cuong le van with the cooperation of tu-anh nguyen ( cnrs,university paris 1, pse)

New Technology, Human Capital, Total Factor New Technology, Human Capital, Total Factor Productivity and Growth Process for Developing Productivity and Growth Process for Developing

and Emerging Countriesand Emerging Countries

Cuong Le Van Cuong Le Van

with the cooperation of Tu-Anh Nguyenwith the cooperation of Tu-Anh Nguyen

(CNRS,University Paris 1, PSE)(CNRS,University Paris 1, PSE)

IntroductionIntroduction Technological progress or TFP is crucial to growthTechnological progress or TFP is crucial to growth

Solow [1957]: capital intensity contributed for 12.3 per Solow [1957]: capital intensity contributed for 12.3 per cent to the US economic growth and the remainder, 87.7 cent to the US economic growth and the remainder, 87.7 per cent, is due to increased productivity. (per cent, is due to increased productivity. (US data from US data from 1909 to 19491909 to 1949))

Fabricant [1954]: about 90 per cent of the increase in Fabricant [1954]: about 90 per cent of the increase in output per capita is attributed to TFP. (output per capita is attributed to TFP. (US data from 1871--US data from 1871--1951 ) 1951 )

IntroductionIntroduction

Debates on impressive growth performance of NIEsDebates on impressive growth performance of NIEs

The endogenous growth supporters: productivity growth is the key The endogenous growth supporters: productivity growth is the key factor. factor.

NIEs have adopted technologies previously developed by more NIEs have adopted technologies previously developed by more advanced economies (assimilation view) (Pack [1992]).advanced economies (assimilation view) (Pack [1992]).

The supporters of the accumulation view stress the importance of The supporters of the accumulation view stress the importance of physical and human capital accumulation physical and human capital accumulation

Krugman [1997] Asian growth could mostly be explained by high Krugman [1997] Asian growth could mostly be explained by high saving rates, good education and the movement of underemployment saving rates, good education and the movement of underemployment peasants into the modern sector.peasants into the modern sector.

No technological progress in Asian Economies: Young [1994, 1995], No technological progress in Asian Economies: Young [1994, 1995], Kim and Lau [1994, 1996], etc.Kim and Lau [1994, 1996], etc.

IntroductionIntroduction

Collins and Bosworth [1996] or Lau and Park [2003]):TFP Collins and Bosworth [1996] or Lau and Park [2003]):TFP gains actually matter in Asian NIEs growth and that future gains actually matter in Asian NIEs growth and that future growth can be sustainedgrowth can be sustained

Stages of development: “Stages of development: “Growth in the early stages may be Growth in the early stages may be primarily associated with physical and human capital primarily associated with physical and human capital accumulation, and significant potential for growth through accumulation, and significant potential for growth through catch-up may only emerge once a country has crossed some catch-up may only emerge once a country has crossed some development thresholddevelopment threshold”. (Collins and Bosworth [1996]).”. (Collins and Bosworth [1996]).

Lau and Park [2003] considers data of Asian economies: Hong Lau and Park [2003] considers data of Asian economies: Hong Kong, Korea, Singapore, Taiwan, Indonesia, Malaysia, Kong, Korea, Singapore, Taiwan, Indonesia, Malaysia, Thailand and G-5:W. Germany, UK, US, France, and Japan.Thailand and G-5:W. Germany, UK, US, France, and Japan. Technical progress plays no role in Asian economies until 1985 Technical progress plays no role in Asian economies until 1985

however it does in period 1986-1995however it does in period 1986-1995 For G-5 it always plays important role For G-5 it always plays important role

IntroductionIntroduction Divergence of economic growthDivergence of economic growth

Barro&Sala-i-Martin [1995], Barro [1997]: cross-countries empirical Barro&Sala-i-Martin [1995], Barro [1997]: cross-countries empirical studies show that development patterns differ considerably between studies show that development patterns differ considerably between countries in the long runcountries in the long run

Model of convex-concave technology can explain these differences:Model of convex-concave technology can explain these differences: Dechert and Nishimura [1983] prove the existence of threshold effect Dechert and Nishimura [1983] prove the existence of threshold effect

with poverty traps explaining alternatively "growth collapses" or with poverty traps explaining alternatively "growth collapses" or taking-off. taking-off.

Azariadis and Drazen [1990] propose an elaboration of the Diamond Azariadis and Drazen [1990] propose an elaboration of the Diamond model that may have multiple stable steady states because the training model that may have multiple stable steady states because the training technology has many thresholds. technology has many thresholds.

Hung, Le Van and Michel [2008]: Hung, Le Van and Michel [2008]: endogeneize these thresholds when endogeneize these thresholds when consider an economy with many technology possibilitiesconsider an economy with many technology possibilities

We share the view of Dollar [1993] that divergence between countries We share the view of Dollar [1993] that divergence between countries is also due to differences in TFPis also due to differences in TFP

IntroductionIntroduction In this presentation we showIn this presentation we show

actually one can reconcile the views on the importance of physical actually one can reconcile the views on the importance of physical

capital, human capital and TFP. The first two are important in short capital, human capital and TFP. The first two are important in short

and mid terms, the last is the core factor in long term.and mid terms, the last is the core factor in long term. A theoretical model to define an endogenous threshold of development A theoretical model to define an endogenous threshold of development

from which a country is encouraged to adopt new technologies and from which a country is encouraged to adopt new technologies and

human capital formation, and builds a part of its growth process on human capital formation, and builds a part of its growth process on

technological advances. Before reaching this threshold, the country technological advances. Before reaching this threshold, the country

must root its growth process in capital accumulationmust root its growth process in capital accumulation the richer a country is, the higher share of investment in new the richer a country is, the higher share of investment in new

technology and training and educationtechnology and training and education the share of investment in human capital will increase with the wealth the share of investment in human capital will increase with the wealth

while the one for physical capital will decrease while the one for physical capital will decrease

Plan of the talkPlan of the talk The Solow ModelThe Solow Model The Ramsey ModelThe Ramsey Model About the non convergence between countries: An explanation About the non convergence between countries: An explanation

with the convex-concave technology.with the convex-concave technology. The Krugman--Solow controversy: an answer ∙The Krugman--Solow controversy: an answer ∙ How to escape from the poverty trap: how to improve the How to escape from the poverty trap: how to improve the

TFP?TFP? 1. The Human Capital Model1. The Human Capital Model 2. The Knowledge Accumulation Model2. The Knowledge Accumulation Model

3. New Technology, Human Capital and Growth: Theoretical Results 3. New Technology, Human Capital and Growth: Theoretical Results

and Evidenceand Evidence

The Solow model (1956)The Solow model (1956) We consider a simple intertemporal growth model for a closed We consider a simple intertemporal growth model for a closed

economy.economy.

Ct, St, Yt, Kt, It denote respectively the consumption, the saving,

the output, the capital stock, the investment and the labour at period t. The labour force grows with an exogenous rate n. The TFP grows at rate γ.

The Solow model (1956)The Solow model (1956) Actually, we haveActually, we have

•We can easily check that there exists a Balanced Growth Path (BGP) with rate g

The Solow model (1956)The Solow model (1956)

The Solow model (1956)The Solow model (1956)

t0

(1 )s tK g

'0K

0K

sK

The Ramsey Model, 1928The Ramsey Model, 1928 In Solow Model the saving rate and the rate of growth is In Solow Model the saving rate and the rate of growth is

exogenous.exogenous. Ramsey model (1928) can be used to endogeneize the rate of Ramsey model (1928) can be used to endogeneize the rate of

saving of the households.saving of the households. Basic ideas of the model:Basic ideas of the model:

an infinitely lived consumer maximizes an intertemporal utility an infinitely lived consumer maximizes an intertemporal utility function of her intertemporal sequence of consumptionsfunction of her intertemporal sequence of consumptions

At each date, her consumption is constrained by the maximum output At each date, her consumption is constrained by the maximum output produced by a stock of physical capital, and by the necessity of saving produced by a stock of physical capital, and by the necessity of saving for obtaining a physical capital stock for the next period production for obtaining a physical capital stock for the next period production process.process.

The main results are that, under some conditions, optimal The main results are that, under some conditions, optimal sequences of capital stocks and of consumptions exist, and sequences of capital stocks and of consumptions exist, and converge to an optimal steady stateconverge to an optimal steady state

The Ramsey Model, 1928The Ramsey Model, 1928 The compact form of the Ramsey model is:The compact form of the Ramsey model is:

Where ( ) ( ) (1 )f k F k k

0

1

1

max ( ),0 1

. .

, (1 ) ( )

( )

tt

t

t t t t

t t t

u c

S t

t c k k F k

c k f k

0k is given

The Ramsey Model, 1928The Ramsey Model, 1928

With assumptions:

Results:Results:The Ramsey Model, 1928The Ramsey Model, 1928

Hence: if the initial capital stock is non null, all economies will converge to its long-term steady state or be caught in poverty trap depends on the technology of production. International Aid to developing countries is necessary to kick offWe will come back the issue of non-convergence between the countries with more details in the next section.

The Ramsey Model, 1928The Ramsey Model, 1928

The rate of growth is positively related the non-impatience of the consumer (large β) and the TFP A. The saving rate is constant and positively related to β and A, the patience of consumer and the level of technology

The optimal solution to the Ramsey model is a BGP with rate of growth

1

1( 1 ) 1g A 1

1( 1 ) 1As

A

The convex-concave production functionThe convex-concave production function

The Solow-Krugman ControversyThe Solow-Krugman Controversy

Solowian supporters attribute the miracle economic growths in Solowian supporters attribute the miracle economic growths in NIEs in second half of 20th century to adoption of NIEs in second half of 20th century to adoption of technologies previously developed by more advanced technologies previously developed by more advanced economies. economies.

Young [1994, 1995], Kim and Lau [1994, 1996] empirically Young [1994, 1995], Kim and Lau [1994, 1996] empirically found no technological progress (TFP) in these economies found no technological progress (TFP) in these economies

Krugman's [1994] concludes that "Krugman's [1994] concludes that "it (high growth rate) was it (high growth rate) was due to forced saving and investment, and long hours of due to forced saving and investment, and long hours of

works...works...”” Essentially, the so-called Solow-Krugman controversy is not a Essentially, the so-called Solow-Krugman controversy is not a

real onereal one


The crucial equation of Solow model is:The crucial equation of Solow model is:

{ } { (1 ) }s ttK K g as t

Where g is growth rate of capital stock and output at steady state and Ks is capital per effective workers at steady state. Tedious calculations show that

1

11 (1 )(1 )g n 1

1

0s sa

K Lg


Now let's consider two economies which are identical in Now let's consider two economies which are identical in everything, except for technological progress: γ and γ′ and everything, except for technological progress: γ and γ′ and saving rate saving rate ss and and ss’’

Define growth rates in these two economies as follows:Define growth rates in these two economies as follows:

And the speed of convergence(1 )

tt s t

K

K g

The Solow-Krugman ControversyThe Solow-Krugman Controversy We get the resultWe get the result

If γ < γ′ and s = s’ then If γ < γ′ and s = s’ then

'

'

'

'

, 1

s s

t t

t t

g g

K K

t

•If s < s’ and If s < s’ and γ < γ′ thenγ < γ′ then

'

'

's s

t t

g g

K K


In dynamic transitional, the saving rate (hence capital In dynamic transitional, the saving rate (hence capital accumulation) does matter for growth rate. accumulation) does matter for growth rate.

A permanent increase in saving rate not only raises the level of A permanent increase in saving rate not only raises the level of steady state but also increases the economic growth rate in steady state but also increases the economic growth rate in transitional period.transitional period.

In development process, the economies where rates of In development process, the economies where rates of technological progress are higher will technological progress are higher will converge faster to their own steady states.converge faster to their own steady states.

grow faster not only in steady state but also in transitional periodgrow faster not only in steady state but also in transitional period

The divergence in rates of technological progress among The divergence in rates of technological progress among developing economies induces the divergence in growth developing economies induces the divergence in growth among developing worldamong developing world


t0

Kt

K0

' ( )sK 's s

Human capital growth model (Lucas 1988)Human capital growth model (Lucas 1988)

No physical capitalNo physical capital Only effective labor is used in productionOnly effective labor is used in production


Meaning: without training (θt=1) the human capital

depreciates with rate δ and if the worker devotes his whole

time for training (θt=0), his human capital will grow at rate

λ.

The Romer Model (Romer, 1986)The Romer Model (Romer, 1986) SS identical consumers and they own firms identical consumers and they own firms Output of each firm: Output of each firm: F(kF(ktt,K,Ktt)) KKtt is economywide knowledge, is economywide knowledge, kktt is firms specific knowledge is firms specific knowledge At equilibrium At equilibrium KKtt = S*k = S*ktt

Ass1Ass1: F(.,K): F(.,K) is concave with respect to the first variable and is concave with respect to the first variable and F(k,S*k)F(k,S*k) is convex in is convex in kk

An investment of An investment of IItt creates additional knowledge creates additional knowledge G(IG(Itt,k,ktt) = k) = kt+1t+1 - k - ktt

Ass2Ass2:: GG is concave and homegeneous of degree one is concave and homegeneous of degree one

Ass3Ass3: : g(0) =0, g’(0) = +∞, g’(x) > 0,g(0) =0, g’(0) = +∞, g’(x) > 0, for all for all x > 0x > 0

The Romer Model (Romer, 1986)The Romer Model (Romer, 1986)

For simplicity we assume S = 1.For simplicity we assume S = 1. Let Let . . The problem becomes: The problem becomes:

ββ and u satisfy assumptions in Ramsey section and u satisfy assumptions in Ramsey section

Ass4: Ass4:

Ass5:Ass5:

Ass6:Ass6:


Theorem 4Theorem 4: There exists an optimal path with grows without : There exists an optimal path with grows without

boundbound. . This result is based on many crucial ingredients: This result is based on many crucial ingredients: (i)(i) the private the private

technology technology f(.,K)f(.,K) is concave, the quality of the knowledge is concave, the quality of the knowledge technology is very good (g′(0) = +∞).technology is very good (g′(0) = +∞).

Le Van and Saglam (2004) weaken these assumptions:Le Van and Saglam (2004) weaken these assumptions: Ass1’:Ass1’:

Ass3’:Ass3’:

The Romer Model (Romer, 1986)The Romer Model (Romer, 1986) We have the following resultsWe have the following results

Hence: fixed costs in the production induce a poverty trap. Hence: fixed costs in the production induce a poverty trap. if the quality of knowledge technology is good enough, it can if the quality of knowledge technology is good enough, it can

be passed over be passed over

New Technology, Human Capital an GrowthNew Technology, Human Capital an Growth

Consider an economy with three sectors:Consider an economy with three sectors: Domestic sector produces an aggregate good Domestic sector produces an aggregate good YYdd

New technology sector with outputNew technology sector with output Y Yee

Education sector characterized by a function Education sector characterized by a function h(T)h(T) where T is the where T is the

expenditure on training and educationexpenditure on training and education..

The output The output YYee is used by domestic sector to increase its total is used by domestic sector to increase its total

productivityproductivity


Φ(.)Φ(.) is a non decreasing function satisfies is a non decreasing function satisfies

KKdd, K, Kee, L, Ldd, L, Lee and and AAee be the physical capital, the technological be the physical capital, the technological

capital, the low-skilled labor, the high-skilled labor and the capital, the low-skilled labor, the high-skilled labor and the total productivity, respectively total productivity, respectively

0 < 0 < ααdd < 1, 0 < 1, 0 < < ααee < 1 < 1 Price of capital goods in term of consumption goods is Price of capital goods in term of consumption goods is

numerairenumeraire λλ >1 >1 is price of is price of KKee in term of consumption goods. in term of consumption goods.


Denote: Denote: hh is the human capital production technology; is the human capital production technology; is number of skilled workers in new technology sector; is number of skilled workers in new technology sector; LLee is is

effective labor;effective labor;

is number of non-skilled workers in domestic sectoris number of non-skilled workers in domestic sector S is available of money to spend on all kinds of capitalS is available of money to spend on all kinds of capital For simplicity we assume T is measured in capital goods, then we have For simplicity we assume T is measured in capital goods, then we have

the budget constraint:the budget constraint:

*eL

*dL

* ( )e eL L h T

d eK K T S


Social planner maximizes following programSocial planner maximizes following program


Assume: Assume: h(.)h(.) is an increasing concave function and is an increasing concave function and h(0) > 0h(0) > 0 Define Define θθ and and μμ as share of expenditure on new technology and as share of expenditure on new technology and

education, education, θθ + + μμ ≤ 1: ≤ 1:

Suppose that function Φ(x) is a constant in an initial phase and Suppose that function Φ(x) is a constant in an initial phase and increasing linear afterwards:increasing linear afterwards:

, (1 ) ,e dK S K S T S

New Technology, Human Capital and GrowthNew Technology, Human Capital and Growth

xX0

( )x


Let’s denote Let’s denote θθ(S)(S) and and μμ(S) (S) the optimal shares. We have the optimal shares. We have

New Technology, Human Capital an GrowthNew Technology, Human Capital an Growth We now consider an economy with one infinitely lived We now consider an economy with one infinitely lived

representative consumer who has an intertemporal utility representative consumer who has an intertemporal utility function with discount factor function with discount factor β < 1.β < 1.

The utility function u is strictly concave, strictly increasing The utility function u is strictly concave, strictly increasing and satisfies the Inada condition: and satisfies the Inada condition: u’(0) = +u’(0) = +∞, u(0) = 0∞, u(0) = 0..

At each period, her savings will be used to invest KAt each period, her savings will be used to invest Kdd or/and K or/and Kee

and/or to and/or to TT. .

We suppose the capital depreciation rate equals 1 and growth We suppose the capital depreciation rate equals 1 and growth rate of population is 0 and rate of population is 0 and

* * * *, ,;e t e d t dL L L L


The social planner will solve the following dynamic growth The social planner will solve the following dynamic growth modelmodel


The main results of this section is:The main results of this section is:


Recall that Recall that

AAee is the productivity of the new technology sector is the productivity of the new technology sector

λλ is the price of the new technology capital is the price of the new technology capital

ααee is capital share in new technology production sector is capital share in new technology production sector

is number of skilled workersis number of skilled workers

aa is a spill-over indicator which embodies the level of social is a spill-over indicator which embodies the level of social

capital and institutional capital in the economy, indicates the capital and institutional capital in the economy, indicates the

effectiveness of the new technology product x on the effectiveness of the new technology product x on the

productivityproductivity

*(1 )e ee e er A L

*eL

A look at evidenceA look at evidence

Recall that Lau and Park (2003) shows that can not reject the Recall that Lau and Park (2003) shows that can not reject the

hypothesis of no technological progress in East Asia NIEs hypothesis of no technological progress in East Asia NIEs

until 1986.until 1986.

Since 1986 when these economies started investing heavily on Since 1986 when these economies started investing heavily on

R&D, technological progress plays significant role in growths R&D, technological progress plays significant role in growths

of these economiesof these economies

This evidence supports our prediction that there exists This evidence supports our prediction that there exists

threshold for investing in new technology in process of threshold for investing in new technology in process of

economic development.economic development.

Table 2: Inputs and Technical Progress: Pre-1973

Contributions (%) of the Sources of Growth

Sample Physical Labor Human Technical

period capital capital progress

Hong Kong 66-73 68.37 (9.67) 28.50 (3.10) 3.13 (5.57) 0

S. Korea 60-73 72.60 (11.58) 21.87 (4.14) 5.53 (7.70) 0

Singapore 64-73 55.59 (12.73) 40.18 (7.56) 4.22 (9.17) 0

Taiwan 53-73 80.63 (13.21) 15.45 (2.63) 3.91 (6.73) 0

Indonesia 70-73 73.09 (11.09) 9.37 (2.15) 17.54 (19.50) 0

Malaysia 70-73 59.97 (9.56) 29.99 (4.32) 10.05 (12.64) 0

Philippines 70-73 39.79 (5.12) 49.97 (7.36) 10.24 (11.51) 0

Thailand 70-73 82.11 (10.96) 7.67 (0.57) 10.22 (11.44) 0

China 65-73 85.29 (13.51) 10.36 (3.19) 4.35 (7.01) 0

Japan 57-73 55.01 (11.43) 4.85 (0.82) 1.06 (2.87) 39.09

G-5 57-73 41.50 (4.62) 6.00 (4.24) 1.43 (1.70) 51.07

Note: The numbers in the parentheses are the average annual rates of growth of each of inputs. G-5: France, W. Germany, Japan, UK and US

Table 2 (cont.): Inputs and Technical Progress: 1974-1985




Hong Kong 74-85 64.31 (9.58) 32.73 (3.40) 2.96 (5.67) 0

S. Korea 74-85 78.08 (13.28) 18.10 (2.83) 3.81 (6.41) 0

Singapore 74-85 64.68 (9.94) 31.72 (3.42) 3.60 (5.48) 0

Taiwan 74-85 78.91 (11.89) 18.12 (2.23) 2.97 (4.98) 0

Indonesia 74-85 77.69 (12.22) 13.55 (2.65) 8.76 (10.20) 0

Malaysia 74-85 61.39 (10.76) 33.61 (4.94) 5.00 (8.15) 0

Philippines 74-85 62.59 (7.29) 29.28 (3.53) 8.13 (8.07) 0

Thailand 74-85 67.53 (8.69) 25.02 (3.55) 7.46 (8.96) 0

China 74-85 80.46 (9.44) 14.64 (2.53) 4.09 (6.37) 0

Japan 74-85 40.65 (6.73) 10.22 (0.93) 0.96 (1.69) 48.17

G-5 74-85 36.29 (2.65) -14.55 (-0.42) 2.53 (1.90) 75.73


Table 2 (cont.): Inputs and Technical Progress: post-1986




Hong Kong 86-95 41.81 (7.56) 6.46 (0.53) 1.58 (3.10) 50.14

S. Korea 86-95 44.54 (11.90) 14.98 (2.76) 1.75 (4.15) 38.73

Singapore 86-95 37.01 (8.50) 31.30 (4.32) 1.52 (3.38) 30.17

Taiwan 86-95 43.00 (9.01) 10.46 (1.34) 1.38 (3.13) 45.16

Indonesia 86-94 62.79 (8.88) 15.91 (2.31) 5.69 (6.94) 15.61

Malaysia 86-95 42.87 (8.53) 33.41 (4.83) 3.25 (6.15) 20.47

Philippines 86-95 52.18 (3.77) 41.63 (2.96) 6.23 (5.09) -0.03

Thailand 86-94 51.01 (11.27) 13.32 (2.72) 2.36 (5.25) 33.31

China 86-95 86.39 (12.54) 10.34 (1.92) 3.27 (4.54) 0

Japan 86-94 38.21 (4.86) 2.47 (0.11) 1.17 (1.44) 58.14

G-5 86-94 27.14 (2.70) 13.83 (5.37) 1.58 (1.36) 57.45


Source: Reproduced from Lau and Park (2003)

A look at evidenceA look at evidence Nevertheless, the question of threshold of investment in Nevertheless, the question of threshold of investment in

human capital is rarely raised in literaturehuman capital is rarely raised in literature

We use pooled time-series aggregate data of educational We use pooled time-series aggregate data of educational attainment for 71 non-oil exporting, developing economies attainment for 71 non-oil exporting, developing economies compiled by Barro and Lee (2000).compiled by Barro and Lee (2000).

Real GDP per capita (Real GDP per capita (yy) (in PPP): in Penn World table 6.2) (in PPP): in Penn World table 6.2

We use five alternative variables to measure human capitalWe use five alternative variables to measure human capital

completed primary school (completed primary school (ll11))

completed secondary school (completed secondary school (ll22))

completed higher secondary school (completed higher secondary school (ll33))

average schooling years of labor force (average schooling years of labor force (AA))


We run two simple OLS regression equation:We run two simple OLS regression equation:

These equations are tested for two sub-samples:These equations are tested for two sub-samples:

First with GDP per capita is not more than 1000 (75 observations)First with GDP per capita is not more than 1000 (75 observations)

Second with GDP per capita more than 1000 (533 observations)Second with GDP per capita more than 1000 (533 observations)

1ln y A

(1)

(2)

1 1 2 2 3 3ln y l l l

Contributions of human capital to economic growth

Equation 1 Equation 2

y≤1000 y>1000 y≤1000 y>1000

R² 4.70% 46.60% 2.10% 54.30%

R² 0.70% 46.30% 0.75% 54.20%

β1 -0.015 (0.08) 0.002 (0.000)*

β2 0.002 (0.88) 0.005 (0.000)*

β3 0.040 (0.63) 0.042 (0.000)*

γ1 -0.03 (0.22) 0.25 (0.000)*

Obs 75 533 75 533

Note: the numbers in the parentheses are p-values of corresponding coefficients; * Indicates statiscally significant at the level of significantce of 0.1%


The results obviously show that when GDP per capita below The results obviously show that when GDP per capita below

1000 USD ( y in PPP and constant price in 2000) all 1000 USD ( y in PPP and constant price in 2000) all

hypotheses of no contribution of human capital to economic hypotheses of no contribution of human capital to economic

growth can not be rejected, while when y > 1000 those growth can not be rejected, while when y > 1000 those

hypotheses are decisively rejected hypotheses are decisively rejected

Furthermore, when y > 1000 coefficients of variables: Furthermore, when y > 1000 coefficients of variables:

percentage of labor force with completed primary percentage of labor force with completed primary

schoolschool, completed secondary school, and completed higher , completed secondary school, and completed higher

secondary school are all in expected sign and statistically secondary school are all in expected sign and statistically

significant at level of significance of at least 0.1%significant at level of significance of at least 0.1%


The results of regression on equation 2 also solidly confirms The results of regression on equation 2 also solidly confirms

the positive contribution of human capital when it is measured the positive contribution of human capital when it is measured

by average year of schoolings and when y by average year of schoolings and when y ≥ 1000≥ 1000

By contrast, when y ≤ 1000 human capital, by all means, plays By contrast, when y ≤ 1000 human capital, by all means, plays no role in economic growth. no role in economic growth.

These results support our model's prediction that when income These results support our model's prediction that when income are lower than a critical level there is no demand for investing are lower than a critical level there is no demand for investing in human capital, or equivalently, there exists threshold for in human capital, or equivalently, there exists threshold for investing in human capital in process of development.investing in human capital in process of development.


Now we look closely at movement of expenditures on human Now we look closely at movement of expenditures on human

capital and new technology in three economies, namely China, capital and new technology in three economies, namely China,

South Korea and Taiwan. South Korea and Taiwan.

The purpose of this section is to examine the our third point: The purpose of this section is to examine the our third point:

““the share of human capital and expenditure for new the share of human capital and expenditure for new

technology in total investment (S) in these economies shows technology in total investment (S) in these economies shows

the increasing trend in the examined periods and human the increasing trend in the examined periods and human

capital increasingly becomes more important than two others”capital increasingly becomes more important than two others”


We follow Casey and Sala-i-Martin (1995) to assume We follow Casey and Sala-i-Martin (1995) to assume that wage paid to a worker consists of two parts:that wage paid to a worker consists of two parts: For human capital contributionFor human capital contribution For non-skilled contributionFor non-skilled contribution

The first part depends not only on number of schooling The first part depends not only on number of schooling years but also on others: on-the-job training, job years but also on others: on-the-job training, job experience, schooling quality, and technological levelexperience, schooling quality, and technological level

The second part depends on many factors such that: The second part depends on many factors such that: ratio of aggregate physical capital stock to human ratio of aggregate physical capital stock to human capital due to the complimentary between physical capital due to the complimentary between physical capital and human capital and change in relative capital and human capital and change in relative supplies of workers. supplies of workers.


Accordingly, the labor-income-based human capital that Accordingly, the labor-income-based human capital that taking all these factors into account reflects the value of taking all these factors into account reflects the value of human capital more comprehensively than the conventional human capital more comprehensively than the conventional measurement that based on schooling years.measurement that based on schooling years.

We assume further that minimum wage is the non-skilled We assume further that minimum wage is the non-skilled wage.wage.

The expenditure for human capital can be calculated byThe expenditure for human capital can be calculated by

Where: Where: EHCEHC is expenditure for human capital, is expenditure for human capital, EE is total employed workers, is total employed workers, AWAW is average wage, is average wage, MWMW is minimum wage is minimum wage

( )t t t tEHC E AW MW


New technological capitals are produced in R&D sector, then New technological capitals are produced in R&D sector, then we use indicator of expenditure for R&D as a proxy for we use indicator of expenditure for R&D as a proxy for investment in technological capital (investment in technological capital (λKλKee););

The fixed capital formation (if not available, then the gross The fixed capital formation (if not available, then the gross capital formation) for expenditure on (capital formation) for expenditure on (KKdd))

Data sources: Data sources: CEIC databaseCEIC database National Statistical Yearbooks in various issuesNational Statistical Yearbooks in various issues WDI database of World BankWDI database of World Bank UNESCOUNESCO US Department of StatesUS Department of States And our estimations for missing dataAnd our estimations for missing data

Figure 1: Human capital and R&D in total available investment

20

25

30

35

40

45

50

55

60

65

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

South Korea China Taiwan

Figure 2: Share of Human Capital in Total available Investment

20

25

30

35

40

45

50

55

60

65

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

South Korea Taiwan China


Figure 1 show the steadily increasing trend of shares of human Figure 1 show the steadily increasing trend of shares of human

capital and R&D in total available investment in all three capital and R&D in total available investment in all three

economies in the examined periods. economies in the examined periods.

The movement of share of human capital in total available The movement of share of human capital in total available

investment shown in figure 2 also show steadily increasing investment shown in figure 2 also show steadily increasing

trend in Taiwan and China, while in South Korea the trend trend in Taiwan and China, while in South Korea the trend

seems more fluctuant, nevertheless, increasing.seems more fluctuant, nevertheless, increasing.

Hence our predictions of movement of share of human capital Hence our predictions of movement of share of human capital

and of human capital and new technology can not be rejected and of human capital and new technology can not be rejected

by evidences from these economies.by evidences from these economies.


If we also assume that the ratios of budget available (If we also assume that the ratios of budget available (SS) to ) to

GDP are constant in the whole period. Thereby, the movement GDP are constant in the whole period. Thereby, the movement

of ratios of of ratios of λKλKee and expenditure for human capital ( and expenditure for human capital (TT) to GDP ) to GDP

are congruent to the movement of ratios of are congruent to the movement of ratios of λKλKee and and TT to to S.S.

Figures below (3,4 and 5) all support our model's prediction: Figures below (3,4 and 5) all support our model's prediction:

μμt t + θ+ θtt the sum of the share of human capital and R&D as well the sum of the share of human capital and R&D as well

as share of human capital in GDP both increase.as share of human capital in GDP both increase.

Figure 3: Human capital and R&D (%GDP)

10

15

20

25

30

35

40

45

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Human capital and R&D Human capital

Figure 4: Human capital and R&D (%DGP): Taiwan

15

17

19

21

23

25

27

29

31

33

35

R&D and HC HC/GDP

Figure 5: Human capital and R&D (%GDP): S. Korea

15

20

25

30

35

40

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

HC and R&D HC/GDP


The figures also show the effects of Asian crisis in 1997 on The figures also show the effects of Asian crisis in 1997 on investment in human capital and R&D these economies. investment in human capital and R&D these economies.

China is the least affected and then quickly recovered the China is the least affected and then quickly recovered the momentum investing activities. momentum investing activities.

S. Korea, the most affected one and had to have recourse to S. Korea, the most affected one and had to have recourse to IMF for help. Under pressure of IMF South Korea had to IMF for help. Under pressure of IMF South Korea had to apply severely tightening expenditure policy. Even though apply severely tightening expenditure policy. Even though South Korea started recovering since 1999 and GDP recovered South Korea started recovering since 1999 and GDP recovered high growth rate in following years, they remained tightening high growth rate in following years, they remained tightening expenditure policy till early 2000s. That's why the figure 5 expenditure policy till early 2000s. That's why the figure 5 shows the declining trend of both variables, shares of human shows the declining trend of both variables, shares of human capital and R&D, and of human capital, since 1997.capital and R&D, and of human capital, since 1997.

Thank youThank you

cuong le van with the cooperation of tu-anh nguyen ( cnrs,university paris 1, pse)

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