The Role of Education and Human Capital on Economic Growth of Nations

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Introduction

It has been proved beyond any doubt that education is an important tool in propelling the states of the world to higher levels of development. According to proponents of human capital theory like Schultz (1961) and Denison (1962), there is overwhelming evidence to the effect that education is an important contributor to the economic growth and development. In many aspects, education has been regarded as the main impetus towards the current world social, technological, political and economic developments witnessed today. In a nutshell, economic growth through education is cited as a major factor for national development. Historically, economic growth has been explained largely by stocks of labour, physical capital, and human capital. Evolution of technology has changed the growth equation, and the rate of technological change is closely linked to the provision and creation of highly educated workers. These educated workers have translated their expertise into higher productivity at their place of work and increased the performance of the people working under them (Bowles et al., 2001). Economic studies have shown that the role of education to economic development is well established when measured either in monetary values or in terms of agricultural efficiency. Education as an economic tool contributes to poverty reduction, improved income differentials, and political development. It leads to evident economic growth through provision of necessary attitudes and super skills necessary for a variety of vacancies in the job market. Education also contributes to economic growth by improving health and reducing fertility, reducing death rates of trained work force, and creation of a peaceful environment void of wars that scare of investments. Although the positive correlation between education and increased labor productivity is still debatable, a generally accepted premise is that knowledge and learning skills obtained in learning institutions make workers more capable of acquiring new skills and adapting to new working areas. The current paper posits by looking at the influence and role of education in the rapid development witnessed in some of the Asian countries. The emphasis in this paper is on the role of education and creation of human capital resource to economic growth.

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Education, Human Capital, and Economic Development

The role of education and creation of Human Capital resource to economic development through education was well reported by a United Nations Development Programme (UNDP) report (1997, 97) which observed that people who lack basic skills cannot adapt to changing market conditions or shift to more complex forms of exports during this market era that is technology driven. The impact of globalization, integration of the world economy, technological change, migration of labor, and the rate of accumulation of new knowledge, has significant changed the demands of market places which has consequently led to the need for new tricks only available through of education. The contrasting education and economic experiences of many of the economies of South and South East Asia have led to a keen interest on education for development. In the 1960s, all these economies were approximately at the same level of economic growth. However, over the last three decades, growth in per capita incomes in East Asia has been about four times as fast as in South Asia. Early and continued investment in education forming a representative level of human capital accumulation is also frequently cited as having a major impact on the positive economic growth. Studies for example, have attributed these developments to the high investments in primary education which is always seen as the largest single contributor to the economic growth rates. The South Asian nations tended to emphasize high-quality primary education accompanied by a largely self-financed university system during this period of time.

Gradstein (2004), in his study to evaluate the expansion of education in the world in relation to economic development notes that accumulation of human capital along side that of physical assets has been widely viewed as a central component of economic development. The acquisition of knowledge through education has led to the growth of technology from most developed countries and spilled over across national boundaries providing an impetus for schooling in developing countries. According to human capital theory, education leads to the acquisition of knowledge skills and attitudes. These skills and attitudes lead to increased productivity of the educated who by any scale demands higher earnings (Blang, 1968). Lockheed in his studies has shown that agricultural productivity increase by an average of 8.7% when farmers are given four years of elementary education (Lockheed, 1980 in Psaucharapolous & Woodhall, 1985). Studies on poverty and educational outcomes have over time associated the social economic status of families with education attainment, and low earnings of the poor seen as a result, partly of lower human capital endowments and partly of labor market discrimination which they find themselves exposed to. Poverty stricken families lack the financial basis for acquisition of quality education and hence cannot get their preferred employment which restrict their level of contributing to the economic development of a nation. Although schooling has been identified to be contributing to the reduction of absolute and relative poverty, the influences of education do not take effect until the poor begin to earn more or become self-employed, and consume more effectively. National education objectives suggest that learning should be built on good policies that ensure that students acquire the necessary skills for future development and not examination and results oriented. Education may be seen as a source of self-development of skills to cope with a wide variety of external problems, including the productivity of labor. As education systems develop, the education process may be expected to turn its attention to higher-order goals such as problem solving and creativity, which themselves are processes, that require good planning and implementation strategies. Most of the education system of the Asians nations are practical oriented that builds in students the necessary skills for development and might be the reasons behind its rapid development.

Education has been identified as the only available means for providing gender equalities both in educational opportunities, social-economic and political participation. It has been established that women participate less than men in labor markets. Their wage rates are consistently lower than those for males and they constitute the majority of unpaid family workers. However, a positive thing to note is that there are some increases in female labor force participation rates in several Asian economies. These has been attributed to several factors, including social and cultural transformations in societies that have altered women’s attitudes; economic development; changes in family structure; and increase in education participation. The increased participation of women in Asian countries might be cited as among the sources of its rapid economic developments. Studies on externalities in education show that increase in the average provision of education to female labour force has a positive effect on male earnings. Another interesting result is that at national levels and regional levels, the earning effect of female human capital externality is higher for males than for females. This is consistent in both urban and rural areas and shows that provision of educational opportunities to females is more beneficial for males than it is for females. Male education benefits men that it does to women. This result suggests that constraining the average education for females through low female access to education may in fact reduce male productivity and earnings. In summary empowerment of women and girls through education is poised to reduce poverty levels, improve health and nutrition which in the in the long run empowers them to equally contribute to the development of the nation. The other supportive reason for investing in education arises from the rate of returns for each level of education. At national levels, economics and developmental studies have put the rate of returns for primary education at 7.9%, 17.2% for secondary education and 32.5% for university education. The more education one has, the more probability that they will contribute more to the economic development of their nations and hence the need for education for economic developments. Human capital resource is developed through education. Increasing the level of education of a worker increases his/her productivity and earnings and consequently those people working with them.

Human capital and economic development

There are a number of theories that support investment in education by nations as a platform for economic development. An example of such theories is the Human Capital theory which was first brought out clearly by Schultz in his address to the American Economic Association in 1960 (Schultz, 1961). He noted that the benefits the concept of human capital theory occurs in future in form of higher lifetime earnings. It is now acknowledged that as the stock of human capital rises, it stimulates investments in development of new technologies by expanding the education, intensive research and development industry (Becker et al., 1990). Economists have come to appreciate the input of human capital resource as the main factor to enhance development in nations. Studies have shown that for maximum economic growth, there is need o to have value investment in human capital exceeding the value of physical capital (Becker et al., 1990). This enables underdeveloped nations to move from a state of underdevelopment to a state of development (David & Whaley, 1989). Education creates in workers special valued skills and super skills that increase the productivity of such workers and hence their contributions to total national production and economic development. The human capabilities created to people through education increases productivity in other sectors of the economic as well. This is well demonstrated by the high rise of economies of East Asia nations, where investment in education has yield higher returns more than high income advanced countries of the world (World Bank, 2002). Examples can be drawn showing the relationship of provision of educational opportunities and providing equitable distribution income and poverty reduction. Korea can be cited as an example in its efforts to fighting poverty. After gaining independence the government implemented free education to all its citizens. In the 1960’s, the level of technology and human capital resource in Ghana, was well above that of South Korea, but its investment in human capital equitably paid off almost immediately. This broad decision led to significant increase in the supply of skilled labour in the short run and equitable distribution of income in the long run. Consequently, absolute and relative levels of poverty have declined. Recent research work in physical capital has shown that investment in human capital stimulates investments in physical capital. There is a dual relationship between education, human capital and technology. Accumulation of human capital in an economy favours creation and absorption of technology, and at the same time, technical progress will increase the incentive to invest in education. It has been argued that a significant part of the effect of human capital is channeled through an increase in the investment rate for physical capital. Spain as a nation presents a framework established by duality theory that analyzes indirect effect that human capital has on economic growth through influence on the optimum stock of physical capital. The high numbers of educational attainments in its citizens has coincided with the increased modern production and institutional structures raising the importance of education to development. The descriptive analysis of human and physical capital in Spain showed that as the years of schooling of workers in the private productive sector of Spanish economy increased, there was a positive growth rate for physical capital throughout the period as well as labour productivity and the capitalization process. It was established that an increase of one year in average level of education of the labour force gave rise to an increase of about 7.3% in the output. These results justify the position of education as a tool for economic development.

Emergence of technology and its contribution to economic growth

Education and research in learning institutions have been linked to the high technological levels that have led to emergence of knowledge –based economy. Education has cemented the role of knowledge and technology in economic growth and has always been the central factor in economic development. Different nation’s economies just like Korea as mentioned above strongly depend on production, distribution, and use of knowledge to nourish. Investments efforts in education increase productivity in other sectors and transform them into higher levels of production. The emergence of technology among nations through education has led to creation of knowledge networks. This has led to creation of new knowledge, collaboration across boarders, diffusion of new ideas and use of information enabling economic growth. Distance countries can now benefit from services of experts abroad easily hence boosting their economy. Trade and economic exchange of goods and services are now made easy which translate to better economies of involved nations. Education, through technology provides the much needed publicity reaching the external market more quickly. China and its African ties is a perfect example where China has penetrated deeply into the African market as a trade partner taking over from super powers that have for so long enjoyed this external markets. This has made China’s economy to shot almost in manifolds to where it is now. The determinants of success of national economies as a whole are ever more dependent upon their effectiveness in gathering and utilizing knowledge. Strategic awareness, know- how and competence are deemed vital. The economy becomes a hierarchy of networks, driven by the acceleration in the rate of change and the rate of learning (David & Foray, 1995). This has even changed the school of thoughts towards innovation. There is a move from the traditional way of looking at innovations that were thought to move through a fixed and linear sequence of phases to the new approach that sees innovation as being multifaceted.

Training of specialists and professionals in various fields has allowed countries to export them to other countries for work. The remittances they provide back in form of money aid in development of their nations. This argument is based on findings of migration research, that well educated migrants are able to attain higher employment positions and ranks in their host nations which provides them with an opportunity to accumulate capital. The migration research shows that most of this accumulated financial capital is mainly transferred through remittances from the migrants to their families and friends in the home country (IOM, 1999). These professionals are also involved in running a number of business related enterprises in their own nations which automatically aids in economic development of such nations.

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Conclusion

The discussion of education, human capital resource and economic growth presents a strong link between education and economic growth. The research summarized shows that schooling is necessary for industrial development. The form of schooling that emerged in the 19th century which generates specific cognitive, affective and social knowledge that is critical for economic development (Bils & Klenow, 2000). The intricacy of the relationship between schooling and the industrial form of economic growth is supported by the enormous economics literature. Economists have examined this relationship quite carefully and come to the conclusion that, through a variety of different avenues and in a number of different ways, invest­ment in school systems does have a strong economic pay-off (Krueger & Lindahl, 2001).

A high endowment of human capital in an economy would make it more attractive for existing firms to continue investing in new firms given the high returns they can obtain, especially for high value added activities which require skilled workers. The relevance of education and creation of human capital resource to economic growth and hence nation development is well illustrated by the rapid economies that have taken place in South Asia. The South Asian nations emphasized high-quality primary education with a largely self-financed university system during the period just after gaining independence. The efforts paid off by elevating its economic positions higher than countries like Ghana that had a much better technology and human capital base than these nations. In a country like South Korea, this was associated with declaration of free primary education to its citizens since basic education has been identified as a major contributor to economic growth.

References

Becker, G. Murphy, K. & Tamura, R. Human Capital, Fertility, and Economic Growth. Journal of Political economy. 2 (1990): 512-537.

Bils M. & Klenow, P. ‘Does Schooling Cause Growth?,’ American Economic Review, 90- 5 (2000):1160-1183.

Blaug, M. Economics of Education. London: Penguin book ltd, 1989.

Bowles, H. Gintis H & Osborne, M. ‘The Determinants of Individual Earnings: Skills, Preferences, and Schooling’ Journal of Economic Literature, 39-40 (2001): 1137- 117.

David, D & Foray, D. (1995). Accessing and Expanding the Science and Technology Knowledge Base, STI Review, No. 16, OECD, Paris, 1995.

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Davis, J & Whalley, J. (1989). Taxation and Capital Formation: How Important is Human Capital? Working Paper no. 29a9 NBER, 1989.

Denison, E. C. The sources of economic growth in USA and alternatives before US. New York: Committee for economic development, 1962.

IOM. Migration and Development, Genf, 1999.

Krueger, M. & Lindahl. ‘Education for growth: why and for whom ?’, Journal of Economic Literature, 39 (2001):1101-1136.

Psaucharapolous, K. & Woodhall, M. Education for development. Analysis Investment choices: New York: OUP, 1985.

Shultz, Theodore. Investment in Human Capital. American Economic Review 51(1961).

UNDP Report. 20 Years of Global Human Development Reports. UNDP, 1997.

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World Bank. The World and Russia: Indicators of Development Sustainability, 2002.

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BusinessEssay. 2021. "The Role of Education and Human Capital on Economic Growth of Nations." December 31, 2021. https://business-essay.com/the-role-of-education-and-human-capital-on-economic-growth-of-nations/.

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BusinessEssay. "The Role of Education and Human Capital on Economic Growth of Nations." December 31, 2021. https://business-essay.com/the-role-of-education-and-human-capital-on-economic-growth-of-nations/.