruction" (Matsuyama, 1999; Young, 1993 ). And the last approach looks at technological innovations and its impact on the complementarity of input requirements (Bresnahan et al., 1999) Economist interest in skilled and unskilled wage dispersion and its outcomes could be explained by capital-skilled complimentarity. Growth's in stock of equipment, reflecting as higher technological levels increases the MPPL of skilled labor while lowering the MPPL unskilled labor. As an outcome, almost in all economies we see that increased wage inequality can be a consequence of capital-skill complimentarity. ( Krussel et al., 1997). Similar findings have been put forward by Twellings (1999). Investment in human capital in terms of training increases the skill level by an equal amount increase in relative wage gain, equal to loss of less skilled, expressed as complexity parameter. Along the same lines, physical capital and more advanced technology should be regarded as relative compliment of human capital (Goldwin and Katz, 1997). When cost reduction in an industry reflect productivity increases, we see that key determinant is employee involvement programs which could also be interpreted as another way of investment in human capital (Helper, 1997). The author argues that, unit cost of a product is not a function of quantity produced but mainly by the amount of commitment and skill improvements.

Along the same line with our argument above literature shows that in an environment where there are frequent innovations (post 1970 period), once the technology turns to an innovation (marketable form) capital and human capital factors are no longer substitutes of production, on the contrary becomes complimentary which on the overall effects productivity rates reflecting to faster economic growth rates. In this respect, physical capital and human capital complimentarity simply reflects that skilled and more skilled educated labor is more complimentary with new technology or physical capital than low human capital endowed labor. This also explains the wider inequality among skilled and unskilled labor wages. Second approach looks at physical and human capital complementarity in terms of market structure. The argument states that complementarity arise through the nature of equilibrium interaction (Matsuyama, 1999). Although an economy may never find itself in an unstable equilibrium suggest multiplicity of stable equilibrium position. This could well reflect presence of complimentarity which alters the structure of equilibrium observed. Along the market structure arguments, in time new technologies are substitutes to older ones. But, at the same time new technologies complements to older technologies. The importance of complementarity can be best shown by balance between inventive and productive activity (Young, 1993). As an outcome of the second argument of complementarity, unlike Romer (1987, 1990) argument gains from specialization for all inputs could only be true with complimentary skill and human capital levels. In this respect, Young's argument towards complimentarity is dominated by steady state compliments our K/H criteria in explaining existing economic growth rates. Third approach to complementarity could be viewed as the micro foundations at a firm level. As the skilled labor use information technology, the pace of complimentary innovation improves (Bresnahan et al., 1999). Thus, the author conclude that skilled-biased technological change is a function of information technology. Along the same line, Grilliches (1969) and Berndt et al. (1994) argue that skilled-biased technological change is a function of the way goods and services are produced. From this argument the human capital development phase at the firm level increases in the firms information technology stock that is associated with productivity increases where high levels of human capital is available. However, firms which implement only one component without the others are often less productive than firms which implement none at all. To sum up, classical, neoclassical and endogenous economic growth theories, independent of inputs taken into consideration, have neglected physical capital-human capital complementarity. To be modest, this complementarity component could have become more

dominant factor of economic growth and productivity changes in an era continues innovation. As stated earlier, given the innovation lengthy time component can create a component for higher substitutability among factors of production. But, in times of heavy industrial technologies (e.g. smoke-truck), which changes every other five years ( unlike 20 years in pre 1970 period) and high technological innovations change every other two years. As a result, substitutability of inputs becomes less important than complementarity of inputs. This is why we have literatures around like TQM, JIT, Benchmarking etc. All this explanations reflects economic theory as, in the classical isoquant approach continuity and slope of the isoquant showing the level of substitutability makes isoquants more convex to the origin, longer the use of that technology. Graph 1. Changing Structure of Isoquants in Time of Adaptation

Increased Substitutabilty Eckaus Phase Innovation

H Thus, in a dynamic sense isoquant properties change in time reflecting stronger elements of complementarity in the first phase and decreasing in time. So, in times of frequent technological changes, innovations force physical and human capital complementarity converge to achieve faster economic growth rates. As in the case of Uzawa (1965) and Lucas (1988), there are economists incorporating k relationship, with z (gross average product of physical capital) trying to show the scarcity of human capital. On the contrary, our attempt hypothesis that, increasing improvements in technology and a number of innovations is aggravating the difficulty of human capital substitutability with the existing technology. This dynamics is expected to be a more dominant retardant of economic growth at the growing stages of globalization. The key element that led to globalization of market seems to be low cost of information, know-how and technology transfer among regions

and countries. But this in no means guarantee the absorption, diffusion and learning by doing of this product to every production element involved in the creation of GDP. Thus, given the increasing share of schooling, R&D and other innovative efforts in GDP in developing countries, the gap between technological improvements and human capital creation is widening in terms of absorption and diffusion of technological advances which are commercialized with short time lags due to increased competition. The hypothesis put forward, if proven to be true, seems to have the potential to explain low growth rates of developed countries. As long as technological improvements and competition rules stays the same, any country converging in terms of income with the developed world will face similar problems, thus will be forced to lower their growth rates. Traditional human capital theory incorporates, educational (formal and informal), managerial, health and migration components. In our hypothesis widening of technology and human capital incorporates R&D and innovation, absorption, diffusion and learning by doing within the human capital component.

2. Recent Developments in Economic Growth Theory

Frank Ramseys 1928 dated publication A Mathematical Theory of Saving could be named as the first contribution to the modern theory of economic growth. The developed theory aims to optimize the decision making process between different time spans. In 1950s R.F. Harrod and E.D. Domar had an attempt to turnaround the static Keynesian growth model to a dynamic model. But unfortunately 1929 Great Depression reduced the popularity of above cited economic models and economists. 1950s also witnessed another important contributions to growth theory by R. M. Solow. The contribution of Solow to economic growth theory can be summarized as diminishing marginal returns on inputs and constant returns to scale which is very typical for neoclassical production functions. Advancements in the Solows theory integrated with constant saving ratios had been utilized in developing the simplified general equilibrium model. Neoclassical features of the model depicts that relatively lower GDP holding countries will be facing faster growth rates. Solow reaches to this striking result, by looking at the capital factor which faces diminishing marginal returns. In other words, countries with low physical capital per worker will have higher capital return ratios, thus will have higher growth rates where this occurrence will reflect to the incomes of developed countries. This type of convergence is known as absolute convergence in economic literature. The narrow degree of convergence stems from; stable nature of physical capital per labor, savings rate, population growth rate and from the

properties of production functions. Post 1980 studies by R.J. Barro (1991) and W.J. Baumol (1986) included initial human capital stocks and institutionalist factors to the growth models. One other important feature of neoclassical growth models is that discontinuities in technological advances will lower existing growth rates. The possible explanation for such an outcome goes back to diminishing marginal returns initiated by D. Ricardo and T. Malthus. Starting from 1960s neoclassical theory has been transformed to endogenous growth models where technology had been endogenized with learning by doing and vintage approaches. In this respect, especially Arrows contribution in 1962 is a mile stone. In this study, individual innovations spread around the economy very fast due the fact that technology being a non competitive product. In cases where spread adjustment slows down, innovations will be transformed to be the product of the R&D sector where the market is imperfectly competitive. Inevitably, this brings in the need for some changes to the neoclassical growth models. The contribution to the neoclassical theory delayed till P.M. Romers contribution to the theory in 1980s. But we should not omit the fact that D. Cass and T. Koopmans work in 1965 sets up the roots of household optimization decisions. While this new approach had examined the dynamics towards development phase, it did not go beyond conditional convergence. In this respect, endogenous nature of savings did not alter dependence of exogenous technological improvements on long term Per capita GDP growth. 1970s, were the years where little had been contributed to growth theory and most contributions in economics focused on Monetarist, Neo-Keynesian and Rational Expectation theories. From mid 1980 s on, economists like P.M. Romer, R.E. Lucas, S.Rebelo, P.Aghion, P.Howitt, E.Helpman, G.M.Grossman focused on physical capital, human capital, R&D sector, externalities and imperfect competition factors in explaining the economic growth process which could be summarized under the heading of endogenous growth models. This development which could be named as new endogenous economic growth theory endogenizes technology (knowledge stock) through human capital. On the other hand, human capital variable had been omitted in the neoclassical models or simply been taken as manna from heaven. Romers supporting efforts via increasing returns to the endogenous growth models enabled several endogenous growth models to be developed in the post 1980 period. These studies accept the following four elements as the major source of economic growth. First group involves profit seeking R&D sector (Romer, 1990; Grossman ve Helpman, 1991; Aghion and Howitt, 1992). Second group has physical capital and learning by doing models (Romer, 1986; Rebelo, 1991; dAutume ve Michel, 1993). Third group involves human capital accumulation (Lucas, 1988; Jones, 1996), and the fourth group involves public investment under the endogenous economic

growth theory (Barro, 1990). Common features of the above mentioned models stem from broadening the definition of capital and including increasing and decreasing returns to growth theory. In the Solow growth models, every production factor works under decreasing returns, and growth in per capita GDP is simply a function of technological improvements. In contrast, basic features of endogenous growth models come from the non existence of decreasing returns. Ak type endogenous growth model (Rebelo, 1991) has these features and the following simple structure; (1)
Y = AK

Here A, shows the technology level,; K, shows the technology, human capital, learning by doing level. Putting the function into factor income form, we get y = Ak . The model could also be expressed in terms of capital accumulation ratio; (2)
k = ! sf ( k ) k = (n + ) k k

Here, k , shows capital accumulation ratio; n shows increases in labor supply;, shows the depreciation. This equates the average productivity of capital to technological level f ( k ) / k = A . Re-defining the capital accumulation process; (3)
k = sA ( n + )

As long as we have a positive technology term (A), average and marginal productivity of capital will be a constant.. This makes the sA term a constant and if we like to have positive capital accumulation, sA>(n+) condition should hold. Thus without exogenous technological improvements it is possible to create capital accumulation. Under Ak type endogenous growth steady state equilibrium Per capita GDP, capital and consumption growth ratios are equal; (4)
= = sA ( n + )

Although changes in population increase solely leads to level effect in Solow growth model, in endogenous growth models it is also possible to lead to growth effects. While it is technically possible to have convergence towards steady state condition, in Ak type models Per capita income growth being independent from Per capita income levels, does not permit such a convergence.. But Jones and Manuelli (1990), had merged , Ak type endogenous models with neoclassical growth models yielding Y = F ( K , L ) = AK + BK L1 . In this production function, marginal productivity of capital reaching to zero, while the capital amount goes to infinity, Inada conditions can not be fulfilled. In Ak type models return on capital is a constant. To overcome this problem, the narrow definition of capital should be improved. Enabling K to show human capital elements as well as physical capital could be a remedy to solve such a problem. .

An alternative, could be taking K as the source of learning by doing process as in the case of Arrow (1962) or Romer (1986). In these models, learning process which is created by physical capital investments, dissemination among the producers leading to an overall gain of the economy (positive externalities), thus, altering the decreasing returns process of physical capital to a constant returns stage. In this respect, physical capital becomes the engine of growth. In the Solow growth model, investments do not have economic growth effect. The structuralized nature of learning in endogenous growth Production function then will look like;
(5)
Y = AK + L1

models have been developed by Romer (1986).

Different from neoclassical growth models the function has a coefficient as an exponential value for capital. This constant term reflects the spreading pace of knowledge accumulation to the rest of the economy. The rare case +=1 shows the case where capital output ratios leads to steady growth. This Ak type, is similar to savings driven economic growth process as in the case of endogenous economic growth models. The contribution of physical capital on economic growth has been tested empirically by, Romer (1987), De Long and Summers (1991, 1992). In this empirical study, explanatory power of share of investment in GDP has been tested against the economic growth rate. Barro and Lee (1994), in their empirical study found that % 1 increase in investment leads to a %0.12 increase in economic growth rate. On the contrary to Barro and Lee, Levine and Renelt (1992), asserts the weaknesses of the explanatory power of the above cited regression results. If the regressed economies can be examined under the assumption of steady state equilibrium, the functional relationship will be inconsistent with the neoclassical economic growth assumptions. Reason being, economic growth effect of saving and investment can be only realized if the economy is not under steady state equilibrium.. These growth rates, after the nonexistence of convergence, which is the phase where steady equilibrium has been reached (Mankiw, Romer and Weil, 1992). Grossman and Helpman (1991), ties the investment growth interaction to technology creation in the R&D sector. Thus, their endogenous economic growth model will have the following form. (6)
! K Y = Y r + Y

Here Y , shows the national income growth as a result of resources devoted to R&D; shows capital-national income elasticity and; r shows the discount factor. The model shows the contribution of physical capital to long term economic growth.

Human capital factor is another key factor frequently discussed effecting the economic growth process. Lucas (1988, 1990), argues the importance of human capital with respect to physical capital. He asserts that, investment to the education sector creates positive externalities which enables increasing returns. Under steady state equilibrium, Per capita income increase should lead to equal to Per capita human capital increases. Romer (1990), makes the distinction between rival and nonrival environments for inputs of production. Production function with these two inputs if written in the following form ( F ( D, X ) ), copying argument, states that doubling of nonrival inputs will be increasing output in larger amounts.. This argument relies on the assumption that, X is a rival and reproducible input while D is nonrival and having no replacement input cost. D being a productive input, F function can not be written in a concave form. In other words, F (D, X ) > F ( D, X ) . This argument is not very new in economic growth literature. Solow (1956) accepts the case of externalities; Arrow accepts the case as learning by doing (1962); Lucas accepts the case as (1988) nonrival and non-excludable goods.. To sum up within the recent economic literature, Romer (1990) argues that increasing returns stems from the externalities in R&D sector. For him, endogenous economic growth models can be examined under two alternatives. The first one, asserts that existing knowledge is the source of human capital which disappears by death. The second one is, basic technology knowledge that is passed over generations which shows continuity in itself. At an empirical level we see that years of schooling is taken as a measure for human capital (Barro, 1991; Barro and Lee, 1993; Tallman and Wang, 1994).

3. The Formal Model

As hypothesized above in the introduction section, the slow GDP growth rates in the developed countries could be verified by the spread between technology and human capital existence. To test our hypothesis, we will use vector auto regression (VAR) technique in assessing whether innovations in K/H (external shocks to K/H) towards long-run GDP growth short phase divergences from the average which verifies that K/H is a dominant criteria explaining GDP growth in developed countries. In this respect, we also would like to test whether neoclassical (Solow, 1956; Swan, 1956; Cass, 1965; Koopmans, 1965; Arrow et al., 1961) and endogenous (Romer, 1986 and 1990; Lucas, 1988; Rebelo, 1991; Mankiw, Romer Weil, 1992) growth theories factor substitutability holds contradicting with the above depicted hypothesis. Impulse response functions estimated via VAR technique will show us that whether K/H shows complementarity or substitutability towards GDP growth rate for developed countries. Impulse response functions explosive or declining nature will support factor

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substitutability toward economic growth while stabilizing around the average in the short-run will lead to K/H complementarity in explaining the economic growth process. The above model can be best expressed by logistic curve which has been put forward in our previous study (Erk, Altan and Ate, 1998) showing why GDP growth rates alter between developed and developing countries. Graph 2. GDP Level-K/H Logistic Curve
GDP

GDP =

1+ eK / H

K/H

In brief, increasing at and increasing rate segment of the logistic curve coincides with the developing countries and the increasing at and the decreasing rate segment represent the developed countries slope of the logistic curve alternative growth rates between developed and developing countries. In testing the formal model, we have the following assumptions; Labor human capital is far more important than the labor itself in the production process. Technological change is a function of physical capital growth. Human capital measured with Barro-Lee data permits human capital in its broadest definition. Human capital and physical capital factors show complementarity In a dynamic relationship between GDP growth rate and physical capital-human capital concentration ratio, our formal model is given by the following equation: (7) gt g t = A( L) g t 1 + B( L)( K / H ) t + t : GDP growth rate : physical capital : human capital

A(L) and B(L): lag operator K H

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4. Findings of the Study

Looking at the data used to test the model, we have taken human capital data for Austria, Australia, Canada, France, Germany, Italy, Japan, Norway, Sweden, Switzerland, United Kingdom and the United States human capital data from Barro-Lee data set (1993), physical capital stock data from Nehru-Dharashwar (1993) and GDP data from World Bank International Statistics (1994). Human capital and physical capital stock data has been annual data adjusted for quarterly data looking at the flow nature of accumulation in both. GDP data has been corrected for its base year to be 1990. All calculations had been conducted under TSP software (version 1.0A) to test impulse response functions and variance decompositions. Our hypothesis to be tested assumes that innovations towards K/H concentration ratio will to move to averages, in the short run, showing that key factor explaining GDP growth stand from K/H concentration and other variables have zero growth effect in the long-run. Besides this, we also expect short disturbances in the impulse response functions due to the complementarity property of physical capital stock and human capital stock. In the test of dynamic time series analysis, to determine the stationarity of the data, initially ADF test has been used. In this respect all GDP data showed stationary behavior. Some K/H series also showed stationary behavior, while very limited country data showed nonstationary behavior, corrected by taking the differences. In implementing optimal lags for the model Schwartz Information Criteria has been used. Some non-stationary data has shown second degree cointegration.

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Table 1. Dynamic Impulse-Response of Growth Rates to One Standart Physical Capital-Human Capital Ratio Innovation
Period
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 30 40 50 60

Austria
0.000 0.007 0.121 0.046 0.029 0.057 -0.002 -0.008 -0.012 -0.035 -0.025 -0.026 -0.025 -0.014 -0.012 -0.006 -0.002 -0.002 -0.001 -0.002 -0.008 -0.008 -0.008 -0.008

Australia
0.000 0.460 0.719 0.583 0.243 0.122 -0.200 -0.254 -0.242 -0.240 -0.121 -0.042 -0.001 0.066 0.063 0.055 0.050 0.017 0.004 -0.006 0.003 0.000 0.000 0.000

Canada
0.000 -0.027 0.067 0.075 0.065 0.049 0.035 0.9025 0.017 0.012 0.008 0.005 0.004 0.002 0.002 0.001 0.001 0.001 0.000 0.000 0.000 0.000 0.000 0.000

France
0.000 -0.031 -0.058 -0.076 -0.086 -0.091 -0.092 -0.090 -0.086 -0.082 -0.076 -0.071 -0.065 -0.060 -0.055 -0.050 -0.046 -0.042 -0.038 -0.035 -0.016 -0.010 -0.008 -0.007

Germany
0.000 0.197 0.309 0.426 0.297 0.321 0.284 0.154 0.068 0.026 -0.043 -0.073 -0.077 -0.070 -0.051 -0.026 -0.003 0.017 0.029 0.034 -0.008 0.000 0.000 0.000

Italy
0.000 0.323 0.310 0.197 0.041 -0.069 -0.132 -0.148 -0.127 -0.081 -0.026 0.023 0.055 0.067 0.059 0.040 0.015 -0.008 -0.023 -0.030 0.000 0.002 0.000 0.000

Period
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 30 40 50 60

Japan
0.000 -0.014 0.073 -0.021 -0.160 -0.125 -0.133 -0.140 -0.103 -0.069 -0.038 -0.003 0.020 0.036 0.045 0.044 0.038 0.028 0.017 0.006 0.002 -0.001 0.000 0.000

Norway
0.000 0.211 0.069 0.045 0.017 0.006 -0.001 -0.004 -0.006 -0.007 -0.008 -0.008 -0.008 -0.008 -0.009 -0.009 -0.009 -0.009 -0.009 -0.009 -0.009 -0.009 -0.009 -0.009

Sweden
0.000 0.135 0.072 0.043 0.025 0.013 0.006 0.002 -0.001 -0.003 -0.004 -0.004 -0.005 -0.005 -0.005 -0.005 -0.005 -0.005 -0.005 -0.006 -0.006 -0.006 -0.006 -0.006

Switzerland
0.000 0.219 -0.037 0.180 0.134 0.087 0.073 0.044 0.025 0.014 0.005 0.001 -0.001 -0.002 -0.002 -0.002 -0.001 -0.001 -0.001 0.000 0.000 0.000 0.000 0.000

United Kingdom
0.000 0.235 0.313 0.194 0.144 0.119 0.092 0.071 0.055 0.043 0.033 0.026 0.020 0.016 0.012 0.009 0.007 0.006 0.004 0.003 0.000 0.000 0.000 0.000

United States
0.000 -0.079 0.064 -0.170 -0.201 -0.206 -0.175 -0.114 -0.059 -0.012 0.019 0.034 0.036 0.031 0.022 0.012 0.004 -0.002 -0.005 -0.006 0.000 0.000 0.000 0.000

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Looking at Table 1 and Graph 3, we have derived Table 2 showing that innovations in K/H stabilizes in the very short-run around averages. In this respect, Jones (1995) defines long-run beyond the period of 25 years. Thus, these findings verify our hypothesis that physical capital-human capital concentration ratio is a strong proxy in explaining GDP growth of selected developed countries. Discrepancy between neoclassical-endogenous and our hypothesis is potentially accounted for by the positive trend in labor, human capital and physical capital trend among countries. This finding also confirms our second hypothesis that in an era where technological changes are frequent, labor, human capital and physical capital complementarity becomes more important than factor substitutability in its classical sense. In brief, the findings related to selected developed countries could be taken as sharp criticism towards neoclassical and endogenous growth models. The transitory effect on growth rates of innovations and long-run stabilization in very short time periods makes neoclassical and Ak models with endogenous growth patterns misleading. Equally similar findings have been derived by variance decomposition of growth rates for one standard physical capital-human capital ratio innovation. All selected developed countries confirm above given hypothesis, and the variance decomposition values (Table 4).
Table 2. Impulse Response Values Showing Stabilization Around Average and Maximum variation Impact on GDP Growth Rate
Countries
Austria Australia Canada France Germany Italy Japan Norway Sweden Switzerland United Kingdom United States

Stabilizing Around Average (Years)

Max. Variation in GDP Growth (%)

4 5 4 13 6 6 7 2 2 3 6 5

0.12 0.70 0.08 0.09 0.04 0.03 -0.15 0.20 0.13 0.22 0.30 -0.20

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Table3. Cumulative Impulse Response of Growth Rates to One Standard Physical Capital-Human Capital Ratio Innovation
Period
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 30 40 50 60

Austria
0.000 0.007 0.129 0.174 0.204 0.261 0.259 0.251 0.240 0.205 0.180 0.153 0.128 0.114 0.103 0.097 0.095 0.093 0.092 0.090 0.011 -0.064 -0.143 -0.223

Australia
0.000 0.460 1.178 1.761 2.004 2.126 1.925 1.672 1.430 1.190 1.068 1.026 1.025 1.091 1.155 1.210 1.259 1.276 1.280 1.274 1.232 1.230 1.230 1.230

Canada
0.000 -0.027 0.040 0.115 0.181 0.230 0.265 0.290 0.307 0.319 0.327 0.332 0.336 0.338 0.340 0.341 0.342 0.342 0.343 0.343 0.344 0.344 0.344 0.344

France
0.000 -0.031 -0.088 -0.164 -0.251 -0.342 -0.434 -0.524 -0.610 -0.692 -0.768 -0.839 -0.904 -0.964 -1.019 -1.069 -1.115 -1.157 -1.195 -1.230 -1.458 -1.579 -1.665 -1.736

Germany
0.000 0.197 0.505 0.931 1.228 1.549 1.833 1.987 2.056 2.081 2.038 1.965 1.888 1.818 1.767 1.741 1.738 1.755 1.785 1.819 1.862 1.876 1.869 1.870

Italy
0.000 0.323 0.633 0.830 0.871 0.801 0.669 0.521 0.394 0.313 0.286 0.309 0.364 0.431 0.490 0.530 0.545 0.537 0.514 0.485 0.480 0.467 0.464 0.465

Period
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 30 40 50 60

Japan
0.000 -0.014 0.059 0.038 -0.122 -0.247 -0.380 -0.519 -0.622 -0.691 -0.730 -0.732 -0.712 -0.676 -0.631 -0.587 -0.549 -0.521 -0.504 -0.498 -0.571 -0.552 -0.555 -0.555

Norway
0.000 0.211 0.280 0.325 0.342 0.348 0.347 0.343 0.337 0.329 0.321 0.313 0.305 0.296 0.288 0.279 0.271 0.262 0.254 0.245 0.159 0.072 -0.016 -0.105

Sweden
0.000 0.135 0.207 0.250 0.275 0.289 0.295 0.297 0.296 0.294 0.290 0.285 0.281 0.276 0.270 0.265 0.260 0.254 0.249 0.243 0.188 0.132 0.075 0.018

Switzerland
0.000 0.219 0.182 0.362 0.496 0.582 0.655 0.700 0.725 0.739 0.744 0.745 0.743 0.741 0.739 0.737 0.735 0.734 0.734 0.734 0.734 0.734 0.734 0.734

United Kingdom
0.000 0.235 0.548 0.742 0.887 1.006 1.098 1.169 1.224 1.267 1.300 1.325 1.345 1.361 1.373 1.382 1.390 1.395 1.400 1.403 1.414 1.415 1.415 1.415

United States
0.000 -0.079 -0.015 -0.186 -0.387 -0.592 -0.767 -0.881 -0.940 -0.952 -0.934 -0.900 -0.864 -0.833 -0.811 -0.799 -0.795 -0.798 -0.803 -0.809 -0.818 -0.818 -0.818 -0.818

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Graph 3. Dynamic Impulse Response of Growth Rates to One Standart

Physical Capital-Human Capital Ratio Innovation for Selected Developed Countries

Austria 0.1 50 Impulse Responses Impulse Responses 0.1 00 0.050 0.000 1 -0.050 Period 4 7 1 0 1 3 1 6 1 9 22 25 28 35 50 0.800 0.600 0.400 0.200 0.000 -0.200 -0.400 1 4 7

Australia

1 0 1 3 1 6 1 9 22 25 28 35 50

Period

Canada 0.1 00 0.080 Impulse Responses 0.060 0.040 0.020 0.000 -0.020 1 -0.040 Period 4 7 1 0 1 3 1 6 1 9 22 25 28 35 50 Impulse Responses 0.000 -0.020 -0.040 -0.060 -0.080 -0.1 00 1 4 7

France 1 0 1 3 1 6 1 9 22 25 28 35 50

Period

Ge rmany 0.500 0.400 Impulse Responses 0.300 0.200 0.1 00 0.000 -0.1 00 1 -0.200 Period 4 7 1 0 1 3 1 6 1 9 22 25 28 35 50 Impulse Responses 0.400 0.300 0.200 0.1 00 0.000 -0.1 00 -0.200 1 4 7

Italy

1 0 1 3 1 6 1 9 22 25 28 35 50

Period

16

Japan 0.1 00 0.050 Impulse Responses 0.000 -0.050 -0.1 00 -0.1 50 -0.200 Period 1 4 7 1 0 1 3 1 6 1 9 22 25 28 35 50 Impulse Responses 0.250 0.200 0.1 50 0.1 00 0.050 0.000 -0.050 1 4 7

Norway

1 0 1 3 1 6 1 9 22 25 28 35 50 Period

Sweden 0.1 60 0.1 40 0.1 20 0.1 00 0.080 0.060 0.040 0.020 0.000 -0.020 1 0.250 0.200 Impulse Responses 0.1 50 0.1 00 0.050 0.000 -0.050 1 4 7

Switze rland

Impulse Responses

1 0 1 3 1 6 1 9 22 25 28 35 50 Period

1 0 1 3 1 6 1 9 22 25 28 35 50 Period

United Kingdom 0.350 Impulse Responses 0.300 Impulse Responses 0.250 0.200 0.1 50 0.1 00 0.050 0.000 1 4 7 1 0 1 3 1 6 1 9 22 25 28 35 50 Period 0.1 00 0.050 0.000 -0.050 1 -0.1 00 -0.1 50 -0.200 -0.250 4 7

United States

1 0 1 3 1 6 1 9 22 25 28 35 50

Period

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Cumulative impulse response of growth rates for one standard physical capital-human capital ratio innovation shows the overall effect on GDP growth of innovations of the system. As in the case of variance decomposition slight deviations (not many) could be stemming from the nature of physical capital and human capital data that is being used in our models. Unavailable physical capital stock data reflecting the marketable production capacity of the capital stock is the first shortcoming of our model. Secondly, human capital data which is commonly used as an index for formal education in no way incorporates factors like learning-by-doing, economies of scope, research and development, managerial talent and other components of health and migration. Another explanation of small disturbances could come from the manipulation of annual data for quarterly adjustments. Apart from this, human capital data taken as years of schooling index assumes that there are significant similarities among educational institutions within and among nations. On the other hand, economies of scope effecting human capital generation and economies of scope in terms of physical capital generation should not be expected to show similarities among nations. Cumulative impulse response values show the smallest absolute values for Sweden and Norway where the countries have very similar human capital and physical capital formation. Germany, France and UK having relatively high cumulative impulse response reactions could be interpreted as beyond dissimilarities in K/H behavior, countries could have different institutional structures effecting physical capital and human capital generation which can be further clarified by political setting, taxes, legislatures, bureaucratic procedures, established institutional procedures. Hall and Jones (1999) also uses similar variables in explaining differing economic growth rates but in no way we can accept that physical capital-human capital and productivity could be used in explaining differing growth rates. Because are econometric tests confirm that K and H complementarity explains growth rates for selected countries where the process should in fact be K and H complementarity first effecting the productivity levels and then GDP growth rates. This in no way, decreases the importance of infrastructure of a country in the physical sense which directly influences physical capital stock and human capital generation. But nonetheless, even for countries with higher cumulative impulse response growth rates on one standard physical capital-human capital ratio innovation contributes to a very small segment of unexplained GDP growth by K/H.

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Table 4. Variance Decomposition of Growth Rates for One Standard Physical Capital-Human Capital Ratio Innovation
Period
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 30 40 50 60 Period 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 30 40 50 60

Austria
0.00 0.00 0.47 0.43 0.44 0.52 0.52 0.51 0.51 0.52 0.53 0.54 0.56 0.56 0.56 0.56 0.56 0.56 0.56 0.56 0.58 0.59 0.60 0.62 Japan 0.00 0.01 0.21 0.17 0.78 1 .1 2 1.52 1.97 2.19 2.26 2.25 2.20 2.18 2.19 2.23 2.27 2.30 2.31 2.32 2.31 2.32 2.32 2.32 2.32

Australia
0.00 6.11 15.53 18.46 19.26 19.46 19.88 19.94 20.58 2 1 .1 4 21.24 21.25 21.25 21.29 21.29 21.33 21.35 21.35 21.35 21.35 21.36 21.36 21.36 21.36 Norway 0.00 0.53 0.56 0.58 0.59 0.59 0.58 0.59 0.59 0.59 0.59 0.59 0.59 0.59 0.59 0.59 0.59 0.59 0.59 0.59 0.60 0.61 0.62 0.63

Canada
0.00 0.02 0.08 0.15 0.20 0.22 0.23 0.24 0.24 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 Sweden 0.00 0.36 0.44 0.46 0.46 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.48 0.48 0.49 0.49

France
0.00 0.06 0.19 0.39 0.63 0.88 1 .1 4 1.39 1.62 1.83 2.01 2.16 2.29 2.40 2.50 2.58 2.64 2.69 2.74 2.78 2.95 2.99 3.02 3.03 Switzerland 0.00 1 .1 3 0.86 1.26 1.47 1.55 1.62 1.64 1.65 1.66 1.66 1.66 1.66 1.66 1.66 1.66 1.66 1.66 1.66 1.66 1.66 1.66 1.66 1.66

Germany
0.00 1.71 4.34 7.38 8.71 10.53 11.98 12.32 12.19 11.99 11.78 11.73 11.78 11.86 11.90 11.89 11.86 11.84 11.82 11.83 11.86 11.86 11.86 11.86 United Kingdom 0.00 1.26 2.76 3.07 3.20 3.30 3.35 3.38 3.39 3.41 3.41 3.42 3.42 3.42 3.42 3.42 3.42 3.42 3.42 3.42 3.42 3.42 3.42 3.42

Italy
0.00 3.94 4.62 4.56 4.42 4.50 4.68 4.78 4.77 4.72 4.70 4.70 4.73 4.75 4.75 4.74 4.74 4.74 4.74 4.75 4.74 4.74 4.74 4.74 United States 0.00 0.20 0.23 0.70 1.31 1.97 2.45 2.64 2.68 2.66 2.65 2.66 2.68 2.70 2.70 2.71 2.70 2.70 2.70 2.71 2.71 2.71 2.71 2.71

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Table 4 shows variance decomposition of GDP growth rates for one standard physical capital-human capital ratio innovation. This estimate also shows that physical capital, human capital concentration ratio is a determinant of GDP growth rates. Estimated values showing low numerical values confirm that, physical capital and human capital components show complementarity for all selected developed countries. Largest values for variance decomposition of GDP growth rates for one standard physical capital-human capital ratio innovation is in Germany confirming impulse-response results. 5. Conclusion We began this paper with the modest goal, namely to test the hypothesis whether capital concentration with respect to human capital has an explanatory power with growth rates. All model estimates using dynamic time series confirm our hypothesis. In brief, innovations towards H/K, leads to small and short instability in GDP growth and stabilizing in very short time intervals. The second contribution, which we believe that is at least as important as the first finding that, unlike endogenous growth models, K represented by physical capital stock and H represented by human capital shows complementarity mainly in times of frequent innovations. As a policy measure we can conclude that, for the tested group of developed countries, optimal combinations in physical capital stock and human capital will yield better results than investing in each separately. Given the statistically significant estimates we have to take into consideration above cited shortcomings related to our econometric estimations. We strongly believe that studies towards, in depth data for human capital data and other components of human capital formation and firm level testing will create stronger evidence towards our hypothesis.

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zet

Fiziksel Sermaye-Beeri Sermaye Tamamlayclnn Uzun Dnemli Ekonomik Byme zerine Etkisi: Zaman Serisi Yaklam
Bu alma uzun dnem ekonomik byme zerinde fiziksel ve beeri sermayenin tamamlaycln aratrmaktadr. Hipotezimiz, sk teknolojik ve ynetsel yeniliklerin yaratld bir dnemde, ulusal gelir dzeyindeki deiimlerin aklanmasnda, faktr tamamlayclnn, faktr ikamesine oranla daha anlaml olacadr. Vektr oto regresif model testlerinden elde edilen sonular, fiziksel ve beeri sermaye tamamlaycl aklayclarnn, GSYH deiimlerinde iyi bir lt olacan ortaya koymaktadr. Ekonometrik sonular, modele dahil edilen gelimi lkelerde fiziksel sermaye-beeri sermaye younlama oranna gelebilecek ekonomik oklarn, GSYH'de ksa sreli ve zayf genli salnmlara yol atn dorulamaktadr.