Human capital and development

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Human capital and development

  1. 1. Chapter 1Human Capital and Development: IntroductionN.S. Siddharthan and K. NarayananGiven the contemporary socio-economic reality in terms of disparities in standardof living, inequity in access to resources, policy asymmetries across countries andcoexistence of higher growth with poverty in developing countries, it is widelybelieved that there is a need for enhancement and appropriate utilisation of humanskills to foster development. India and other large emerging economies have greatpotential for achieving high-economic growth if only they could use their demo-graphic dividend much more judiciously. There has been a great deal of theoreticalunderstanding and rich empirical evidence on the link between human capital anddevelopment. However, the gross enrolment ratio in both school and higher educa-tion has been a cause for concern in several developing countries. The needs of thechanging pattern of industrialisation, which demands more and more skilled man-power, are also going unmatched by the supply. What are the paradigms available inthe context of modern development? How appropriate could they be specifically forIndia? How can one evaluate the suitability of different paradigms? What are theinterlinkages between skill content of the workforce and competitiveness of indus-tries? These are some of the questions that we have addressed in this volume.N.S. Siddharthan (*)Madras School of Economics, Chennai, Indiae-mail: nssiddharthan@gmail.comK. NarayananDepartment of Humanities and Social Sciences, Indian Institute of Technology Bombay,Powai, Mumbai, Indiae-mail: knn@iitb.ac.inN.S. Siddharthan and K. Narayanan (eds.), Human Capital and Development: 1The Indian Experience, DOI 10.1007/978-81-322-0857-0_1, © Springer India 2013
  2. 2. 2 N.S. Siddharthan and K. Narayanan1.1 Human Capital and Economic DevelopmentThe issues relating to the role of human capital in fostering economic growth anddevelopment of an economy have been of interest to several economists. In thetraditional neoclassical growth models by Solow and Swan in 1950s, the output of aneconomy grows in response to larger inputs of capital and labour. Furthermore, theeconomy under these models conforms to the “law of diminishing returns to scale”.With these assumptions, the neoclassical growth models analyse some implicationsto the economy; in particular, they show that as the capital stock increases, growthof the economy slows down, and in order to keep the economy growing, it mustcapitalise from incessant infusions of technological progress. It is well known thatthis mechanism in neoclassical growth model is neither inherent nor does it strive toexplain much; this simply means that the technological progress is “exogenous” tothe system. Addressing the above issues, in the mid-1980s, a new paradigm wasdeveloped in the literature, mostly due to the Romer (1986), which is now com-monly known as “endogenous growth models”. In simple terms, what this means isthat if the firm which invests in capital also employs educated and skilled workerswho are also healthy, then not only will the labour be more productive but will alsobe able to use the capital and technology more efficiently. This will lead to a “Hicksneutral” shift in the production function, and thus there can be “increasing” ratherthan “decreasing” returns to investments. In other words, technology and humancapital are both “endogenous” to the system. The theoretical models of economicgrowth have underscored the role of human capital. The empirical analysis of growthfor a broad group of countries shows that the school attainment has positive effecton growth (Barro 1992). Many studies have found that a region’s growth is influencedby the initial level of human capital. Glaeser et al. (1995) find that human capitallevel in 1960 influences growth of the cities between 1960 and 1990. Similarly,Simon and Nardinelli (2002) found that cities that have higher level of human capitalgrow faster in the long run. Few factors are as important in raising labour productivity as human capitalinvestments. While the average years of schooling in many Asian countries haveincreased substantially during the last few decades, this has not necessarily led tothe workers having the skills and training that help them obtain higher qualityemployment. Moreover, low level of human capital may be a constraint to invest-ment and expansion in sectors that require skilled workers. As markets in countriesat different stages of development typically demand different skill sets, educationalinvestments and policy are likely to vary with these needs. In particular, low-incomecountries with a high proportion of informal workers may need to consider develop-ing a focused and narrow set of skills through vocational education and trainingprogrammes. However, middle-income countries that are trying to move up thevalue chain may require more general tertiary education that allows for the develop-ment of innovative ideas. As Foster (2011) noted, the informal labour market inagriculture that exists in many low-income countries may reflect the shifting natureof agricultural labour demand; it may also indicate lack of specialisation in particular
  3. 3. 1 Human Capital and Development: Introduction 3land or tasks. By contrast, most self-employed workers and most factory workersoutside of the farm sector may have specific skills that cannot easily be replaced bysomeone working in another sector. Thus, the rents associated with these skillsshould appear in terms of labour market earnings. Because specific skills are associ-ated with nonfarm employment, a wage premium is observed for many forms ofnonfarm employment (Lanjouw and Murgai 2008), which suggests focusing ontraining and educational programmes that can allow nonfarm workers in rural areasto develop a specific set of skills. Entrepreneurship training is also a potentially useful tool for raising the incomeof micro-entrepreneurs. Karlan and Valdivia (2006) used a randomised treatmentthat added business training to an existing micro-credit programme in Peru to studythe impacts of entrepreneurial training. They found that the training increasedrepayment and business revenues for the clients. This provided evidence that impor-tant management skills can be taught. While the pendulum has swung from anemphasis on technical and vocational education and training (TVET) programmesin the 1980s and early 1990s to an emphasis on general education programmes sincethe mid-1990s, there is limited research to firmly resolve the debate on which typeof education is more beneficial. Because students who enrol in TVET may have,overall, different backgrounds and educational competencies from those who electgeneral education, it has usually been impossible to assess which track of educationmay be better. Horowitz and Schenzler (1999), correcting for selection bias, found that generaleducation exceeded returns to TVET in Suriname. Conversely, Malamud and Pop-Eleches (2008), using an education reform that shifted a large proportion of studentsfrom vocational training to general education while keeping the average years ofschooling unchanged, found that in Romania there were no differences in returnsbetween graduates of vocational versus those of general schools. However, the dif-ference in findings may reflect the quality of the general education versus the tech-nical vocational education institutions. In general, expanding and strengtheningvocational education opportunities can serve an important purpose, especially in arapidly growing, liberalised economy. Vocational education can also be a powerfultool for improving job prospects and job quality among the poor. For example, inVietnam, which still has a large agricultural sector, people with vocational educa-tion were shown to have greater success in finding employment and higher wagesthan people with general education up to the secondary level, but had slightly loweremployment and earnings than people who had general tertiary education. Ultimately,as economies evolve and become more service oriented, promoting TVET may nolonger be very useful for the majority of the population. Newhouse and Suryadarma (2011) examined the labour market outcomes ofIndonesian youths who entered the TVET track and those who entered the generaleducation track for senior high school. They found that female TVET graduateswere able to get more jobs and higher wages than males who had general education.They cited concerns over expanding public vocational education and the relevanceof the skills taught by TVET, especially for males in an increasingly service-oriented economy. In general, there is a strong role for building human capital to
  4. 4. 4 N.S. Siddharthan and K. Narayananimprove employment outcomes, whether through vocational or general education.Both systems and institutions may need to be strengthened. For workers in developingcountries who are largely going to become self-employed, having a very specificskill to market seems warranted. However, as countries upscale and evolve, it maybe preferable to focus more on general education, which may better impart theflexibility and innovation that is useful for service-oriented economies.1.2 Technology, FDI and Skill IntensitySeveral studies have shown that current technology favours the use of skilled labourforce (Salvanes and Forre 2003; Kim 1998) and production of differentiated products(Kim 1998). The world market is growing mainly in high-tech and skill-intensivegoods. The global market for standardised goods is either stagnating or declining(Lall 1999). Under these conditions industrial units using skill-intensive workforceand producing differentiated and high-quality products are likely to grow faster andthereby contribute to growth and employment. Furthermore, some other studieshave documented (Ciccone and Papaioannou 2009) that countries with highereducation levels experienced faster value addition and employment growth. In thecontext of the industrial sector, some studies argue and show that the ownership patternof industries could make a difference. For example, a study for Turkey (Alvan andGhosh 2010) shows that human capital’s contribution to growth was mainly confinedto the private sector and not to the public sector. By and large, there is general agree-ment that the current technology is mainly knowledge and skill intensive, and thequality of human capital plays an important role in the growth of industries, agricultureand services sectors. The layout and the format of the information technology using factories are verydifferent from the traditional factories. The new factories are characterised byflexible manufacturing practices, multi-skilled workforce, flexible job responsibilities,few managerial layers, better inventory management and increased outsourcingactivities in contrast to the earlier ones that had almost the opposite characteristics(Brynjolfsson and Hitt 2000). There is also evidence to show that human capital in host countries has alsobeen influencing the inflow of foreign direct investments (FDI). For example, thestudy by Noorbakhsh et al. (2001) shows that despite a dramatic increase in FDIinflows to developing countries, only a few countries have been receiving FDI andthe host countries could improve their location advantage by investing in humancapital and increasing the skill content of their workforce. Furthermore, the USFDI outflows have also been attracted by country skill-labour abundance andindustry skill intensities (Yeaple 2003). There is also evidence to show that regional/state governments within a country that have been spending more on humanresources have been attracting more FDI (for interstate differences in FDI inflowsfor India and China, see Siddharthan 2009, and for China see Broadman and Sun1997; Wei 1999). FDI inflows could also contribute to skill development in the hostcountries (Doctor 2007).
  5. 5. 1 Human Capital and Development: Introduction 5 Even in traditional areas like agriculture skill-intensive operations are on theincrease. Thus, the link between human resource development and economic devel-opment has also got strengthened. This emerging phenomenon has resulted in ascarcity of skilled and educated workforce and a huge backlog of unemployed personswho are not sufficiently skilled. To create employment for this unskilled workforce,it has become vital for the governments to spend heavily on education at all levels –primary, secondary and university (including technical education). Scholars from different disciplines in economics and other social sciences havebeen working in these areas. Though the issues involved cut across disciplines andso require a multidisciplinary approach involving interaction between scholars fromdifferent disciplines, there is no forum or platform to facilitate scholars belonging toscience, technology, business schools, economics and other social sciences to cometogether to present their research findings in one volume. This book is in responseto this vital need. So far, there is no comprehensive volume that addresses theseissues as systematically as we have done in this book. The theme “Human Capital and Development” has several dimensions, and the chap-ters included in the volume cover several dimensions and discuss the following aspects:• Knowledge revolution and the changing role of skilled workforce• Skill-biased technological change and job destruction of low-skilled workers• Human resource, labour productivity and employment• Foreign direct investment and human resources• Human capital, energy use and environment• Human capital and antipoverty programmes• Government and efficiency of educational institutions1.3 Guided Tour of the ChaptersSeveral studies argue that the current technology is human capital and knowledgeintensive and cannot be used in the absence of investment in skill development.Quite a few studies also emphasise the skill bias in the technology. The first twochapters in this volume test for the role of skill differences among the Indian statesin influencing productivity, its growth and employment. In Chap. 2, Bhat andSiddharthan hypothesise a positive relationship between skill content of the popula-tion and labour productivity and growth of labour productivity and employment.The chapter measures interstate skill differentials through enrolment rates in middleand high schools. Using a balanced panel for 21 Indian states for the period 2003–2007, they showed that after controlling for fixed capital and other control variables,human capital as represented by higher education levels and health infrastructurecome out significant in influencing interstate differences in labour productivity, itsgrowth and growth of employment. In addition, states that enjoyed higher levelsof urbanisation and industrial agglomeration experienced higher levels of labourproductivity and employment growth. The chapter advocates emphasis on educationand health facilities to achieve productivity and employment growths.
  6. 6. 6 N.S. Siddharthan and K. Narayanan The next chapter (Chap. 3) by Kathuria, Raj and Sen analyse the role of humancapital in influencing total factor productivity in the Indian manufacturing sectors.They also examine interstate differences. However, they use enterprise level data toinvestigate whether differences in the total factor productivity growth for the sameindustries across 15 major Indian states covering both formal and informal sectorsare influenced by human capital differences. They consider 90 industries for theperiods 1994–1995 and 2005–2006. They find human capital (literacy rate) impor-tant for productivity growth only for the formal sector. Furthermore, total factorproductivity steadily grew only in the formal sector. In fact it recorded a negativegrowth rate for the informal sector. The chapter not only emphasises the role ofhuman capital in influencing growth of productivity but also the importance of theformal manufacturing sector. Export and import intensities did not influence pro-ductivities in the manufacturing sector across the states. The finding of negative growth rate of productivity of the informal sector leadsto the question of gainful employment in the informal sector. The more generalquestion relates to the access of the Indian workforce to productive employment.This question is important for India as the growth is taking place accompanied byinformalisation. In this context it is important to find out whether acquisition ofskills enables workers in the informal sector to graduate and move to the formalsector. Furthermore, does informalisation accentuate inequalities? The chapter(Chap. 4) by Maiti and Mitra addresses some of these important questions. As in thecase of the earlier two chapters, this chapter also deals with interstate differences.It estimates the size of the informal sector in nonfarm employment. In particular,it derives the index of informal sector employment that could be attributed to thedistress led or supply pushed phenomenon. The results show that developmentexpenditure aimed at improving education, health and infrastructure facilities,results in a decline in distress led informalisation. These very same variablesexplained labour productivity and employment growth (Chap. 2). Thus, the threechapters taken together convey an important and consistent message. The next chapter (Chap. 5) deals with another important issue relating to humancapital, namely, the relationship between labour intensity and energy savings. Forthis purpose it takes the Indian paper and pulp industry as a case study. This industryis one of the most energy and pollution intensive industries, and if it could be shownthat labour input and energy input are substitutes, then energy consumption couldbe reduced by employing more of skilled labour. The results of the study byNarayanan and Sahu show that labour and energy intensity has an inverted U shaperelationship, suggesting a substitution possibility between energy and labour for thepulp and paper industries in India. Furthermore, the results also showed a negativerelationship between energy intensity and technology intensity. Thus, by spendingmore on labour and technology, the units could significantly bring down energyintensity. In this chapter labour intensity is measured by the sum spent on labour asa proportion of sales turnover. This definition takes into account the skill content ofthe workforce. Higher proportion spent on labour could indicate employment ofbetter skilled workers as the wage rate for low-skilled workers are very low.
  7. 7. 1 Human Capital and Development: Introduction 7 The next chapter (Chap. 6) by Banga and Sahu deals with another importantaspect of human capital, namely, the migration of workers and the remittances repa-triated back to India. India is one of the highest recipients of remittances in theworld. The study analyses the impact of remittances on poverty in India. Among allthe Indian states, Kerala has the highest percentage of non-resident Indians. Hence,the study gives special emphasis on Kerala. There are very few studies on the exportof human capital, remittances and its impact on poverty and development. Thisstudy fills this major gap in literature. Banga and Sahu argue that unlike otherfinancial flows, remittances are more stable and predictable, and what is more theycould also provide a cushion against economic shocks. The study also indicatesremittances and other variables like poverty and state per capita income could havetwo-way relationships. Nevertheless, it does have an influence in reducing poverty.Furthermore, estimates for Kerala show a definite impact of remittances on per capitaincome and investments. The discussion on remittances and poverty leads to an analysis of other measuresaimed at reducing poverty. In Chap. 7, Mukherjee and Sinha examine one of themost important antipoverty programmes, namely, the National Rural EmploymentGuarantee Act (NREGA). The chapter develops a theoretical model to analyse theimpact of NREGA on rural labour market, income of the poor households andagricultural production. One of the predictions of the model is that consequent to theintroduction of NREGA, the cultivating households will employ less labour therebyadversely affecting production. There is some evidence to support this prediction.However, the poor would be better off. Their model also predicts increases in foodprices due to the introduction of NREGA. The last chapter (Chap. 8) deals with a very different aspect of human capital,namely, efficiency of education institutions. Sunita and Duraisamy, using the dataenvelopment analysis, evaluate the efficiency of engineering colleges and technicalinstitutes of Kerala. They use the number of teaching, nonteaching and nonpersonnelexpenditures as inputs and student enrolment as output. They found the governmentinstitutions more technical and scale efficient than the private institutions. Thisfinding reinforces the crucial role of government in promoting higher education.The private sector could at best complement the government. In other words, thegovernment cannot withdraw from higher education and leave the field to theprivate sector. The chapters included in this volume cover several aspects of human capital.It starts with the role of human capital in influencing productivity, employmentand growth of employment. The chapters show that Indian states that have beenneglecting schooling and health facilities have become victims in terms of lowproductivity and lower rates of employment. Consequently, employment cannot beincreased without spending on education and health. Furthermore, the unorganisedsector in India cannot provide gainful employment as productivity in this sector islow and is also declining. Skill-intensity influences mainly productivity in theorganised sector. As a result, states that have been neglecting human capital wouldlose on both counts.
  8. 8. 8 N.S. Siddharthan and K. Narayanan The chapters also reveal that human capital could be substituted for energy useand help in reducing energy consumption and pollution. India is also one of theimportant exporters of human capital, and the non-resident Indians send remit-tances back to India. The volume indicates that remittances play a significant rolein poverty reduction and increase in per capita consumption levels. In additionremittances, unlike foreign direct investments and portfolio investments, are lesserratic and are not influenced by slowdown in the world economy. Poverty couldalso be directly attacked through the use of antipoverty programmes like NREGA.This volume provides an analytical framework and a theoretical model to analysethe impact of these programmes to examine their influence on labour demand,income, prices and productivity. The volume also emphasises the crucial role of thegovernment in directly running education institutions. As seen from the volume,government run engineering institutions are technically more efficient than the pri-vate run ones. In sum, the theme Human Capital and Development has several dimensions.This volume tries to cover as many aspects as possible. It has chapters dealing withthe following features: skill bias of the current technology and its consequences forgrowth and employment; negative implications of skill bias on the unorganised sectorand an analysis of remedial measures like antipoverty programmes and in particularNREGA; the role of remittances as a consequence of migration of human capital inpoverty alleviation and economic development; role of government in improvingskill content of the population by directly funding education institutions, includinginvestment in technical education; and importance of human capital in energyconservation in manufacturing skilled labour as a substitute for energy.ReferencesAlvan A, Ghosh BN (2010) Productivity and growth in Turkish manufacturing industry: 1980–2001. J Develop Areas 43(2):187–219Barro RJ (1992) Human capital and economic growth. In: Proceedings of Federal Reserve Bank of Kansas City, pp 199–230Broadman HG, Sun X (1997) The distribution of foreign direct investment in China. World Econ 20(3):339–361Brynjolfsson E, Hitt LM (2000) Beyond computation: information technology, organizational transformation and business performance. J Econ Perspect 14(4):23–48Ciccone A, Papaioannou E (2009) Human capital structure of production and growth. Rev Econ Stat 91(1):66–82Doctor M (2007) Boosting investment and growth: the role of social pacts in the Brazilian automo- tive industry. Oxf Dev Stud 35(1):105–30Foster AD (2011) Creating Good Employment Opportunities for the Rural Sector. Asian Development Bank Economics working paper series no. 271, http://dx.doi.org/10.2139/ ssrn.1940166Glaeser E, Scheinkman J, Shleifer A (1995) Economic growth in a cross-section of cities. J Monet Econ 36:117–143Horowitz A, Schenzler C (1999) Returns to general, technical and vocational education in developing countries: recent evidence from Suriname. Educ Econ 7(1):5–20
  9. 9. 1 Human Capital and Development: Introduction 9Karlan D, Valdivia M (2006) Teaching entrepreneurship: impact of business training on microfinance clients and institutions. Yale University, MimeoKim KS (1998) Global integration, capital and labor: a north–south comparative perspective. In: Dabir-Alai P, Odekon M (eds) Economic liberalization and labor markets. Greenwood Press, Westport, pp 25–44Lall S (1999) India’s manufactured exports: comparative structure and prospects. World Dev 27(10):1769–1786Lanjouw P, Murgai R (2008) Poverty decline, agricultural wages and non-farm employment in rural India: 1983–2004. Working paper no. 437, Stanford UniversityMalamud O, Pop-Eleches C (2008) General education vs. vocational training: evidence from an economy in transition. Working paper no. 0807, University of ChicagoNewhouse D, Suryadarma D (2011) The value of vocational education: high school type and labor market outcomes in Indonesia. World Bank Econ Rev 25(2):296–322Noorbakhsh F, Paloni A, Youssef A (2001) Human capital and FDI inflows to developing countries: new empirical evidence. World Dev 29(9):1593–1610Romer PM (1986) Increasing returns and long-run growth, the journal of political economy, 94 (5) 1002–1037Salvanes KG, Forre ES (2003) Effects on employment of trade and technical change: evidence from Norway. Economica 70:293–329Siddharthan NS (2009) FDI, determinants, constraints and impact: India–China comparison. In: Agarwal M (ed) India’s economic future. Social Science Press, New Delhi, pp 71–102Simon CJ, Nardinelli C (2002) Human capital and the rise of American cities, 1900–1990. Reg Sci Urban Econ 32:59–96Wei Y (1999) The regional distribution of foreign direct investment in China. Reg Stud 33(9):857–67Yeaple SR (2003) The role of skill endowments in the structure of US outward FDI. Rev Econ Stat 85(3):726–34

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