Human capital investment as the main determinant of sustainable economic development in Latin America

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Macroeconomic evidence on human capital and economic growth

There has been a long debate whether human development is the baseline for economic growth or economic development is the prerequisite condition for human development. Both arguments hold clear casualty in terms that economic growth provides the sufficient resources to permit sustained improvements in human development, and higher human development -healthier and more educated people- constitutes an important condition to economic growth (Ranis, Stewart and Ramirez, 2000). Analysis shows strong flows from human development to economic growth, yet the relationships from economic growth to human development seem much weaker in Latin America than that indicated by worldwide evidence (Ranis and Stewart, 2002).

This casual chain from human development to economic growth focuses on the empirical findings that improved health has direct effects on labour productivity especially in countries whose mayor labour force is concentrated in manual labour (Strauss and Thomas 1998), extended basic education helps to raise productivity especially in agriculture where farmers use modern technologies (Rosenzweig, 1995), and that education affects the growth of exports in that primary and secondary education provides literacy, numeracy and discipline which are crucial in a modern factory (Wood, 1994). The opposite chain flow from economic growth to human development hasn’t proved a strong casualty in Latin American case, mainly examined as due to frequent economic fluctuation caused by debt crisis, dependency on international price of commodities and other macroeconomic volatilities.

Cases of success and failure 

An econometric estimate presented by Ranis and Stewart (2002) helps to locate the position of Latin American countries in the relation of human development and economic growth. In this estimate the measurement of human development adopted the Human Development Index but excluded the income component not to count it double in the measurement of economic growth which adopted average GDP per capita growth rate during 1960-2000 period.

Costa Rica, Chile and Mexico are nominated as successful cases of development in the region, and those countries have a long historical commitment to human development. Even in the time of economic downturn and expenditure cuts, those countries managed to soon recover to finance the rising social expenditure. Costa Rica abolished the army in 1948 then redirected the resource for social expenditure. Its illiteracy rate dropped from 20% in 1950 to 13% by 1980 (Thorp, 1998), then it went further to 4.5% by 1999. In the same period, life expectancy raised from 67 years in 1960 to 76 by 2000. Chile experienced neoliberal dictatorship from 1973 worsening income distribution mainly in metropolitan area (Riveros, 1998), but it maintained its welfare programmes of social security, health and education showing the progress in human development as a result of better targeting of recipient population. The return to democracy in 1990 led to a renewed expansion in social expenditure, doubling on both education and health over 1990-1999. After the debt crisis in 1980s, Mexico initiated economic reforms bolstered by foreign investment following the ratification of NAFTA. From 1990s a sharp increase in social expenditure was observed as the expenditures on education rose by 90% while those on health increased by 79% (Ranis and Stewart, 2002, p19).

Jamaica in 70s showed a strong commitment to human development reaching social expenditure ratio to 1.2% of GDP in 1975, but after severe trade shocks and economic contraction, Jamaica realised sharp cutbacks in social expenditure which led to deterioration in human development. Even between 1986 and 1990 when Jamaica’s economy was recovered it didn’t turn into social investment. Guyana shares a similar story. successive economic shocks and a failure to protect social sectors linked to the failure of human development in both countries. In Nicaragua, heavy external debt accumulated during the civil war, undermined the importance of human development improvements leaving the country hard to reboot the sector productivity, confirming the finding of Ranis and Stewart that in Latin America “human development improvements do lead to economic growth improvements, although in this case economic growth did not systematically generate advances in human development” (Ranis and Stewart, 2002, p22).

Links to other growth determinants in the region

Human capital improvement is a determinant intertwined with other growth determinants such as institutions, geography or industrialisation process. The policies that concern public education and health come from inclusive institutions. On the contrary, Guatemala gives us an example of how extractive institutions can deteriorate human development improvement of a society. Guatemala had developed colonial and extractive institutions for coffee production with a massive labour extractive economy, leaving the majority population away from the economic surplus (Acemoglu and Robinson, 2013). Guatemala currently remains as one of the poorest nations in Latin America. Geography also links to human development improvement in the way some tropical environments weaken public health by exposing the risk of Malaria, thus economic growth (Sachs, 2003). Modernisation of industries also is an important determinant for economic growth, which is embedded deeply with the improvement of human development. Either in agricultural sector or in industrial sector, the process of modernisation requires skilled and healthier labours aiming to enhance sector productivity that leads to market competitiveness, thus economic surplus (Diamond, 1997; Chang, 2002).

In many Latin American case, natural resource can be considered as an important growth determinant as its export generates a volume of revenue for its institution which guarantees social investment. Oil in Venezuela, Tin in Bolivia and Soy in Argentina are the major income for those nations that finances social expenditure on education, health and infrastructure of those nations. But we are witnessing in case of Venezuela that the economic growth depending on natural resource might not be sustainable when the commodity price falls, yet critics are made that educational missions have been rather successful (Ellner, 2011) but medicines once heavily subsidized became highly inaccessible, jeopardising public health. Population is also in count, in that in smaller population it’s easier to invest in human capital as demonstrated in Chile or Costa Rica. But the most populated nations in Latin America; Brazil and Mexico, show similar improvement of human capital as that of Costa Rica. Once again, this turns back to institutional capacity and commitment to invest in human capital as the main determinant of economic growth in the long run.

References

Acemoglu, D. and J. Robinson (2013): Why Nations Fail: The Origins of Power, Prosperity and Poverty, Profile Books, London.

Chang, H-J. (2003): Kicking away the ladder: Development Strategy in Historical Perspective, Anthem Press, London.

Diamond, J. (1997): Guns, Germs, and Steel: The Fates of Human Societies, Norton, London.

Ellner, S. (2011): Venezuela’s Social-Based Democratic Model: Innovations and Limitations, J. Lat. Amer. Stud. 43, 421-449, Cambridge University Press.

Ranis, G., F. Stewart and A. Ramirez (2000): Economic growth and human development, World Development, vol.28, No.2, Oxford, U.K., Pergamon Press.

Ranis, G. and F. Stewart (2002): Economic growth and human development in Latin America, CEPAL Review 78, Santiago de Chile.

Riveros, L. (1998): Chile’s structural adjustment: Relevant policy lessons for Latin America, in A. Berry (ed.), Poverty, Economic Reform and Income Distribution in Latin America, Boulder, Colorado, Lynne Riener.

Rosenzweig, M. R. (1995): Why are there returns to schooling?, The American Economic Review, vol.85, No.2, Nashville, Tennessee, American Economic Association.

Sachs, J. D. (2003): Institutions don’t rule: Direct Effects of Geography on Per Capita Income, NBER Working Paper No.9490.

Strauss, J. and D. Thomas (1998): Health, Nutrition and Economic Development, Journal of Economic Literature, Vol.36, 776-817.

Thorp, R. (1998): Progress, Poverty and Exclusion: An Economic History of Latin America in the 20th Century, Baltimore, Maryland, The Johns Hopkins University Press.

Wood, A. (1994): North-South Trade, Employment and Inequality: Changing Fortunes in a Skill-Driven World, Oxford, U.K., Oxford University Press.

 

 

 

 

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