The Knowledge Economy - K.S.

Pang (2011)
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CASE STUDY 1: THE CORRELATION OF HUMAN CAPITAL AND SUSTAINABLE
ECONOMIC DEVELOPMENT
Human capital is a significant key perspective to making economic development sustainable in
the 21
st
century. In addition, some planning strategies that should a developing nation adopt
regarding the perspective has been discussed in this paper. To the above refers, we should brief
about what actually 1) Sustainable development and 2) Human capital are talking about.
1) Sustainable development
Sustainable development is development that meets the needs of the present without
compromising the ability of future generations to meet their own needs.
This is one of the most widely recognized definition by United Nations and be released
in Brundtland Report on year of 1987. It does included 2 points of concept which are: a) The
concept of 'needs' is the essential needs of the world's poor, to which overriding priority should
be given; and b) The idea of limitations imposed by the state of technology and social
organization on the environment's ability to meet present and future needs.
In a simple explanation, the resources should be used in the pattern that satisfied all human needs
but preserving the environment simultaneously. Therefore these needs can be met not only in the
present, but also for future generations. Coincidently, this is seems like the classical definition of
the word economics Use the limited resources to satisfy unlimited needs.
Basically, the field of sustainable development can be conceptually broken into three constituent
parts: i) environmental sustainability, ii) economic sustainability and iii) sociopolitical
sustainability. Therefore, the development is considered sustainable only if human successfully
achieved a permanent equilibrium of these 3 parts. As illustrated as below:

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Since sustainable development is crucially concerning the carrying capacity of the available
natural resources with the social challenges facing humanity. How to maximize the productivity
of each unit of resource? How to recycle the resource? And how to make all resources are
recyclable are become the most difficult but important mission of entire mankind on 21
st
century.
Too much of conflicts of interest will be incurred.
Still other researchers view environmental and social challenges as opportunities for
development action. This is just match with the concept of those sustainable enterprises that
frames these global needs as opportunities for private enterprise to provide innovative and
entrepreneurial solutions.
In addition, sustainable development is said to set limits on the developing world. While current
first world countries polluted significantly during their development. And these countries
encourage third to reduce pollution, which sometimes impedes growth. Some of them may
consider that the implementation of sustainable development would not that beneficial to growth
of third country.
Regardless from the view of private enterprises (opportunity to provide innovative solutions) or
third world (reduce pollution but not harmful to economic growth), the sterling conclusion we
drawn here is we need a sustainable development immediately because the true fact is the
resource is depleting soon!
"The word sustainable has been used in too many situations today, and ecological sustainability
is one of those terms that confuse a lot of people. You hear about sustainable development,
sustainable growth, sustainable economies, sustainable societies, and sustainable agriculture.
Everything is sustainable! (Temple, 1992)."
A question arise here, what kind of sustainable development do we actually need? We do hope
we can maximize the carrying capacity of the existing natural resources or we found another
alternative resource. Meanwhile we need a green energy which is highly-recyclable and highly-
efficient in term of productivity. To create something new, we need a scientist or engineer.
Therefore, we need human capital accumulation.

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2) Human capital and Technological progress
Human capital is acquired and useful abilities of all the inhabitants or members of the society.
The acquisition of such talents, by the maintenance of the acquirer during his education, study,
or apprenticeship, always costs a real expense, which is a capital fixed and realized, as it were,
in his person. Those talents, as they make a part of his fortune, so do them likewise that of the
society to which he belongs. The improved dexterity of a workman may be considered in the
same light as a machine or instrument of trade which facilitates and abridges labor, and which,
though it costs a certain expense, repays that expense with a profit.
The father of economics, Adam Smith was defined human capital as abovementioned in his well-
known Division of Labor.
In another way to explain this, human capital is the stock of competences, knowledge and
personality attributes embodied in the ability to perform labor so as to produce economic value.
It is the attributes gained by a worker through education and experience. Many early economic
theories refer to it simply as workforce, one of three factors of production, and consider it to be a
fungible resource which is homogeneous and easily interchangeable.
Mankiw, Romer and Weild (1992) was specified an Augmented Solow Model by adding human
capital (denoted by H) inside the traditional Solow Model

to become an Augmented Solow
Model, (Y = AK

H

L
1--
). Therefore, this showed that physical capital (AK) and human capital
(HL) would expand only as long as the amount of investment is large enough to more than offset
the need to equip new workers, cover depreciation and exceed the rate of labor augmenting
technological progress. This new Solow Model is trying to interpret that human capital is
another major source and beneficial for long term economic growth. For traditional Solow
Model is solely focused on technological progress and believe it can bring betterment to standard
of living in the long run.
The relationship between human capital and technology progress has been discussed by another
economist. Lucas (1980) was developed the endogenous growth model which is specified human
capital as the most critical force to generate technology progress in an economy. Human capital
is responsible for i) labor productivity in the world and ii) overall output level in the world.
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This is possible because human capital is creator of technological progress and makes it be able
to overcome diminishing returns to capital and other producible factors. And the increase in
human welfare occurred because we learned to do things more efficiently. For example, we have
created new methods, tools and ideas at a more rapid pace. Because of these importances of
technology, economists have developed models to explain technological progress. These new
models do not assume technological progress as exogenous or determined outside the model. But
it is endogenous, or is treated as an integral part of the model. These new models are referred as
models of endogenous technological progress.
Correlation between education and development: From historical data
On the present day, the overall state of education in the world has been increasing at rapid rate.
More and more countries are reaching very high rate of education that only a few highly
developed nations were able to achieve in the past. For example, Taiwan has raised its average
number of years of education from less than 3 years in the early 1950s to over 10 years in 1995.
On another hand, But many countries still remain with low levels of education. Especially in
Africa, southern Asia and the Middle East, the overall levels of education remain extremely low.
High income economies provide their residents with much more education than developing
economies do. The average years of education in developed countries is 11.1 years but the
average years of education in developing countries is only 3.9 years. There are also very large
differences in education attainment among the developing countries. For examples countries in
Africa such as Chad, Burundi and Mali have the average years of education of only 0.4 year but
compared with countries such as South Africa (3.9 years) and Swaziland (3.8 years).
The performance in Latin America is better. For examples, high education attainment is found in
Argentina (9.2 years), Uruguay (8.1 years) and Chile (7.8 years). But country such as Haiti can
manage only 1.7 years of average education. In Asia the achievement is more unequal. High
performing countries include South Korea (9.3 years), Taiwan (8.4 years) and the Philippines
(7.6 years). Low performing countries with low education attainment usually do not perform
better than the others. For example, Afghanistan is 0.9 years and Bangladesh is 2.0 years.
From these all historical facts, obviously and significantly, we found the positive correlation
between development and education.
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How human capital and technological progress making development sustainable?
Lets we start with a simple example: the effectiveness of a secretary with secondary school
education level is lesser than a secretary who is a bachelor degree holder. The assumption is
ceteris-paribus; we are talking about the effectiveness will be higher if someone with higher
education level. By the way, the effectiveness of this secretary who is even a bachelor degree
holder will slower than the software of Microsoft Office which can detect all grammar errors
within few seconds precisely. But the software is invented by mankind. Therefore, human capital
and technology progress are contributive to economic growth and development simultaneously.
In the previous parts, we discussed from Solow model to augmented Solow model and from
exogenous technology progress to endogenous technology progress. But how actually human
capital and technology progress can make the development sustainable? We turn back to our
initial question, how the limited natural resources can satisfy the unlimited human needs?
Food crisis that the mankind worried about nowadays is a good platform to answer this question.
As we know that, one of the reasons for food crisis on 21
st
century is the population is increasing
at rapid rate but the land for food planting purposes is getting lesser now. Therefore, we need to
maximize the productivity of food and agricultural plantation by scientific approach and
technological progress.
I found and review 2 economic journals to shown that how technological progress can maximize
the productivity of food plantation:
Effect of Technological Change and Institutional Reform on Production Growth in Chinese
Agriculture by Shenggen Fan (1991) American Journal of Agricultural Economics
The rapid growth of agricultural production in Chinese agriculture could be attributed to an
increase in inputs, technological change, and institutional reform. However, technological
change is crucial to furthering production growth because of the limited potential for significant
increase in the use of conventional inputs and in particular land.
In traditional productivity theory, total production growth consists of movements along the
production function (an increase of total inputs) and shifts of the production function
(technological change). The growth rate of total factor productivity is the growth rate of total
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output minus the growth rate of the total input. Hence, technological change is considered as the
unique source of productivity growth. As shown in Figure 1 (captured from the article) below,
technological change is defined as a shift of the frontier production function. And the increase of
technological change is measured by the distance from frontier 1 to frontier 2.

After we go through the estimates of the frontier production function as shown in Table 2
(captured from the article) indicate that traditional inputs are still important to agriculture of
China. But the importance of traditional inputs of land, labor, and manurial fertilizer is
decreasing rapidly. In contrast, the coefficients of modern inputs, chemical fertilizer and
machinery were small in 1965 but increased rapidly onward until 1985.
The results of this study indicate that technological change accounts for 15.7% of total
agricultural production growth in China. However, if compared to other countries, this
proportion is very small because underinvestment in agriculture of China. From 1960 to 1980 in
Japan, 47.4% of total production growth stemmed from technological change. And technological
change accounted for 84.2% of growth in USA as well.
The underinvestment in agriculture may explain the slow technological change in China. In 1985,
the agricultural sector produced 28.1% of total national output and 41.1% of national income,
although the agricultural investment was only 3.4% of total investment. Hence, an increase in
agricultural investment is needed to stimulate technological change, especially in research and
development.
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Hybrid Corn: An Exploration in the Economics of Technological Change by Zvi Griliches
(Oct 1957) Econometrica, 501-522
One of the first studies of the diffusion of new technologies was carried out in 1957 by Zvi
Griliches, an outstanding economist from Harvard University. He looked at the diffusion of
hybrid corn in different state in United State. Producing hybrid corn entails crossing different
strains of corn to develop a type of corn adapted to local conditions. The introduction of hybrid
corn can increase the corn yield by up to 20%. Although the idea of hybridization was first
developed at the beginning of 20
th
century, but the first commercial application did not take
place until the 1930s in United States.

This is figure we captured from the article; Figure 1 shows the rate at which hybrid corn was
adopted in few particular states (Iowa, Wisconsin, Kentucky, Texas and Alabama) in United
States from 1932-1956.
The figure shows two dynamic processes at work: First, is the process through which varieties of
hybrid corn appropriate for each state were discovered. Hybrid corn became available in
southern states (Texas and Alabama) more than 10 years after it had become available in
northern states (Iowa, Wisconsin, and Kentucky). Second, the speed at which hybrid corn was
adopted within each state. Within 8 years of its introduction, practically all corn in Iowa was
hybrid corn. The process was much slower in the south. More than 10 years after its introduction,
hybrid corn accounted for only 60% of total acreage in Alabama. This is because speed of
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adoption in each state was a function of the profitability of introducing hybrid corn. And this
means that, profitability was higher in northern states than southern states.
Basically, this article indicate that at least the process of innovation, adapting and distributing a
particular invention to different markets and its acceptance by entrepreneurs is amenable to
economic analysis. As shown in figure 1 again, the lag in the development of adaptable hybrids
for particular areas and the lag in the entry of seed producers into these areas can be explained on
the basis of varying profitability of entry.
What planning and strategies should a developing nation to adopt?
As refer to the 2 articles abovementioned. Technology progress did showed its significant
contribution to push up the productivity level. Therefore, human capital is become considerably
more valuable as the need for skilled labor came with newfound technological advancement. The
20th century is often revered as the "human capital century" by scholars such as Claudia Goldin.
The policy maker of developing country should treat human capital as a crucial resource for its
future economic growth and taken this into consideration while they are developing their
countries. Some important issues that cannot be ignored about human capital are human capital
accumulation, governments expenditure allocation for education, how to impede human capital
flow out or brain drain and so on. It is suggested by several economists about the less developed
countries have not established a set of institutions favoring equality and role of education for the
masses and therefore they have been incapable of investing in human capital stock necessary for
technological growth. Hence, to sustained economic development is ultimately due to human
capital and technological progress. Perhaps the most important things that we need to concern in
the growth theory are the determinants of technological progress.
An age-old worry is that technology progress will become less and less fertile, that most major
discoveries have already taken place, and that technological progress will slow down. But this is
only an analogy because so far there is no evidence to prove it is correct.