A REEVALUATION OF THE EFFECT OF HUMAN CAPITAL ACCUMULATION ON ECONOMIC GROWTH: USING NATURAL DISASTERS AS AN INSTRUMENT

A REEVALUATION OF THE EFFECT OF HUMAN CAPITAL ACCUMULATION ON ECONOMIC GROWTH: USING NATURAL DISASTERS AS AN INSTRUMENT (ECONOMICS PROJECT TOPICS AND MATERIALS)

Abstract

This study is a reevaluation of the effect of human capital accumulation on economic growth using natural disasters as an instrument. The total population for the study is 200 staff of ministry of economic development, Abuja. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made economic advisers, economic analysts, senior staff and junior staff were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies

CHAPTER ONE

INTRODUCTION

1.1      Background of the study

Theoretic models of economic growth suggest that human capital accumulation is a significant determinant of rising per capita income. Microeconomic evidence of the positive relationship between schooling and wages supports this prediction. Estimates using macroeconomic data demonstrate that the initial stock of human capital is an important determinant of economic growth, but empirical estimates of the effects of changes in human capital (human capital accumulation) poorly match theoretic predictions (Barro and Sala-i-Martin (1995) and Benhabib and Spiegel (1994)). Most studies approach this poor match as a measurement error problem (Temple (1999a), Mankiw, Romer, and Weil (1992), Krueger and Lindahl (2001)), including correcting for imperfect measures of quality (Hanushek and Kimko (2000), Wossmann (2003)). Other studies have focused on the effects of outliers (Temple 1999b) or the use of incorrect specifications (Englander and Gurney (1994) Gemmel (1996), Bassanini and Scarpetta (2002), Engelbrecht (2003)). These studies suggest that restricting the sample to OECD countries can generate a generally positive effect of changes in schooling or school enrollments on growth that is similar in magnitude to those found in microeconomic estimates based on survey data, but tell us little about the experience of countries outside the OECD, which are often considered to be the developing countries. Our contribution to the literature is based on the possibility that the poor match between theory and empirical work results not from how we measure human capital, but from the potentially endogenous relationship between changes in human capital and economic growth. Using data from developed and developing countries, we present evidence suggesting that human capital is, in fact, endogenously determined and therefore empirical analysis requires an instrumental variable approach. Of course, we are not the first to introduce instrumental variables to this literature. Pritchett (2001) and Krueger and Lindahl (2001) apply an instrumental variables technique to estimate the effect of changes in average years of schooling on growth, using Nehru, Swanson, and Dubey (1995) and Kyriacou’s (1991) schooling data as instruments, respectively.2 Their purpose in using the instrumental variables method is to overcome the measurement error issue, and not necessarily to address endogeneity per se. Indeed, the Nehru, Swanson, and Dubey and Kyriacou schooling variables are not appropriate instruments if one is trying to address endogeneity. A valid instrument in this context is one that determines changes in schooling but is not a direct determinant of economic growth; alternative measures of schooling are arguably just as important a determinant to growth as is the Barro and Lee measure of schooling. Furthermore, researchers like Glewwe and Hanan (2004) have shown that demand for education is positively correlated with increases in household income and wealth, thus emphasizing the two-way relationship between economic growth and human capital accumulation. It appears that a key reason that researchers have not yet addressed the endogeneity issue is because of the lack of valid instruments.

A REEVALUATION OF THE EFFECT OF HUMAN CAPITAL ACCUMULATION ON ECONOMIC GROWTH: USING NATURAL DISASTERS AS AN INSTRUMENT (ECONOMICS PROJECT TOPICS AND MATERIALS)