An Analysis of Relationship Between Human Capital and Economic Growth

Human capital in every sense is one of the fundamental factors of development. No country can achieve sustainable economic development without substantial investment in human capital. The relationship between economic growth and human capital has been long recognized. Many studies especially in Western economies have shown that human capital has a positive impact on economic growth. However, economic growth also has a strong effect on human capital outcomes, both through private expenditures and government programs. Thus, higher incomes facilitate the achievement of other crucial human development objectives; it also has an indirect effect on human development. In Malaysia, human capital investment is becoming an important aspect of the development agenda for which a large percentage of its expenditure is being allocated. This study attempts to analyze the relationship between human capital and economic growth in Malaysia using an augmented aggregate production function growth model, we apply the bounds testing (ARDL) approach to cointegration which is more appropriate for estimation in small sample studies. Human capital is represented by life expectancy at birth and public expenditure on education, while economic growth is measured using real gross domestic product. The data used for the analysis are gathered from various government agencies and world reports and the coverage is from 1980 to 2009. The study reveals that the traditional inputs i.e capital and labour are statistically significant in both the long-run and the short-run, having positive effects on economic growth in Malaysia. Government expenditure on education is only significant at 12.6 per cent level, while life expectancy is significant at 16.1 per cent. In other words, economic growth in Malaysia is very much input-driven i.e. by adding more and more resources into the same production function. Such growth is hard work and by the law of diminishing returns, cannot be sustained indefinitely. A large budget allocated to education does not translate into improvement in the quality of workforce and production process, innovation and technological advancement. Empirical results in this paper suggest that Malaysian education system must produce more efficient workforce to increase the contribution of human capital to its economic growth. A large budget allocation to education sector must be utilized optimally through providing education that tailored to the nation's need. Further human capital investment in the labour market is also needed to produce skilled workers. This argument is further strengthened when we look at the objective for improving human capital which is not merely to achieve a high level of economic growth but also to fulfill social needs. [Idris Jajri, Rahmah Ismail. An Analysis of Relationship Between Human Capital and Economic Growth. Life Sci J 2012;9(4):3735-3742] (ISSN: 1097-8135). http://www.lifesciencesite.com. 554