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Literature review Previous literature regarding the relationship between human capital and economic growth For several

decades, the interaction between human capital and economic growth has been the subject of investigation for scholars in the economic field. This includes both macroeconomic studies (Pereira & Aubyn, 2009: Odit et al. 2010) and microeconomic studies such as those of (Psacharopoulos 1995; Bouaissa 2009; Ahmed 2009). In the macroeconomic view, the relationship is mainly analyzed through two approaches. These are the neoclassical growth models of Solow (1956) and the endogenous growth models of Romer (1990) (Wilson & Briscoe 2004). Current empirical studies and literature aimed at evaluating the impact of human capital development on economic growth explore many issues. These include: 1.) the usage different variables as a proxy for human capital (Solaki 2011). These variables include the average years of active schooling (Khalifa 2008; Chandra and Islamia 2010), the expenses incurred in supporting educational ventures (Asteriou & Agiomirgiannakis 2010; Babatunde & Adefabi 2005). 2.) The issue of using different methodological approaches in the inquiry of the relationship between human capital and economic growth is the second issue explored in recent empirical literature. Researchers such as () and () have employed the multiversatile methodological approach which is mostly concerned with the physical assets and labor in an estimated growth model. On the other hand, () and () have employed the bi-variate model in their studies.3.) Third aspect concerns the issue of employing various approaches concerning human capital in empirical literature. The two main approaches; quality approach measured by life span and infant mortality) and quantity approach (versed into the stock approach and flow approach) have been used in recent empirical literature (). The accumulation of human capital is regarded in modern growth theory as an important prerequisite for economic growth in all countries. Human capital development and accumulation is of great importance to the personal development of an individual as well as performance which is often termed as productivity and quality of life. Studies have been conducted to establish whether training and education can contribute to the realization of a productive workforce that will actively contribute to the growth of the economy by different scholars. While some of the macro studies conducted in this area end up with inconsistencies and controversies, micro studies conducted to establish the link between education and training for a working person and the general performance prove the existence of such a link. In other words, the general findings of these studies prove that the more educated people handle the jobs that provide them with higher benefits and they in return provide better output as compared to the others who are relatively less educated. Organizations and governments in several countries have as a result of this regarded educating and training their workforce as a major investment that will surely contribute to their growth whether in a short time or in the long run. Human capital is considered to be both a condition and a result of economic growth in the framework of an aggregate production. Human capital activities are involved not only with the transmission of existing knowledge but also with the creation of new knowledge. The diffusion of human capital and economic growth is responsible for the growth of the global economy regardless of the originating geographical

locus (). Human capital accumulation provides an impeccable link between economic growth and the demographic transition (). Investment made in human capital development and accumulation in organizations is intended to increase competitiveness as well as the quality of the lives of the workers. For both fully industrialized nations and those striving to move to industrialization, more capable and well educated labor force is mandatory to manage this growth and sustain it. Therefore, the nations human resources should be strengthened and stabilized to be able to contribute to economic growth and trigger higher income and productivity (). According to Benhabib and Spiegel (1994), organizations and governments should invest heavily in education since it is a measurement for quantity, availability and human resource quality with a single method that can also be used to analyze the effect of human capital on the growth of the economy. Human Capital Theory Considering that the global economy is shifting from the reliance on industries that harness natural resources to more knowledge based sectors such as ICT, telecommunications and pharmaceuticals, development of necessary competencies and skills through human capital development becomes paramount to policy makers and practitioners in economic development. Since the inception of the theory on human capital in the 1960s, a number of studies have been engaged in that aim at addressing the relationship between the theory and economic growth. According to this theory, schooling and training activities are viewed as the best investments in both skills and competences () .As a way to augment their productivity, it is argued by () that people choose based on their rational expectations the type of education and skills that they want to receive. Another strand of studies aim at establishing the interactions that take place between educational levels and the measurement of technological activities ().Human Capital theory clearly stipulates that firms or organizations with more skilled workers are capable of easily adopting and implementing the new technologies that reinforce returns on education and trainings(). Empirical evidence has been provided by () which supports the average effects of education and training activities. Barro () and () confirms the relationship between education and the ability to implement technological projects in their study which cuts across several countries such as the USA, Canada and the UK. Others studies by () and () confirm that skills are positively related to technological change in the number of the organizations in which they carried out their studies. Crouch et al. (1999) establishes that more educated people are capable of getting jobs in the most technologically advanced and competitive firms which reveals the close relationship between educational levels and technological activities. By considering the effects that education/ skills have on the society, () concludes that human capital development is one of the major ingredients that sustain a nations economic growth which he regards as social capability (). Source of Economic Growth due to Human Capital The different models of economic growth differ in the manner that they predict how different factors can be attributed to cause growth in the economy. For instance, the Solow-Swan Model holds the argument that this growth in per capita income is as a result of the accumulation of capital to the extent

that the economy becomes steady. In that steady state, the per capita income growth then solely relies upon technological process that the Solow-Swan model fails deliberately to elaborate. On the other hand, endogenous growth models tend to put R&D in the centre of their frameworks. According to these models, per capita income can be predicted by considering the resources have been set out and devoted to the R&D. For instance, the neoclassical Solow- Swan model depicts the change in capital (accumulation) as the key source of economic growth but only until the economy comes to a steady state while the endogenous models make the assumption that the stock of a particular resource that is devoted to R&D contributes actively to the decision of economic growth (). This lack of a particular agreement on the main sources of economic growth portrayed in the growth models is also visible in the discussions concerned with human capital. Two major frameworks exist within which the relationship between the human capital and economic growth is analyzed (). The first approach is modeled from the 1964 Bockers theory of human capital. The approach is inspired mainly by the idea that economic growth is primarily driven by the accumulation of human capital (). The approach posits that the difference of the growth rates experienced in different nations can be directly related to the differences in which the countries or regions accumulate human capital (). From the seminal paper of 1966 by Nelson and Phelps comes the second approach which was in recent days rejuvenated by the Schumpeterian economic growth literature (). According to this approach, the stock of human capital determines the capacity of the economy to use innovations in an effort to catch up with other economies that are relatively more advanced. This efforts result to economic growth in such countries. The approach makes the conclusion that human capital stock, though indirectly, is responsible for economic growth as it determines the per capita growth. Lucas (1988) assumes an economy in which individuals make the choice as to how they will allocate their time daily to current production activities and other ventures aimed at acquiring skills (through schooling or trainings) to ensure increased productivity in the future as well as better wages. There are further disagreements that result when empirical evidence is being sought regarding to what exactly is responsible for influencing economic growth between accumulation of human capital and the level of human capital stock(). A cross country study taken by Barro (1995) during two periods; from 1965 to 1975 in 87 countries and another taken from 1975 to 1985 in 97 reveals the following: i. The attainment of formal education as evidenced through the average years an individual spends in formal schooling is directly related to subsequent growth of the individuals. However, when the educational attainment is further decomposed by education level, profound insignificance of the primary education is revealed. Government as well as public spending in education and training activities exerts a posit implication in the economies resulting to economic growth. For instance, an average of 1.5% ratio increase in the government and public education spending to GDP during the period of 1965-1975 in such countries would raise the yearly economic growth by an average of 0.3% in that period ().


Using the Solow-Swan model, () tested the implications of human capital formation in his study which made an assumption of a steady state and went ahead to employ a proxy for human capital

accumulation that measures approximately the percentage of the working age population that is in secondary schools(). The study was carried out to examine the GPD for every working person in 98 nonoil producing countries. () discovered that human capital accumulation is significant to economic growth since when placed alongside physical capital accumulation they account for the growth in per capita GDP of every individual. A contrasting study by () made an estimation of the stock capital and then took a test of the augmented Solow-Swan model. They did so without making the assumption of the steady economic state (). The study established that human capital accumulation leads to a negative economic growth even though the impact is not statistically significant. The log difference in human capital in their specification always enters insignificantly, and always with a negative coefficient (). In the literature of growth model, human capital has enjoyed increasing recognition as a major factor of economic growth closely following labor and physical capital. Growth models that excluded human capital such as the original Solow-Swan model became irrelevant with time and had to be reviewed and augmented to take into consideration human capital. The importance of academic education (preferably higher education) and its effect on human capital and economic growth Most people consider capital in terms of cash, shares and other tangible assets and they often tend to overlook the magnitude of human capitals which include schooling and training among others. Investments made with the purpose of developing human capital end up achieving similar or better results than those achieved when investments are made solely on tangible assets (). This is because other qualities such as honesty and a sense of responsibility are nurtured in the process. Education and training are therefore considered as among the paramount factors of human capital development since they impact directly to economic growth. In the Economic dictionary, Tahir et al., 1993, p.76, describes human capital as all productive investments in a person such ability, skill, expertise and health as a result of investment towards education, training and health care. Guided by this description of human capital () posits that human capital development as achieved through activities such as education and training is among the greatest sources of economic growth in the world in the past, recently and in times to come. Compared to the contributions made by factories and other physical assets, human capital is considered by () to have made the greatest contributions towards the growth of economies in most developed and industrialized countries. The relationship between human capital and economic growth has been explored in a number of previous studies. For instance, Ramires et al. (1998, p.) explain that despite their being irrevocable bilateral ties between human capital and economic growth, there are essential factors that should strengthen the relationship that still lack in the concept of system exploration. In the same study, Ramires et al. point out that high levels of human capital development will enhance the economy by impacting increase in the capacity of the populations as well as their productivity and creativity(). It is through the assessment of the populations educational and skill levels that the ability of the

populations to organize and make use of the resources of economic growth such as technology will be determined. It is only through the attainment of quality education that resources such as technology can be utilized to achieve the maximum results. An empirical study carried out in Indonesia by Akita and Alisjahbana ( ) establishes how the negligence of human capital development contributed to the economic crisis in the countries. This study proves the importance of human capital development in achieving economic growth as it is in such areas in the country where human capital development was not considered keenly that adverse effects were realized in the country. Wibisono (2001) includes variables such as educational attainment in his study. This variable is measured by the successful completion of a given education level, life expectancy, fertility rate, infant mortality as well as inflation (). Wibisonos study revealed that education as a factor of human capital development; infant mortality number and life span were the variables that were actively influential in economic growth. The study portrays education as the most paramount of the variables scoring the highest. The importance of academic education and its effect on human capital and economic growth

Effects of Fertility on human capital The discussion as to whether older employees are less productive compared to younger ones has been continuing for a number of decades by scholars and economists. Some have established in their studies that labor participation among the older generation is declining over the decades (). Some of the older people have either retired or have decided to resign from active work due to the factor of old age. Considering the fact that firms are increasingly adopting newer versions of technologies explains in part the decline in the participation of older employees in such projects. There is empirical evidence that proves the relationship between the technical change and demographic shifts. For instance a study conducted by () aimed at investigating the nature of the relationship between labor force growth and growth in productivity established a strong negative relationship that exists between the two. The idea that technical change level is higher when fertility declines emanates from the assumption that it is quality of the workforce rather than the quantity that is influential in the process of technical change. In his study, () opposes this idea claiming that a high population reflects the influx of young and recently educated people which in turn influences technical change. The notion that increased fertility impacts on the market size which in turn influences innovations and makes them profitable opposes () arguments. According to this notion, there is a clear positive relationship between the size of the population and the number of new ideas which impact on technological change. As () noted after making keen consideration of the postwar growth figures, the increased market size due to population explosion due to increased fertility did not lead to economic growth but rather stagnation and in most cases negative growth patterns were experienced. The transition from such

stagnation to the realization of economic growth has formed the subject of intensive research studies in the field (). The rise in demand for human capital and decline in fertility are considered to be major forces that guide the transition from the epoch of economic stagnation to economic growth. The Malthusian stagnation market the evolution of most economies in the human history. Rapid population growth has been constantly offsetting the technological and human capital demand in the growth of per capita income and the expansion of resources. The evolution of fertility increase in the global economy has been non-monotonic ( ). According to () the onset of the demographic transition in less developed economies in the second half of the 20th century established a fertility decline to an average of 1.63% per year in the period of 1973-1998 (). This positively impacted on the demand of human capital and the ability to attain proper schooling which in turn impacted in a growth in the per capita of these countries.