Annotation. Strategies of many countries are focused on two area of growth: sustainable and inclusive that couldn’t be achieved without major contribution of human capital. It clear that these goals could be realized without a good education and training system, a large diffusion of knowledge in manufacturing services, a creative industries and a great effort to create a research-intensive economy. The contribution of human capital to economic growth has been accepted as by theoretical models and as by empirical studies. This study aims at providing a theoretical concept of human capital and its impact on economic growth. Another focus is overview of models describe relationship “Human capital – Economic growth”. 

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The role of human capital on economic growth has received much scientists attention. There are many study in economic literature that show the channels through which human capital accumulation and education may lead to economic growth.

Human capital affects growth through two mechanisms.  Firstly, human capital directly participate in production  as  a productive  factor.  Therefore, the accumulation of human capital would directly generate the growth of output. Secondly, human capital can contribute to raising technical  progress. In this way, the  level of human capital affects productivity growth.

Human capital was generally defined into five categories: 1. Health facilities and services; 2. On-the-job training; 3. Formally organized education at the elementary, secondary and higher levels; 4. Study programs for adults; 5. Migration of individuals and families to adjust to changing job  opportunities  The concept of human capital refers to the  abilities and skills of human resources of countries, while human capital formation refers to the process of acquiring and increasing the number of people who have the skills, good health, education and experience that are crucial  for economic growth.

There are a number of studies to investigate the relationship between human capital  and economic growth. A lot of economist paid attention in estimating the relationship between these two issues like education and growth.  According Keynesian Theory public expenditure can contribute positively to economic growth. Hence, an increase in the government consumption is likely to lead to an increase in employment, profitability and investment through multiplier effects on aggregate demand. As a result, government expenditure augments the aggregate demand, which provokes an increased output depending on expenditure multipliers. In Solow model, other things being equal, saving/investment and population growth rates are important determinants of economic growth. Higher saving/investment rates lead to accumulation of more capital per worker and hence more output per worker. On the other hand, high population growth has a negative effect on economic growth simply because a higher fraction of saving in economies with high population growth has to go to keep the capital-labor ratio constant. In the absence of technological change & innovation, an increase in capital per worker would not be matched by a proportional increase in output per worker because of diminishing returns.

Mankiw, Romer, and Weil (1992) have built a model to explain the growth endogenously by extending the Solow growth model to enlist human capital as a separate input from labor (known as MRW models). The variables in their model can be expressed in terms of efficiency unit of labor. Based on the similar production function and by assuming that the country specific shock is not correlated with the saving rate and population growth, the OLS estimation can be employed. They use average percentage of working people in secondary school to proxy for human capital investment rate and other traditional variables as well as the baseline coefficients, and establish relations among the variables through the so called Augmented Solow model. The results show this model can explain over 67% of the cross-country difference in income per capita. Also, another interesting result is that the poor countries tend to converge to the steady state faster than the rich countries.

According to a framework of endogenous growth model, the production function takes the Cobb-Douglas form as the following. 

ln Y (t ) =ln A (t )  + a ln K (t ) + b ln L (t )  + c ln H (t ) + ε(t ),           (1) 

where Y is GDP or output, K is the capital stock, L is labor, H is human capital, ln is natural log, ε is disturbance term, a, b, c, and ln A, are coefficients.

The coefficient in front of each variable is the elasticity of output with respect to that input. Such interpretation explicitly makes human capital an endogenous determinant of growth because if the stock of human capital increases by one percent, how many percentages the GDP rise, which is the same notion of growth. However, the objective of this section is to find the casual relationship patterns between human capital and economic growth, a prerequisite that needs to be verified is the existence of linear relationship as assumed by the econometric estimation method widely used, so called OLS (Ordinary Least Squares).

One of the main methodological problems is to choose the proxy indicator used to measure human capital, since the amount of influence is affected by the indicator chosen for this purpose. Nonnemen and Vanhoudt (1996) use as proxy in MRW model, the share of education expenditure in GDP and they conclude that the relationship between human capital and economic growth is insignificant. Murthy and Chien (1997) as a proxy of human capital using a weighted average of the population registered in tertiary education, secondary and primary and they conclude that there is a significant positive and direct links with economic growth. Barro and Lee (1993), Islam (1995) used as a proxy for human capital the average number of years of schooling of the population over 25 years. María Serena (2001) used as a proxy for human capital both individual income and the educational attainment of the population aged 25 years and over, as an average years of education. Izushi and Huggins (2004) used as a proxy for human capital the number of people in research development in the private sector. In many papers, because the average number of years of schooling is difficult to determine, this indicator was replaced by gross enrolment rate in primary, secondary and tertiary school or by enrolment rate (literacy rate).

There are e lot of research papers that estimate the relationship between public funding of education and economic growth both in developed and transition countries. Some results of Barro (1999), showed positive link between education quality and economic growth. Gregorious and Ghosh (2007) made use of the heterogeneous panel data to study the impact of government expenditure on economic growth. Their results suggest that countries with large government expenditure tend to experience higher economic growth. The positive impact of education quality more than quantity is highlighted by Hanushek and Woessmann (2007) who use as indicators of human capital the results of PISA and TIMS tests. Hanushek and Schultz (2012) for example showed that a deviation of 100 points in PISA test results may lead to a difference of 2 percentage points in the growth rate of GDP per capita.

In many researches  Human Development Index (HDI) is chosen as a proxy indicator describing human capital.  a statistic composite index of life expectancy, education, and per capita income indicators, which are used to rank countries into four tiers of human development. A country scores a higher HDI when the lifespan is higher, the education level is higher, and the gross national income GNI (PPP) per capita is higher. It used to measure a country's development by the United Nations Development Programme (UNDP)'s Human Development Report Office. Some scientist pay attention on Human Capital Index witch quantifies the contribution of health and education to the productivity of the next generation of workers. The Human Capital Index is a report prepared by the World Bank. The Index measures which countries are best in mobilizing the economic and professional potential of its citizens. The index measures how much capital each country loses through lack of education and health. The Index was first published in October 2018 and ranked 157 countries. The Human Capital Index ranges between 0 and 1 with 1 meaning maximum potential is reached.

The models mentioned above   are positive relationship, statistically significant between GDP per capita and innovative capacity of human capital  and qualification of employees (secondary education) as expected according to economic theory. 

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