Role of Human Capital in Economic Development
CHAPTER ONE INTRODUCTION a) BACKGROUND Kenya is one of the less Developed countries that are endowed with relatively good levels of resources and labor. However, there are still a lot to be done to tap those resources into viable productivity and industrialization levels. One way of achieving this is by maximizing the use of both physical and human capital.
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In or case we shall consider human capital. Human capital, according to Adam Smith refers to the acquired and useful abilities of all the inhabitants or members of the society.
The acquisition of such talents by the maintenance of the acquirer, during his education, study or apprenticeship, always costs a real expense, which is a capital fixed and realized, as it were in his person. Those talents, as it makes a part of his fortune, so do they likewise to that of the society to which he belongs. The improved dexterity of a workman may be considered in the same light as the machine or instrument of trade which facilitates and bridges labor and which, though it costs a certain expense, repays that expense with a profit.
Therefore, the greatest improvement in the productive power of labor and the greater part of the skill, dexterity and judgment with which it is anywhere directed or applied, seem to have been the effects of division of labor. Other types of capital being equally important, they can be provided with ease if the private sector and the government, through public expenditure can use the existing human capital to develop and widen the capital stock base, both in domestic production and production of industrial goods. Human capital is therefore a vital factor of production, seemingly the most prominent of all the other types of Capital.
Owing to increasing population growth in Kenya, labor is not a hindrance to development. In fact, people export their workforce to the United States of America through the famous Green card lottery. There is more than this in economic development process. Explaining why less developed countries are poor, Robert L. Heil Broner, the author of the book, ‘The Economic Problem, 1970’, said that these are poor countries because they are traditional societies, that is, societies that have developed neither the mechanisms of command nor of the market by which they might launch into sustained process f economic growth. He stressed that as he examines the less Developed Countries he gets a feeling that he is encountering in the present the anachronistic counterparts of the static societies of antiquity. He considered agricultural and industrial capital not to be the only reason for low productivity and economic development. To him, an endemic cause of low par capita output and income lies in the prevailing social attitudes that are vital determinant of human capital development. Typically, people of underdeveloped economy have not learned the economic attitudes that foster rapid industrialization.
Instead of disciplined workers they are reluctant and untrained workers. Instead of product-minded businessmen, they are trading-oriented merchants. It’s therefore very necessary to inculcate human capital into the economy of less developed countries. b) STATEMENT OF THE PROBLEM What exactly is the role of human capital and other social variables in economic growth and development of an economy? In the traditional neoclassical growth models developed by Robert Solow and Trevor Swan in the 1950s, the output of an economy grows in response to larger inputs of capital and labor (all physical inputs).
Non economic inputs such as human capital or human health variables have no function in these models. However, the endogenous growth models developed by Paul Romer (1980) broadened the concept of capital to include the human capital. The advent of endogenous growth models with human capital (providing externalities) is argued to have enhanced the understanding of the mysteries of rapid and long sustainable high growth performance of some developing countries.
However, to establish the point whether healthy human capital was one of the important factors in explaining the economic development for east African countries including Kenya, it will be useful to analyze the actual data on these variables across the countries. This paper therefore seeks to determine if, indeed, human capital has been the factor that has caused a rise in economic growth and development in east Africa. c) RESEARCH QUESTIONS ? What is the role of human capital in economic development in east African countries? Is healthy human capital and other non economic inputs are part of the determinants of economic growth in east African countries? d) OBJECTIVES OF THE STUDY ? To find out the role of human capital in economic development in east African countries. ? To determine whether healthy human capital and other non economic inputs are part of the determinants of economic growth in east African countries. e) SIGNIFICANCE OF THE STUDY This study is seeking to establish the relationship between human capital and economic growth and development in east Africa.
By so doing, we will be able to know with certainty whether human capital is actually one of the reasons for economic growth in east Africa, in which case the findings will be used to establish the right proportion of human capital needed to mix with other economic inputs so as to facilitate sustainable economic development in the region. It also gives an indication of the possible way to rate human capital against other inputs to the economic development of east African community. The findings of this study will help the implementation process of the east African development goals and objectives.
This will be possible given the evidence of the role of human capital in economic development, as established in this study. Furthermore, this study will also shed light to east African states on whether to put much reliability on social amenities such as hospitals, schools and churches. If the study finds a positive relationship between human capital and economic development, then it is left with no much option but to improve on its social amenities and allocate more of its resources to the same.CHAPTER TWO
LITERATURE REVIEW In this chapter, we will first consider past theories regarding the field of the study. This is to appreciate the various aspects that are of significance in our study as has been developed in theories. In the traditional neoclassical models developed by Robert Solow and Trevor Swan in the 1950s, the output of an economy grows in response to larger inputs of capital and labor (all physical inputs). Non economic variables such as human capital or human health variables have o function in these models.
Furthermore, the economy under such a model conforms to the law of diminishing returns to scale. With these assumptions, the neoclassical growth models afford some implications to the economy; particularly that as capital stock increases, growth of economy slows down, and in order to keep the economy growing it must capitalize from the infusions of technological progress. It is well known that this type of mechanism is the neoclassical model is neither inherent nor does it strive to explain much. In economic lexicon, this simply means that the technological progress is exogenous to the system.
Yet the reality is quite contrary to that, especially in East African countries which kept over the years. This implies that it is not only technology which is the main driving force accountable for maintaining such high growth performance in the economies but there are other factors which are outside the realm of neoclassical growth model. Addressing the above issues, in the mid 1980’s, a new paradigm was developed in literature, mostly due to the Paul Romer (1986), which is now commonly known as Endogenous growth models.
By broadening the concept of capital to include human capital, the new endogenous growth model argues that the law of diminishing returns to scale phenomenon may not be true as is the case for developing countries. In simple terms, what this means is that if the firm which invests in capital also employs educated and skilled workers who are also healthy , then not only will the labor be productive but it will also be able to use capital and technology more efficiently. This will lead to the so-called ‘hicks neutral’ shift in the production function and thus there can be an increasing rather than decreasing returns to investment.
In other words, technology and human capital are both endogenous to the system. Indeed, the advent of endogenous growth models with human capital (improving externalities) have certainly enhanced the understanding of the mysteries of rapid and long sustainable high growth performance of east African economies. Julie Turcotte & Lori Whelwel Reninson also studied on technology and human capital. They examined the effects of education, training and technology use on productivity and wages at firm level. They made innovative use of statistics in Canada’s orkplace and employee survey, which allows the linking of characteristics of workers in a firm to firm performance measures. They found that productivity is higher; the intensively the technology is used in the firm, the greater the proportion of university educated workers, the greater the participation of workers in training programs the greater the proportion of workers who get computer training the greater the firm’s export orientation. A key finding with important policy implications is that computer skills training can augment the qualifications of low skilled workers and consequently boost firm productivity.
From the theories, therefore, we can correctly postulate that human capital has a role to play in economic development of any nation, especially the developing ones like the east African countries; Kenya Uganda and Tanzania. CHAPTER THREE METHODOLOGY OF THE RESEARCH CONCEPTUAL FRAMEWORK The methodology of carrying out this research is ideally dependent on the various aspects of human aspects such as human health, education and training. In regard to health, we shall consider the mortality rates of the three countries under study.
This study will then seek to show the relationship between mortality rates and the level of economic development in the three countries. In respect to education and training, this study will use the level of education and other skills acquired through training. It will then determine the relationship between education and training and economic development for each of the three countries under study. Finally, this study will establish the overall impact of the different trends in education, training and health on economic development of each of the three countries.
If we find that there is a positive relationship, then we shall be able to conclude that human capital has a role to play in economic growth and development. On the other hand, if there is a negative relationship, then we dismiss the possibility of human capital playing a role in economic development. RESEARCH MODEL The research model to be developed in this study is that which considers economic growth given by output (y) as a function of both labor and capital, but puts much emphasis on human rather than physical capital.
We shall first consider the cob Douglass function given by; Q=Af (L, K): where Q is the level of output, K is the level of capital, L is labor and A is technology. Now, if we assume that the amount of labor is sufficiently provided and that technology is constant, then capital will be the determinant factor in production. If we break down capital into fixed Physical capital and human capital we get; Q=Af (L,Kp,Kh): where Kp refers to physical capital and Kh refers to human capital.
Therefore, output is directly related to human capital, and we have to prove this in our study by using relevant variables. DESCRIPTION AND MEASUREMENTS OF VARIABLES The variables to be used in this model will be the two major determinants of human capital. In order t explain the point whether healthy human capital is one of the important factors in explaining the economic development for east African countries, it will be useful to analyze the actual data on these variables across the countries.
Although there are many variables that can represent human capital and healthy conditions of the people of a nation, to keep the analysis simple while, at the same time, capturing the basic broad thrust of these two variables, this paper will focus on total literacy rate and life expectancy at birth. Total literacy rate will give us an overview of what we expect as the overall level of education and skill development, while life expectancy at birth will determine the level of health among the citizens of a nation. This gives the overall level of human capital which we shall relate to the level of output, growth and economic development.
Life expectancy at birth refers to a measure of overall quality of life in a country and summarizes the mortality at all ages. It can also be thought of as indicating the potential return on investment in human capital and is necessary for the calculation of various actuarial measures. This entry contains the average number of years to be lived by a group of people born in the same year, if mortality at each age remains constant in the future. Literacy rate on the other hand includes a definition of literacy and census bureau percentages for the total populations; males and females.
There are no universal definitions and standards of literacy. Unless otherwise stated, all rates are based on the most common definition – the ability to read and write at a specified age. Information on literacy, while not a perfect measure of educational results, is probably the most easily available and valid for international comparisons. Low levels of literacy and education in general can impede the economic development of a country in the current rapidly changing, technology-driven world. SOURCES AND TYPES OF DATA The sources of data in our study are basically the internet, lecture notes, library books and journals and magazines.
We shall use available data relating to the life expectancy rates and literacy rates from the internet, government documentaries and articles. We shall also use lecture notes and library books to get the theories of scholars and adopt them in our study. The types of data will be of secondary nature. It will involve data of theories, findings by other individuals or groups, established models and empirical studies. It will also include government documentaries and public opinions as established in secondary data. DATA ANALYSIS
In analyzing the data, we shall first quantify the value of each variable using the appropriate society preference schedule. We then tabulate the results, establish the graphs, evaluate the results, interpret and draw conclusions. In summary, the data analysis will involve a systematic process of putting the variables into quantifiable statistics, evaluating them, interpreting and making conclusions. This will include the use of both geometric and mathematical analysis. SCOPE AND LIMITATIONS OF THE STUDY This study will be carried out within Kenyatta university premises in a period not less than three months and not more than four.
It will include visits to the library, use of Kenyatta university computers, discussions with Kenyatta university students especially from the school of economics and also consulting lecture notes, perhaps in the study room or in the hostels. There are some limitations to this study just like any other kind of study. First is the intermittent network failure in the school computers. There is also the problem of inadequate books in the library and the school policy not to allow undergraduate students to access research materials from the Africana section of the library.
Worse still, is the problem of shallow coverage of the syllabus content by lecturers and the students’ tendency not to cooperate in discussions. CHAPTER FOUR INTRODUCTION The world today is very different from the one which experienced the two world wars. During the second half of the Twentieth century, considerable advancements in science and Technology, along with the establishment of broadly-based Governments and strengthening of institutions, have led to significant Socio-economic progress and improvement in the lives of a large number of people in many countries.
However, there are still many others among us who are lagging behind. The current reality in the East African region is the existence of significant differences in the state of economic development among countries. For instance, when GNP per capita income is taken as an indicator of economic development (see figure 1. 1), the figures for Kenya, Uganda and Tanzania. Fig 1. 1 1999 | KENYA 1600 | UGANDA 1060 | TANZANIA 550 | 2000 | 1500 | 1100 | 710 | 2001 | 1000 | 1200 | 610 | 2002 | 1020 | 1260 | 630 | 003 | 1000 | 1400 | 600 | 2004 | 1100 | 1500 | 700 | 2005 | 1100 | 1800 | 700 | 2006 | 1200 | 1900 | 800 | 2007 | 1700 | 1000 | 1300 | 2008 | 1600 | 1300 | 1300 | 2009 | 1600 | 1200 | 1400 | 2010 | 1600 | 1300 | 1400 | Given the vastly divergent economic development among the three countries, it would be a common myth to presume that the discrepancy in development is somehow inherited by the respective groups of countries.
Contrary to this general perception, it is quite an enigma to note that, this had not been the case in the past. In fact, figure 1. 1 distinctly shows that economic development measured in terms of GNP per capita in the early 2000 for these countries except Kenya was quite similar and comparable to the extent that they were below 1200 USD mark. In light of the above, the pertinent question is: what factors led to this exceptional economic development for some countries (i. e. , East African developing countries) in the last three decades?
Obviously, the factors could be numerous, ranging from social to cultural, from economic policies to institution development, geographic location to opportune time. In this paper, however, rather than focusing on all these factors together, which of course is beyond the scope of this study, only the socio-economic factors, particularly the human capital dimensions, are briefly investigated across the group of countries to establish the possible role and linkage of human capital with economic development. HUMAN CAPITAL AND ECONOMIC DEVELOPMENT
In inspecting the total literacy rate data for various East African countries in figure 1. 2, it is intriguing to note that even in the 1990s when most of these countries were at similar stages of economic development, Kenya was far ahead of both Uganda and Tanzania. In fact, the total literacy rates for Kenya in 1995 was as high as 78. 1 per cent, 67. 8 per cent for Tanzania and even Uganda had a rate of over 61. 8 per cent. After three decades, while Kenya and Tanzania have somewhat ameliorated their human capital, the total literacy rates are still far below 70 per cent in the case of Uganda as shown in figure 1. . During the same period, however, Kenya and Tanzania have more or less achieved the formidable task of educating most of their people. As a result, in the late 2003, the total literacy rate of the Republic of Kenya has reached 85. 1 per cent and Tanzania managed to achieve a rate of about 78. 2 per cent. Fig 1. 2 | KENYA | UGANDA | TANZANIA | 1995 | 78. 1 | 61. 8 | 67. 8 | 2000 | | 62. 7 | | 2002 | | 66. 8 | 69. 4 | 2003 | 85. 1 | 69. 9 | 78. 2 |
Analyzing the health variable measured in terms of life expectancy at birth across the three groups of countries in the East African region, like the literacy rate, again a similar sort of pattern is evident among these countries. For instance, in 2000, all East African countries had a Life expectancy at birth below 50 years except Tanzania with Uganda having a figure of even much less than 45 years as shown in figure I. 3. On the other hand, during the same period, Tanzania had a life expectancy at birth well over 50 per cent with the Republic of Kenya having a figure almost 50 years (47. 98 years).
In 2011, although East African countries enhanced their life expectancy to a level of over 50 years, Tanzania and Uganda, in this context, is far more stagnant, as shown in figure 1. 3. In the case of Kenya, the life expectancy rate is now in the order of over 55 years. Fig 1. 3 | KENYA | UGANDA | TANZANIA | 2000 | 47. 98 | 42. 93 | 52. 26 | 2001 | 47. 49 | 43. 37 | 51. 98 | 2002 | 47. 02 | 43. 81 | 51. 7 | 2003 | 45. 22 | 44. 88 | 44. 56 | 2004 | 44. 94 | 45. 28 | 44. 39 | 2005 | 47. 99 | 51. 59 | 45. 24 | 2006 | 48. 3 | 52. 67 | 45. 64 | 2007 | 55. 31 | 51. 75 | 50. 71 | 2008 | 56. 64 | 52. 34 | 51. 45 | 2009 | 57. 86 | 52. 72 | 52. 01 | 2010 | 58. 82 | 52. 98 | 52. 49 | 2011 | 59. 48 | 53. 24 | 52. 85 | What can one infer from the discussions so far? First of all, the empirical data overwhelmingly incarnate that, in the past decade, the three East African countries considered in this paper started with a similar state of economic development but now, in 2011, there is a marked difference among them on account of their per capita incomes.
Kenya is now well beyond the reach of Uganda and Tanzania in 2011 in terms of economic development. Tanzania, on the other hand, is overtaking Uganda as depicted by the economic growth in terms of GDP per capita in 2011 in fig. 1. 2. Secondly, although in terms of per capita income all these countries were quite comparable in the early 2000, nevertheless, in the context of human capital and health sector development, there were huge differences among them; Kenya and Tanzania were, by far, ahead of Uganda. In the 1990s, most Kenya’s population were literate while Uganda and Tanzania still had a long way to go.
Thirdly, based on the facts presented earlier, it is evident that the onslaught of East Africa developing countries’ rapid economic progress in the 1990s occurred along with their reasonably well developed and healthy human capital endowment which started to take momentum in the 1960s or even earlier. It is the view of the author that, for human capital to spawn a perceptible impact on economic development, a nation needs to have a minimum captious mass of at least 70 per cent or more literate population.
What this means is that if an overwhelmingly large number of people in a country are literate, even with simple basic education as being able to read newspapers, this may open up the minds of the masses, possibly make them more enlightened workers and perhaps institute some element of discipline in them. These are, of course, some of the essential prerequisites for a large organized production to run efficiently and for leading to rapid growth.
Through mass literacy, better prepared healthy workers and conducive investment friendly government policies, Kenya and Tanzania seem to have been able to furnish those essential elements of rapid growth at the very early stages of their development. And, therefore, at the dawn of globalization in the early 1980s, Kenya and Tanzania were befittingly prepared to attract large sums of foreign investments thus accomplishing rapid economic progress. On the other hand, during the same period, unfortunately Uganda was neither primed in terms of human capital endowments t large nor were its government investment policies responsive enough to allure foreign investors in sizeable quantities to trigger rapid economic growth. Thus, in a mere two decades, Uganda lagged far behind Tanzania and Kenya to the extent that any catching up in the near future by the former country to the level of the latter countries would be a very challenging onus. As shown by the GDPs per capita, Kenya still maintains its High level of 1600 USD as it was in 1999 and Tanzania has rose fast to 1400 USD from 550 USD of 1999.
On the other hand, Uganda seems to stagnate around 1300 USD. These results are due to the well developed human capital base depicted by literacy rates and life expectancies of Kenya and Tanzania in figures 1. 3 and 1. 4 respectively. What led to the divergence in human capital among nations? As demonstrated above, a well developed human capital base of a nation played an important role in economic development and, on this count, Kenya and Tanzania were far ahead of Uganda even at the early stages of economic development.
A germane public policy question, in this context, is how Kenya and Tanzania managed to delude such a well developed human capital base as compared to Uganda even when the per capita incomes for all these countries were rather similar as shown earlier. In other words, for all practical purposes, in the 1990s, all these groups of nations could be contemplated as equally rich or equally poor, yet in terms of human capital development they were distant apart from each other.
What led to this significant divergence in the human capital development among these groups of countries? This study argues that it is the direction of a nation’s priorities and commitments measured in terms of actual resources devoted towards the education sector that led to such differences in human capital among the groups of countries. Since independence and now in the new millennium, however, the disparities in per capita expenditure on both education and health between the three countries are staggering.
For instance, data from CIA world fact book shows that the Kenya’s government spending on education as a percentage of GDP in 2006 was 7%. Uganda’s spending on education as a percentage of GDP was 3. 2% in 2009 while that of Tanzania in 2008 was 6. 8%. The world fact book’s data government’s spending on health in the last decade also shows that Kenya spends more as a percentage of GDP as compared to Tanzania and Uganda. Kenya’s spending was 12. 2%, Uganda’s spending was 8. % while that of Tanzania was 5. 1%. These data show that Kenya spends more of its GDP on health and education than any other east African country. Therefore, it is correct to say that a country which is committed to providing education and good health to its citizens is able to make use of its human development in an economically productive manner, hence raising its GDP per capita and its economic growth and development. CHAPTER FIVE GESTATION PERIOD FOR HUMAN CAPITAL INVESTMENT
Given the acceptation of human capital investments towards Economic development, a pertinent question is whether the time taken or the gestation period of such investments to proliferate intended Impact in terms of literate skilled workers is comparable to that of physical infrastructure investments such as roads, highways and hydroelectric dams. It needs to be underscored that, while the physical infrastructure investments may ordinarily take a long time to be completed, however, the impact period for human capital investments could be even longer if it is to forge results.
Not only that, while it may even be possible to abbreviate the gestation period of physical infrastructure investment by apportioning more resources through borrowing or foreign aid, the same cannot be said for human capital. Notwithstanding of the size and pace of human capital investments, it will necessitate a fixed number of years (say five years for a primary high school or eight years for secondary education) to shape a generation of educated and skilled labor force.
Another important distinction between physical infrastructure and human capital investments is that the former type of investment customarily requires one-time capital expenditures while the latter category enjoins investments on an interminable basis. For instance, once a hydroelectric dam project is completed, it is expected to generate electricity for a long time without entailing future heavy capital expenses. On the other hand, to mould a generation of educated workers will entail investments in human capital on an incessant basis.
Thus, the return of the social sector investment is a long term continuous proposition and, therefore, its affiliation with economic growth and development should be delved and analyzed within a framework which has a longer perspective. This proposition is also empirically substantiated by the author for Pakistan in two other earlier studies (Pasha, Hassan et al, 1996a, and 1996b). Based on a large, over 200 equations dynamic econometric model of Pakistan, the findings of these studies insinuated that a shift in the investment priority to social development (i. . , education sector) would entail enduring positive impact on economic growth but with long lags of about eight years. The results of the studies further suggested that, in the short to medium term, the impact of human capital investment on economic growth for the country may not be noticeable; however, after the critical time period of eight years the economic growth for the country will be substantial and long-lasting. CONCLUSION How relevant is this study to public policy?
First of all, the study empirically found out that in the past decade, among other things, the east African nations broad based healthy human capital (such Kenya and Tanzania) grew faster than the ones with less human capital investment (such as Uganda), where the elements of human health were missing. Thus, the empirical results in this study corroborated the premise that there is an important link between healthy human capital and rapid economic development of any country. This link can be illustrated mathematically by deriving the cob Douglas function and modifying it to include the aspect of human capital.
In this sense, we take a country’s GDP represented by its output Q as a function of labor, human capital and physical capital. The function is represented by the linear equation; Q=Af (L,Kp,Kh): where Kp refers to physical capital and Kh refers to human capital. Therefore, output is directly related to human capital, just as the results of our study have shown. Secondly, the study also found that, under similar economic Predicaments with comparable per capita, Kenya and Tanzania were investing far more in human capital and health sectors on a per capita basis than Uganda.
This result substantiated the point that it is the commitment and priority of a nation rather than other economic factors alone that led to more economic growth and development in Kenya and Tanzania as compared to Uganda. Even when they were all equally endowed with resources, and in fact Uganda was doing better in earlier years than Tanzania in terms of GDP per capita, but is now lagging behind. Thirdly, it is important to acknowledge the fact that there is a distinction between investments in human capital versus physical capital.
The finding of the study, in this context, upholds the view that, while it is possible to cut down the gestation period of physical infrastructure the same outcome, however, may not be possible for human capital investment. Unlike physical infrastructure investment, human capital development investment is a long term as well as continuous proposition. Commitment and public policy are very simple and unpretentious. In the 1990s, most countries in the east Africa were remarkably analogous in terms of their economic development.
However, at the dawn of the new millennium, although Kenya and Tanzania have made some economic progress, these countries are still attributed to their earlier copious investments made in human capital. What policy options and choices are available to the Uganda under the prevailing circumstances to improve economic development and to catch up with the other east African countries? It is the view of the author that it will have to adopt similar policy options that Kenya and Tanzania did in the 1960s – that is, to deeply commit and heavily invest in human capital development.
This study has shown that there is no shortcut procurable in terms of educating the masses of a nation and in the event these countries demonstrate any laxity in building up a broad human capital base sooner than later. This is likely to be a recipe of postponing the impending quagmire to a future date. REFERENCES Hafiz Pasha, M. Aynul Hasan, Aisha Ghaus and M. Ajaz Rasheed, Pakistan”, Pakistan Development Review – 579. , 1996b. “An integrated planning model and expenditure on social development: the case of Pakistan,” 2) Romer, Paul, 1986. Increasing returns and long-term capital”, Journal of Political Economy, Vol. 94, pp. 1002-1020. Wishart, M. D. , Principles of Microeconomics, 4e, 2005. Stamford, Thomson publishing. Robert, L. H. , The Economic Problem, 2e, 1970. New Jersey, Englewood. http//:www. ciafactbook. com http//:www. gisdevelopment. net Republic of Kenya (1965). African Socialism and its Application to Planning in Kenya, Nairobi. Government press. Todaro, M. P. , Latest edition, Introduction to Economics for a Developing World. Oxford. Chapter 24.