CONTRIBUTION OF HUMAN CAPITAL INVESTMENT IN RAPIDLY-MODERNIZING ECONOMIES

Abstract

This thesis aims at examining the role of human capital in an economy undergoing rapid modernization. Human capital is the acquired abilities of people embodied in the advancement of knowledge and skills. The main types of human capital investment examined in this thesis are formal and informal education, health and on-the-job training. In rapidly modernizing economies, the contribution of human capital to rapid structural transformation, industrialization and urbanization is especially important. Human capital can contribute to economic growth and development of rapidly modernizing economies in several ways. Firstly, human capital can increase labor productivity by enhancing the ability of workers to make better use of existing resources. Besides the more efficient use of existing production techniques, human capital can also increase labor productivity by increasing the rate of adoption of new inputs or techniques. Secondly, human capital helps to increase the ability of individuals to make allocative decisions in disequilibrium situations. In economies undergoing rapid modernization, this ability to reallocate resources is particularly important. Thirdly, human capital accelerates the rate of diffusion and transfer of new technology which facilitates innovation and research and development efforts. In rapidly modernizing economies, the uncertainty surrounding manpower forecasts, particularly uncertainty about future technical change, means that flexibility in the labor force is extremely important. As such, formal education may be the most conducive to promoting growth as it can hedge against the uncertainty of a continually changing environment. Moreover, competencies from basic education is required to utilize the technical knowledge in skills training. While high rates of skill obsolescence may lower the return to on-the-job training, it nevertheless may be a more responsive and cost-effective channel of skills development than vocational schooling. However, the relevance of vocational education can be raised if it imparts general rather than specific skills. After examining the theories relating human capital to economic growth, we conduct case studies on Singapore, Korea and India. The case of Singapore and Korea has provided the justifications for the relevance of the theories in which human capital can contribute to economic growth. We find that rather than the possession of natural resources, human capital is a requisite and an impetus to their high sustained growth. The attainment of universal primary education has preceded the onset of economic growth. Investments in formal education and skills acquisition through vocational institutions and on-the-job training, with careful regard for the manpower requirements of the economy, has facilitated the structural transformation in their industrialization process. The rapid accumulation and efficient utilization of human capital is a key determinant of their economic success. However, human capital accumulation by itself is no guarantee for high growth, as illustrated in the case of India. Beset with problems of poverty and low literacy, India has illuminated the typical constraints faced by a poor developing country in human capital formation. The dismal economic performance can be largely attributed to its low literacy and the misallocation of resources devoted to human capital investments. The emphasis on the inappropriate type of human capital, specifically an overinvestment in higher education and a concomitant underinvestment in basic education, without regard to the absorptive capacity of the labor market, has eroded much of the benefits of human capital accumulation. The serious problem of educated unemployment that results has shown that the potential benefits of human capital investment can be squandered if resources devoted to it is improperly utilized. Thus, human capital investment is a necessary but not a sufficient condition for growth. Nonetheless, the contribution of human capital investment to economic growth cannot be undermined. In rapidly modernizing economies, human capital plays a pervasive role in facilitating the swift structural changes, industrialization and rapid urbanization through raising productivity, enhancing the ability to deal with disequilibrium situations and facilitating the transfer and diffusion of technology.