Human capital and economic growth across regions: a case study in Indonesia

This paper investigates the role of human capital on economic growth in both a quantitative context as well as a qualitative one. The empirical assessment focuses on a subnational Indonesian dataset with wide spatial diversity by using two different approaches: (1) production function estimates using panel data and (2) conditional convergence equation estimates of cross-sectional observations, with national examination results used as a proxy of education quality. The study’s results suggest that human capital is a main driver for economic growth. This conclusion explains major variations in medium-term economic growth across subnational units and also underscores the importance of investing in human capital. The empirical estimates indicate the followings: (1) elasticity of human capital to economic growth varies across regions, which may be related to the share of the manufacturing sector, and (2) quantitative measures of human capital (e.g., years of schooling) are important for economic growth. However, cognitive skills are a more significant factor because they are derived from the quality of human capital investment. Therefore, while we suggest that school enrollment is important, high-quality educational infrastructure and a curriculum that focuses on enhancing cognitive skills are key to ensuring higher economic growth.