Human capital development is considered as a main pillar for desired economic growth. Empirical research indicates that countries are increasingly paying attention to this factor while establishing future economic growth plans, (Romer, 1986; Lucas, 1988; Nelson and Phelps, 1966). Natural resources can no longer be considered as the main contribution to growth. Researchers argue that resource-abundant countries usually witness a shift in their economic sectors towards natural resources. This may eventually lead to “Dutch Disease” in which economic growth becomes slower than in countries whose natural resources are limited, resulting in the natural resources being considered more as a curse than a gift, (Sachs and Warner, 1999, 2001)
Endogenous growth theory looks at human capital from a different perspective than previous theories. Both Romer (1986) and Lucas (1988) debate that the accumulation of human capital contributes marvelously to countries’ achievement of a higher return of growth through increasing the productivity of workers accompanied by the innovation of new product design. The relationship between accumulating human capital and technological change is discussed thoroughly, starting with Becker (1964), followed by Nelson and Phelps (1966), Lucas (1988), Romer (1986, 1987, 1990, 1994) and Aghion and Hewitt (1992).
Nelson and Phelps (1966) argue that positive growth rate is enforced by a positive growth of human capital stock which drives in turn countries’ capabilities to innovate. Countries’ ability to acquire human capital stock is the corner-stone for inclusion among the developed countries which enjoy a high level of productivity, as the result of their possession of a high level of human capital stock accumulation. Nelson and Phelps (1966) attribute the difference among countries’
growth levels to the difference of the level of human capital they develop and reserve. There is a debate whether education and accumulation of knowledge are behind technological change or vice versa, but either way, the accumulation of human capital is essential for innovation and it drives in turn the countries’ technological change level. (Romer, 1990).
Both Becker (1964) and Lucas (1988) concur that the accumulation of human capital through education, formal and informal training is the main factor behind a country’s growth. Lucas (1988) finds that the difference among countries’ growth rates is related to the difference in knowledge accumulated through time. Lucas (1988) finds that there is a strong relationship between productivity and human capital accumulation. Productivity growth rate increases with the level of education level attainment especially when countries have a high level of enrolment in secondary and higher education.
Romer (1986) and Lucas (1988) introduce within their model the notion of knowledge spillover of education among individuals. The direct effect of any individual’s education is primarily on his own productivity level, while the secondary one is called the demonstration effect on group average level of education within which the individual interacts socially. A group’s level of education is positively affected by each and every individual’s attainment of new knowledge. This drives the group to learn through interaction with each other and with the higher level of knowledge spillover that happens when discussions occur. Lucas (1988) argues that there are two main ingredients which formulate the country’s human capital: Education and learning-by-doing. Workers devote a fraction of their time to work production and the remaining fraction to on-the-job training (learning-by-doing).
Following the same stream of thought, Romer (1990) argues that human capital accumulation and technology are driving countries’ growth in the long term rather than the investment in physical capital and the accumulation of more workers. Romer (1990) believes that countries should invest in human capital in terms of research function. Examples of research outcome could be a new product design, better ways to perform operational activities, and newer services. The resulting innovation in terms of ideas generation and new product design drives the country’s ability to generate a higher standard of living and in turn achieve a higher level of return on investment of the human capital.
Aghion and Hewitt (1992) debate in their model that growth rate is the function of the level of innovation, size of skilled labour-force and the volume of research activities. In this stream of thought, labour is classified into three types. First is unskilled labour which is used in the simple line of production. Second is skilled labour used either in the intermediate level of operations or in research activities. The last is specialised labour used mainly in research activities. Aghion and Hewitt (1992) presume that skilled labour is needed for research which would lead to a random sequence of innovations which in turn will drive the economy’s intended growth level.
Based on the above arguments, modern economists believe that Human Capital is one of the major pillars to sustainable economic growth. Human capital has a strong link with technological change; although some may assume that human capital drives technological change through the level of research and development and, in turn, innovation. Human capital stock can be illustrated by most or even all of the following components: Education, knowledge accumulation, formal and informal training, learning-by-doing, and skilled labour subject to technological change.
Al Sakka, FAM 2014, Human capital development in special economic zones the case of Dubai , PhD thesis, University of Salford.