Fixed Investments and Human Investments for Economic Growth - A case study of Aceh Province - Indonesia

Under endogenous growth theory, education as part of human investments has become one of the key drivers of economic growth. Many recent studies have put an increasingly strong emphasis on human investments as opposed to physical fixed investments. More attention has been paid to find evidence of whether government intervention through education spending has a positive contribution to educational outcomes, labor market outcomes and hence economic growth. This study is aimed at making a comparative analysis of whether human investments have a greater impact on the economic growth than fixed investments, by taking Aceh province, Indonesia, as a case. A static linear panel data model was utilized to gauge the impact of the two types of investments on economic growth. The panel data from all 23 districts within Aceh Province from 2008 to 2011 were collected. Based on statistical testing for model selection, random effects model was selected as the appropriate approach to explaining the relationship among the following variables; fixed investments, education spending and economic growth. The results of the study have shown that both types of investments have statistically positive impacts on the economic growth of a regional economy. Moreover, fixed investments have well greater impact than education spending on economic growth. Therefore, subnational governments, particularly those with special fund allocation to education, should optimally manage the use of their education funds in a more effective way in order to achieve a certain targeted rate of economic growth.