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The Concept Of Human Capital Economics Essay

Paper Type: Free Essay Subject: Economics
Wordcount: 5432 words Published: 1st Jan 2015

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In recent times, the development of human capital has been the focus of concern towards the development of a nation. This is for the fact that the growth of tangible capital stock of a nation depends to a considerable degree on human capital development. Without adequate investment in developing the human capital which is the process of increasing knowledge, skills and the capacities of people in the country, the possibility of the growth of that nation might be minimal. Historical evidences proved that advanced countries depended on education of their rapid economic growth, such as those of United States, former Soviet Union, Denmark and Japan. There were significant relationships between their economic growth and the quantum and kinds of education provided to their work-forces (Miachi, 2006). Health and education are both components of human capital and contributors to economic welfare. Thus, according to Lyakurwa (2007), human capital development has the capacity to enlarge people’s choices and opportunities, improve healthy living through acquired skills and knowledge and eventually enhance growth in the nation’s gross domestic product through increased productivity.

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The concept of human capital formation refers to a conscious and continuous process of acquiring and increasing the number of people with requisite knowledge, education, skill and experience that are crucial for the economic and political development of a country (Odusola, 1998). Human capital is so important that in the Khartoum Declaration of 1988, it was asserted that:

…the human dimension is the sine qua non of economic recovery …no SAP or economic recovery programme should be formulated or can be implemented without having at its heart detailed social and human priorities. There can be no real structural adjustment or economic recovery in the absence of the human imperative (Adedeji et.al. 1990: 390)

A. W. Lewis is said to have begun the field of Economic Development and consequently the idea of human capital when he wrote in 1954 the “Economic Development with Unlimited Supplies of Labour.

The use of the term “human Capital” in the modern neoclassical economic literature dates back to Jacob Mincer’s article “Investment in Human Capital and Personal Income Distribution” in The Journal of Political Economy in 1958. Then T.W. Schultz who is also contributed to the development of the subject matter, the best-known application of the idea of “human capital” in economics is that of Mincer and Gary Becker of the “Chicago School” of economics. Becker’s book entitled “Human Capital”, published in 1964, became a standard reference for many years. In this view, human capital is similar to “physical means of production”, e.g., factories and machines: one can invest in human capital (via education, training, health) and one’s outputs depend partly on the rate of return on the human capital one owns. Thus, human capital is a means of production, into which additional investment yields additional output.

Modern growth theory sees human capital as an important growth factor economic growth. Human capital may be defined as the total stock of knowledge, skills, competencies, and innovative abilities possessed by the population. Among the most important changes that characterize the 21st century are, “the increasing importance of knowledge as a driver of economic growth; the information and communication revolution; the advent of a worldwide labour market and global socio-political transformations” (World Bank 2002).

Numerous quantitative studies of the studies of the sources of economic growth in the west have demonstrated that the growth of human capital has been the principal source of economic growth (Todaro, 1985). The outstanding experiences of the fast growing Asian economies such as Taiwan, Hong Kong and South Korea are perhaps obvious examples of the importance of human capital to economic growth. Despite the lack of natural resources, these countries have managed to grow faster than any other country, because they have had higher quality in human capital (Becker, 1992).

Economists and other social scientists have applied the concept of human capital since the 1950’s in, many ways (Bryan, 1990). Schultz (1972), who is considered a pioneer in human capital theory, classified investment in human capital into investment in:

Schooling and higher education.

Post-school training and learning.

Pre-school learning activities.




Investment in children.

Hence, the concept of the human capital has been used in a variety of ways. Becker (1975), for example, in his book human capital discussed investment in human capital in the context of the labour market. Investment in human capital also could be discussed in relation to changes infertility decisions and mortality (Becker, 1992)

In the developed nations like the United States of America, Britain and Japan, human capital formation constitutes the major element in the overall strategies for socio-economic development. In Nigeria, the drive at human capital development had not acquired such momentum. That notwithstanding, there had been some attempts in the country at the human capital development via educational planning such as the Ashby Commission of 1960 on “investment in education” which led to the increase in the university places in Nigeria. Prior to the aforementioned Ashby Commission’s Report was the report of the Federal Advisory Committee on Technical Education and Industrial Training 1957 and it was to advice the minister on the development and training including the common training required to meet industrial and commercial needs. These two national efforts among others marked the beginning of the national consciousness of the need to develop human capital for the overall socio-economic growth in Nigeria.

Myers (1964) maintained that the most obvious way of developing human capital is formal education, beginning with the first level education, continuing with various forms of post primary education and post-secondary education. Furthermore, that education is one of the main domains of public intervention in the social sectors where the most spectacular results have been achieved. This national consciousness of the significance of education in Nigeria education system has stilled proved inadequate to reach the universal primary education and suppress the regional (zonal) and gender disparities in access. The characteristic distribution of the population reveals a high proportion of young as a result of improved primary health care which impact upon infant mortality rate coupled with high fertility rate among Nigerian women. In the seventies precisely, the massive reconstruction after the civil war and the oil boom stimulated industrial, commercial enterprises and various services, but Nigeria education system was not able to keep up with the manpower

demand, nor could it produce the required human capital in the labour force. One of the most obvious reasons for the poor performance of Nigeria education system is poor financing.

According to Adesina (1980) the implications of Nigeria government assuming total financing of education system are far reaching. It means that the amount of education to be provided in a given year would solely be determined by the amount government is willing and able to give to education. Furthermore, the volume of education has to be drastically pruned down any time government declares its inability to meet the financial requirements of the system. Indeed, this

Was what happened in the second – half of the 1980s right from the instance of Structural Adjustment (1986) in the country where severe financial and economic constraint affected all levels of education and their capacity to provide services. In the first national Rolling Plan Document (1990-1992) it was pointed out that the sharp fall in federal government subvention especially to the universities from which they have never recovered since 1984 explains their present financial predicament with regard to the implementation of their capital projects.

It is pertinent to note that in Nigeria, the government as well as the public can attest to the fact that the overall education system is underfunded and poorly financed, which render it incapable of playing its main role in human capital development.

Human capital development as a process of increasing human knowledge, enhance skills in vocational, technical education and health care for increase in productivity and stimulate resourcefulness of trainees should be systematic, sustainable and strategic. The process should be systematic to the extent that there should be a plan for which previous activities will provide support for upcoming activities while facilitating the attainment of set goals. The process should be sustainable since the product (human capital) must make desired and enduring impact on the organsation or society. The process should be strategic to the extent that there are well-defined goals and targets whose attainments are time bound. It should be dynamic, responsive and result oriented; continually evolving and proactive to address emerging challenges (Akingbola, 2011).


Uwatt (2002) empirically examined the impact of human capital on economic growth, using five variants of the original Solow Model linking physical capital, labour and human capital proxied by total enrolment in educational system to real Gross Domestic Product. The result showed that physical capital exerted a positive and very statistical impact on economic growth. Its coefficient was statistically different from zero at 5% significant level. Labour force that entered all the models in log form had also positive but statistically insignificant effect on economic growth. On human capital variable, it was human capital from primary school education that was statistically very significant on the growth of the Nigerian economy. In the case of tertiary education, the result failed to tally with a priori expectations. One of the reasons advanced by Uwatt was that Nigerian tertiary institutions produce more graduates in humanities than in Mathematics and Sciences. Prior to the study undertaken by the World Bank’s (2010), Odia and Omofonmwan’s (2007) had reported that the Nigerian education system was constrained by several challenges, which included poor funding, poor educational infrastructure, inadequate classrooms, lack of teaching aids (such as projectors, computers, laboratories and libraries), dearth of quality teachers and unconducive learning environment. Moreover, they pointed that many social vices, such as examination malpractice, cultism, hooliganism, and corruption, have emerged from the school system. These in addition, compound the problems that impede the nation’s ability to cultivate the kinds of people that can serve as tools to facilitate economic improvements.

Scholars have not been able to resolve whether higher government outlays on education will always boost growth or not. They have not resolve the question: why might higher spending be ineffective? However, one reason, according to Baldacci, Clement, Qui and Gupta, 2005 is the macroeconomic effects of excessive public outlays.

Chete and Adeoye (2002) studied the empirical mechanics through which human capital influences economic growth in Nigeria. They attempted to achieve this objectives using vector Auto regression analysis and ordinary least square to capture these influences. They however concluded that there is an unanticipated positive impact of human capital on growth which the various Nigerian governments since the post-independence have appreciated by prodigious expansion of educational infrastructure across the country; but they are quick to point out that the real capital expenditure on education and health have been rather low.

Therefore, there has been a growing interest to extend the relationship between health and economic growth, catalyzed in considerable extent by a 1993 World Bank report on health (see World Bank 1993). Barro (1996) comments health is a capital productive asset and an engine of economic growth. Using this argument, we can consider health as a determinant of human capital. Likewise, Mushkin (1962) indicates human capital formation, with the help of health services, and education are based on the argument that people develop themselves when they invest in these assets and will earn a future return with them. Grossman (1972), Bloom and Canning (2000) explain healthy individuals are more efficient at assimilating knowledge and, in consequence, obtain higher productivity levels. Hamoudi and Sachs (1999) argue there is a cycle of simultaneous impact between health and wealth.

In an early empirical review of the impact of health on economic development, Sorkin (1977) concluded that health, seen through reductions in mortality, had an important impact on economic growth during the early twentieth century. However, he comments increases in the health status of the population of developed nations will have little impact on economic growth, but the impact could be different for developing nations. For this matter, he points out several ways how health programs could have an impact on economic development on developing nations.

The first way is through productivity gains and increasing man-hours of work. Jack (1999) explains productivity of labour depends on factors like physical and mental capabilities, investments in human capital and efficiency of labour organization and management, and emphasizes changes in health could affect labour productivity through the previous channels. Also, labour productivity could also be reduced by the need to care for sick relatives or by reducing years of schooling if parents are chronically ill. On the other hand, improvements in health could positively affect the experience level of the work force by increasing their life expectancy and good health status condition.

The second way is making feasible the development of previously unsettled regions. Sorkin (1977) mentions a major health program could initiate the development of areas where economic activity was deterred unfavourable health matters. Bryant (1969) indicates health and health services can improve or retard economic development and social and economic changes within a region.

The third way is improving innovation and entrepreneurship by changing the attitudes of people. Malenbaum (1970) used a step wide regression equation with macroeconomic data of 22 poor countries, using agricultural output as the independent variable, with several social, economic and health data as dependent variables. With this, he showed how the influence of health factors on output seems to be larger compared with other economic and social variables. As a conclusion, Malenbaum (1970) suggests health programs could change the happenings of the lives of the poor by taking their own decisions and to have the feeling to influence the events on their everyday activities, which often accept them as pre-ordered.

There is large body of empirical evidence to support the claim that there is a positive relation between education and health. In their survey of non-market outcomes of education, Wolfe and Zuvekas (1997) identify five health and health related effects of Education:

• A positive relation between one’s education and one’s own health status.

• A positive association between schooling and the health status of one’s family

members (in particular on one’s children).

• A positive link between one’s own schooling and the schooling received by one’s


• A positive contribution of schooling to the efficiency of (consumer) choices (i.e.

on smoking and on the use of health care).

• A relation between schooling and one’s own fertility choices and the fertility

choices of one’s children (in particular a negative effect on the probability of

giving birth out of wedlock as a teenager).


Economic growth is essential for sustainable development. There is a strong link between economic growth and improvement in living standard. Economic growth is quantitative sustained increased in the countries per capita output or income accompanied by expansion in consumption, capital and volume of trade (jhigan,2001). Among the notable macroeconomic objectives, economic growth has been one of the most important for a long time in Nigeria. Growth is an important objective of economic policy particularly in Nigeria because it is the key to a high standard of living, it brings increasing revenue which more and better schools, hospitals, and other social services. Economic growth makes it easier politically to carry out policies of income distribution. Durable growth requires sustainable policies-ones that do not give rise to accelerating inflation for its attainment. There could be no significant economic growth in any country without adequate human and natural resources. In essence, Ojo (1996), explained that improved human beings, human capital formation is fundamental to nations economic progress will not complain about their education, health, food, housing and security among other things, therefore the improved humans beings are better producers who contribute positively to economic growth and its sustainability.

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The concept human capital refers to the abilities and skill of human resources of a country (Adamu,2000), while human capital formation refers to the process of acquiring and increasing the number of persons who have the skills, education and experiences that are crucial for the economic growth and political development of a country (Okojie,1995). Human capital formation Okojie (1995), concludes is thus associated with investing in man and his development as a creative and productive process.

Effective investment in human capital is a key component of long term economic growth and increased productivity. A well educated population is an objective in itself as well as the conduct to accelerate social and economic development. According to the African Development Bank Report (1998), Human capital development is an essential means of sustained economic growth and poverty reduction and also an end itself.

World Bank (1995) assessment of 192 countries indicated that human capital on the average, accounts for 64% of the total wealth, while physical and natural capital accounts for 16% and 29%, respectively. Of all the contributory factors to economic development, human resources standout as the major factors that determines the manner in which of all other should be seen in the light of how economic growth is managed and distributed for the benefit of the people.

Babalola explained that the contribution of education to economic growth is resumed on its ability to increase to economic growth is presumed on its ability to increase the productivity of an existing labour force. According to him education contributes to economic growth in the following ways:

First, education inculcates skills such as engineering, medicines, law, accounting, computer science and teaching, which are useful in the production process.

Secondly, education imparts knowledge economic political science art, geography, philosophy, history, mathematics and logical reasoning which can contribute to the most important aspects of economic growth such as innovation, adaptation and entrepreneurship.

Thirdly, education provides job ethics and attitudes conducive to production of goods and services.

Finally, education serves as screening device for selecting or identifying talents in the most efficient manner. Therefore, education is capable of enhancing the efficient production of goods and services by ensuring through screening that the best people are made available for the world of research.

UNR (1996) expressed that education is fundamental to enhancing the quality of life and ensuring social and economic progress. Education plays a key role in the ability of a developing country to absorb modern technology and to develop the capacity for self-sustaining growth and development. Lee (1989) emphasized that the main problem associated with the belief that education is god for economic growth is linked with how to maintain an equilibrium position. That is, where there will be no incidence of either shortage or supply of educated people. A shortage of educated people might limit growth while excess supply of it might create unemployment and thus limiting economic growth.

Health comes next to education in the development of human resources. There is a symbiotic nexus between health and education. Education facilities general in the population as well as acquisition of the varied and much needed skills for the transformation of the society, have the tendency to foster a change in the attitudes and habits which may be conducive to the attainment of high health status particular amongst people in the developing countries where the major causes of the deaths are largely preventable. So far, for the manpower resource of a nation to be utilized, harness the other resources of a nation, the population must be healthy. Without good health, productivity is low and to ensure adequate productivity, the majority of the population needs to be protected from illness. A strong and healthy labour force is an essential actor in development, it signifies absence of disability and discomfort.

According to Yesufu (2000), a good health policy is a means by which government can at once, ensure that manpower is generated in the right mixes, distributed in accordance with national priorities and ensure the highest level of labour productivity. Health improvement influences morbidity and labour force productivity thereby enhancing the process and speed of economic development. Most development countries have given serious attention to the provision of public health, education and social welfare services. This is because; they believe that such measures could improve the quality of life of their people and their efficiency as productivity agents thereby accelerating the general socio economic development of their nations.

The world is talking about globalization, international property right and information technology and these are only achieved through sound education and good health care of the citizens. Since health and education status affects the individual participation in economic activities and consequently the level of the labour force in an economy, a re-examination of the level investment in the human capital and sustainable growth is imperative, hence, this re-examination is the principal focus of this study.


Education is an economic good because it is not easily obtainable and thus needs to be apportioned. Economists regard education as both consumer and capital good because it offers utility to a consumer and also serves as an input into the production of other goods and services. As a capital good, education can be used to develop the human resources necessary for economic and social transformation. The focus on education as a capital good relates to the concept of human capital, which emphasizes that the development of skills is an important factor in production activities. It is widely accepted that education creates improved citizens and helps to upgrade the general standard of living in a society. Therefore, positive social change is likely to be associated with the production of qualitative citizenry. This increasing faith in education as an agent of change in Nigeria, has led to a heavy investment in it. The pressure for higher education in many developing countries has undoubtedly been helped by public perception of financial reward from pursuing such education. Generally, this goes with the belief that expanding education promotes economic growth. Education occupies an important place in most plans for economic and social development. Whichever way one looks at it, the education sector is important in human development as a supplier of the trained manpower. It is a prerequisite for the accomplishment of other development goals. Also, it is the main sector through which national identity goals and aspirations are evaluated and realised (Adebiyi, 2003).

Therefore, positive social change is likely to be associated with the production of qualitative citizenry. It would seem to follow naturally that if more individuals were educated, the wealth of the nation would rise, since higher education attracts higher wages and in the aggregate, higher national income (Ayara, 2002). This increasing faith in education as an agent of change in many developing countries, including Nigeria, has led to a heavy investment in the sector and, thus, the delegation of responsibility for manpower development to the schools. The pressure for higher or school education in many developing countries has undoubtedly been helped by public perception of financial reward from pursuing such education. Generally, this goes with the belief that expanding education promoted economic growth (Ayara, 2002).

In Nigeria, primary schools prepare candidates for secondary education and while secondary schools prepare candidates for higher education at least for those candidates who have the academic capability and the required resource to further their education. A known examination that prepares candidates for higher education in Nigeria is the West African Examination Council (WAEC). In the year 2000, 725,575 candidates sat for WAEC and those that passed at the qualifying level that can earn their admission to higher institutions were 58,864; for 2001, the number that sat for the examination was 1,099,296 and those that qualified for admission to higher institutions were 178,054; for 2002, the number that took the examination was 1,224,381 and those that qualified were 188,494. In 2005, those that sat for WAEC were 1,742,663 and 203,991 qualified for admissions into higher institutions. What is meant here by qualification at this level to higher institutions are candidates that pass at credit level in 5 subjects including Mathematics and English. For graduate output in 2001, 47,791 were produced, 2002, 58305, and in 2005, 26042. Graduate output here refers to those who obtained their first degrees from various universities.

The concept of human capital formation refers to a conscious and continuous process of acquiring and increasing the number of people with requisite knowledge, education, skill and experience that are crucial for the economic and political development of a country (Odusola, 1998). Burneth et al. (1995) say that investing in education raises per capita GNP, reduces poverty and supports the expansion of knowledge. Education, it is argued, reduces inequality. Fishlow (1995), Persson and Tabellins (1994) and Alesina and Rodrik (1994) agree that inequality is negatively related to growth. Stiglz (1998) states, “Successful development entails not only closing the gap in physical or even human capital, but also closing the gap in knowledge.”

Abridged education policies in Nigeria

Nigeria is of the opinion that education can help its growth and it evolved some educational philosophy in that direction. The five main national objectives of education as stated in the second National Development Plan, and endorsed as the necessary foundation for national policy on education (NPE Revised, 1998), are the building of:

1. A free and democratic society;

2. A just and egalitarian society;

3. A united, strong and self-reliant nation;

4. A great and dynamic economy;

5. A land of bright and full opportunities for all citizens.

Nigeria’s philosophy of education is therefore based on the integration of the individual into a sound and effective citizen and equal educational opportunities for all citizens of the nation at the primary, secondary and tertiary levels both inside and outside the formal school system (NPE p.4).

The quality of instruction at all levels had to be oriented towards inculcating the following values:

1. Respect for the worth and dignity of the individuals

2. Faith in man’s ability to make national decisions

3. Moral and spiritual values in inter-personal and human relations

4. Shared responsibility for the common good of society

5. Respect for the dignity of labour

6. Promotion of the emotional, physical and psychological health of all children.

One of the national educational aims and objectives to which the philosophy is linked is: The acquisition of appropriate skills, abilities and competences both mental and physical as equipment for the individual to live in and contribute to the development of the society. Governments were to take various measures to implement the policy as education was considered a highly rated investment in the national development plans as any fundamental change in the intellectual and social outlook of any society has to be preceded by an educational revolution. Government therefore set out step-by-step plans to implement primary education, secondary education, higher education including professional education, technical education, adult and non-formal education. Above all, university education was to be pursued with emphasis on research to expand knowledge horizon that lead to improved technology.

Nigeria had invested in formal education for a period not less than 167 years (1842 to 2009). The number of primary schools had grown to above 50,000, 8275 post primary institutions and over 77 universities. Nigeria’s higher institutions have been turning out not less than 120,000 graduates yearly. The Federal Government and some corporate bodies via educational Trust Fund (ETF) had been funding education. Comparing education funding of some countries in the Sub-African region, it is observed that Nigeria had never in any year met the minimum standard prescribed by the UNESCO, which is 26% of total expenditure or annual budget of an economy.

Education expansion in Nigeria does not seem to equally match with expansion in economic growth. For instance, between 1970 and 1980, growth in primary school was 141%. For the post primary institutions, the percentage increase between 1970 and 1980 was 133 and 157% between 1980 and 2000. Tertiary institutions percentage increase between 1970 and 1980 is 160%, and between 1980 and 2000, 101%. Even more astronomical is the student intake at various levels of school. For primary schools, between 1970 and 1980 is 247% and between 1980 and 2000, was 104%. In terms of post primary institutions, the growth rate of intake between 1970 and 1980 is 426% and between 1980 and 2000 is 239%. For tertiary institutions, the intake growth rate between1970 and 1980 is 299%, between 1980 and 2000, 1689%. Equally, the growth rate of GDP (at 1984 factor cost) between 1970 and 1980 is 77.6% and 1980 and 2000, 25%. The growth in GDP is a distant comparison with the growth in the schools intake. Unfortunately, observing the growth of GDP per capita was -15.0, -7.7,-5.1 and -4.4 measured in percentage point for the years 1981, 1984, 1990 and 1999 respectively (Ayayi, 2002).

There is also a question; to what extent had education in Nigeria contributed to knowledge economy, the current vogue in world economy? For knowledge economy index (KEI),

Umo (2006:5) states the following; South Africa5.08, Mauritius 4.32, Egypt 3.77 and Nigeria 1.55. The simple observation here is that Nigeria stands at the bottom of knowledge economy. Education is generally considered to be an instrume


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