� Pradhan and Abraham (2002): “Does Human Development Policy Matter for

Economic growth”, www.econ.yale.edu/`egcentre/research.httm

� Chakraborty, Lekha S. (2003): “Public Expenditure and Human Development: An Empirical Investigation”, http://www.wider.unu.edu/conference/conference.

� Dutta (2005): “Human Development: India in the world context”, Indian Human Development Report 1995, NCAER, Oxford University Press, New Delhi.

� Mohan, Rakesh (2005): “Human Development and State Finances”, Reserve Bank of

India Bulletin, 59 (12), pp. 1123-1129.

ECONOMIC GROWTH AND HUMAN DEVELOPMENT - A THEORETICAL JUSTIFICATION

3.1 Introduction

The theoretical evidences focusing on the role of human capital in shaping

economic development. The stock of skill and productive knowledge embodied in

people constitute human capital. The idea of investment in human capital actually

started with Theodore W. Schultz’s presidential address to American Economic

Association in December 1960. Human capital is defined as ‘the body of knowledge

possessed by the people and the capacity of the population for using knowledge

effectively. (T.W. Schultz, 1961).

Since then, there has been a growing recognition of human capital as a central force

by economists like Simon Kuznets (1966),Psacharopollob and Woodhall (1985), Becker

(1964) Dennison (1967), PQLI of Morrison and Morrison (1970) and Acemogen (1988).

However, since 80s, a much broader perception of human capital i.e., Human

Development begain to receive crucial importance in development literature. Generally

all these exercises culminated in the publication of human development reports by the

UNDP every year focusing on various dimensions of human development. The human

development approach emphasizes investment in education, health, nutrition and

income.

This chapter has a threefold objective. One is to explore the strong theoretical

foundation of human capital vis-à-vis human development and the other one is to

examine the causality perception between economic growth and human development

and vice-versa. The last part examines empirically the causal relationship between

human development and economic growth in Indian states. This entire exercise serves

as a background to understand better the regional disparities in human development in

the context of economic growth.

This chapter is classified into three parts. Section I consists exclusively of theoretical

perception of human development, section II deals with the causality between economic

growth and human development and the section III examines empirically the causality

between economic growth and human development in Indian states.

Section I

3.1.1 Human Development Perspective: A Theoretical Analysis

A study of the theoretical perspective of human development enables an

understanding of the evolution of the concept of human development over a

period of time reflecting different nuances of human development.

Adam Smith (1776) was the first classical economist to include human capital in

his famous book “An Enquiry into the Nature and Causes of the Wealth of

Nations”. He argues that growth means not only capital accumulation and

technical progress, but also growth of human capital which play a critical role in

the process of economic development. He included in the capital stock of a

nation the inhabitantly ‘acquired and useful talents of human being which

improves wealth of society and individuals country as a whole. He expressed

the view that “economic development should enable a person to mix freely with

others without “being ashamed to appear in public”. Thus expressing Smith

concerned himself with the notion of poverty that went beyond counting calories -

a notion that integrated the poor into the mainstream of the community. Thus,

quality of people’s life becomes the central concern of development.

Marshall (1890) the neoclassical economist, seems to have recognised that capital

consists in a great part of knowledge and Organisation and of this, some part is private

property and other part is knowledge, a most powerful engine of production; it enables

us to subdue nature and force her to satisfy our wants (Marshall, 1961). Marshall also

stressed education and parental care as investment in human capital. However,

Marshall rejected the capitalized-net-earnings approach to human capital as being

unrealistic as human beings are not marketable.

Frank Knight (1944) states that investment in man, the traditional concept of capital,

had to be extended to make room for human capital. Human capital is also of many

different forms, and it renders many different consumer and producer services.

Investment in human capital is probably, the major theme of human development. The

investment in man particularly in education, health, nutrition etc, are essential to take

advantage of better job opportunities.

Schultz T.W. (1961) in his Human Capital model shows how education allows the

production process to benefit from positive externalities and promotes growth. The

growth theories that emphasize Research and Development (R & D) also underline the

importance of human capital in economic growth. Both sets of theories, however,

consider human beings as means and not the end of economic development. According

to Schultz, there are five ways of developing human resources:

1. Health facilities and services, broadly conceived to include all expenditure that affect

the life expectancy, strength and stamina, and the vigor and vitality of the people.

2. On-the-job training, including old type apprenticeships organised by firms.

3. Formally organised education at the elementary, secondary and higher levels.

4. Study programmes for adults that are organised by firms, including extension

programmes notably in agriculture. And

5. Migration of individuals and families to adjust to changing job opportunities.

Kenneth J. Arrow (1962) emphasised the acquisition of knowledge through “Learning

by Doing”. The term learning is a product of experience that takes place during activity

since it usually occurs through the attempt to solve a problem. Increases in cumulative

output brought about by the learning curve results in higher productivity. He firmly

believes that each new input is used more effectively than the old ones, which, can be

explained only by ‘Learning by Doing’.

Gary Becker (1966) following the same argument of Schultz says that human capital is

the investment in training, education, health, values, and other aspects of human

potential. Human capital investments increase the ability of people to create wealth.

He justified that the current century is the "Age of Human Capital," citing the

tremendous growth in investment in human capital in this century, and the resulting

huge increase in wealth1. He noted that the widely varying economic growth rates

among nations could best be explained by investments in human capital rather than by

raw materials or other measures.

Dennison (1967) states that human capital stock improves labour productivity, and

contribute to the general betterment of society. He provided a direct link between

educational attainment and the economic and social welfare of countries. In the modern

era, the conventional inputs such as labour and capital could explain only 60% of the

total growth of United States. The remaining 40% growth in real national income could

be attributed to improvements in human capital. It is estimated that the direct benefit of

education accounts for 11% and the remaining 29% is due to the indirect influence in

the form of advances in knowledge. (Dutt, 2003)

Harbison (1970) stated that Human Resource constitutes the ultimate basis for wealth

of nations. Capital and natural resources are passive factors of production, human

1 Gary Becker, the Nobel Laureate in Economics, addressed the "human capital" aspect of school choice in a presentation in Grand Rapids, Michigan, on October 24, 1996.11

beings are the active agents who accumulate capital, exploit natural resources, build

social economic and political organisations, carry forward national development. Clearly

a country which is unable to develop the skills and knowledge of its people and to utilise

them effectively in the national economy will be unable to develop any thing else.

(Harbison et all 1970)

Paul Streeten (1970) developed the Basic Needs Approach, in the mid 1970’s,

and he defined basic needs in terms of food, housing, health, sanitation and

education. He rightly says that fulfillment of Basic Needs is the criterion for

economic development. He identified the six reasons to promote human

development

� Human development is an end in itself that needs no further justification.

� It is a means to higher productivity.

� It reduces human reproduction by lowering the desired family size.

� Human development is good for the physical environment. It reduces the deforestation, desertification.

� Reduced poverty contributes to a healthy civil society, democracy, and greater

social stability and

� It reduces civil disturbances and increase political stability.

Tinbergen (1975) he has made an attempt to analyse the relationship between human

capital and inequality. He suggested that inequality was ultimately determined by the

opposing effects that technology and education exerted on the relative wage. He

stipulated that the relationship between growth and inequality was determined by the

race between technological development and education (Jan Tinbergen, 1975).

He suggested five areas of human qualities, which are conducive to economic

development –

� An interest in material well being.

� An interest in techniques and innovation.

� An ability to look ahead and a willingness to take risks.

� Perseverance and

� An ability to collaborate with other people and to observe certain rules.

Romer (1986) in the Endogenous Growth Theory highlights the fact that technological

progress is not an exogenous factor influencing development but is the result of

‘intentional actions’ taken by people who respond to market incentives. Technology is

considered to consist of a non-rival component, which being separate from individuals,

can grow without bound and, therefore, leads to increasing returns to scale. Thus,

private investment in Research and Development (R & D) raises the level of technology

so that it acquires the nature of a public good.

Lucas (1988) was another endogenous growth theorist who emphasised investment in

human capital more directly and links it to long-term rates of economic growth. These

human capital theories indicate how investment in education enables the entire

production process to benefit from positive externalities. Educated people not only use

technology more efficiently, they are also likely to innovate and spread the benefits of

such innovation to co-workers thereby increasing the efficiency of all factors of

production. The human capital theories attribute the lack of convergence between the

growth rates in developed and developing countries to the fact that the poorer countries

do not make adequate investments in human capital, which results in their recording low

growth rates.

Nancy Stocky (1990) her model ‘Human capital, product quality and growth’ explains

heterogeneous labour, differentiated by level of human capital, determines a country’s

comparative advantage. The growth phenomena experienced by some successful new

industrialized countries in East Asia, where rapid economic growth was accompanied by

higher volume of exports, rapid growth in education and rapid changes in the

composition of output. In this process she highlighted that –

� The labour is heterogeneous and differentiated by the level of human capital.

� The technology for human capital accumulation used in the model is one that distinguishes between the private human capital of individuals and the stock of knowledge of the society as a whole.

� An individual accumulates human capital by investing, in his education. His level

of human capital determines the quality of labour force. UNDP Human Development Reports since 1990, every annual report has focused

on a particular dimension of human development along with the strategies to achieve

the same. (See appendix No. 3).

Mahbub Ul Haq (1997) defined human development paradigm as “the process of

enlarging people’s choices”. In principle, these choices can be infinite and change over

time. But at all levels of development, the most critical and essential ones are for people

to lead a long and healthy life, to be educated and to have access to resources needed

for a decent standard of living. If these choices are not available, many other

opportunities remain inaccessible

He advocated five important aspects of human development –

1. People must be in the centre of development and each activity should be analysed to see how much each person participates and benefits from this.

2. Human development is analysed in two ways – formation of human capabilities

and making use of their acquired capabilities.

3. Importance of human development lies in distinction between ends and means of development.

4. The idea of human development paradigm embraces all aspects of society – not

only in economic terms but also social, political, psychological and cultural. Amartya Sen (1998) argues that the standard of living of a society should be judged not

by the average level of income but by people’s capabilities to lead the life they value. He

also expressed that commodities should not be valued in their own right but as ways of

enhancing capabilities such as health, knowledge, self-respect and ability to participate

actively in common life. The Capabilities refer to what a person can (not) do or can (not)

be. Freedom from hunger, being free to participate in the political process, being

adequately sheltered, access to health and education etc., can be quoted as different

manifestations of capabilities.

Sen has argued that development ought to be viewed as capability expansion and

freedom, rather than being viewed as purely economic phenomenon (Sen, 1989).

Development should be evaluated from the perspective of enriching human life focusing

on –

1. Entitlements, such as good health and education.

2. Capabilities, which are generated by entitlements, and can provide individuals with the freedom to choose between different ways of living.

3. Functioning’s, which refer to the ‘doings and beings’ that constitute the nature of

an individuals existence in society.

In brief, the theoretical perspective of human development traces the

evolution of human development from human capital concept � Basic Needs

Approach � PQLI � endogenised factor � enlarging people’s choices �

human capability approach � human poverty and deprivation � human security

and ultimately human freedom. As such, even the list of human development

indicators is growing ever since. This analysis provides the potential background

for understanding critical the issues connected with regional disparities in human

development.

Section II

a. Economic Growth and Human Development – A Causality Analysis

Economic growth is also an important factor leading to high human development.

Section I, examines the role of human development in economic growth. However, an

attempt is made in this section to examine the causality between these two. The

provision of large quantities of goods and services improve the standard of living of the

people. In developing countries, economic growth is needed for reducing poverty,

providing access to basic social services, building of basic capabilities in the people and

generating the resources required for human development. (Taylor et al, 1997). Even

empirical evidences have shown that people in high-income countries have greater

capabilities than those people in poorer countries.

Economic growth is a necessary but not a insufficient condition for the promotion of

human development. Beyond quantity, it is the quality of growth that is crucial for human

well-being. Growth can be jobless, rather than job creating – ruthless, rather than

poverty reducing – voiceless, rather than participatory – rootless, rather culturally

enshrined and futureless, rather than environmental friendly. Growth that is jobless,

ruthless, voiceless, rootless and futureless is not favourable to human development

(Jahan, 2000). In this regard, economic growth is a means of development and not its

ultimate goal. Increased income contributes largely if it improves people’s life. But

income growth is not an end by itself. Development should be people centered and

economic growth must be equitable for its benefits to have an impact on people’s lives.

Clearly, there exists a strong connection between economic growth (EG) and

human development (HD). On the one hand, EG provides the resources to permit

sustained improvements in HD on the other, improvements in the quality of the labour

force are an important contributor to EG. Yet, while this two-way relationship between

human development and economic growth are widely accepted, the specific factors

linking them have not been systematically explored. Nor has the question of priorities in

the phasing of policy.

i. Causality links between EG and HD Economic growth expands the material resources available for the fulfillment of

human needs. But the extent to which these needs are met depends on the allocation of

the rewards of growth through the distribution of private and public resources (both

income & assets). The distribution of opportunities, particularly, employment is crucial.

Economic growth will not invariably translate into human development if other important

factors are not in place. Among the most important of these factors is public policy.

There is also a key link back. Human development raises the levels of education,

health and nutrition in an economy. The results are a healthier and better-educated

population capable of being economically more productive. Modern growth theories

explain economic growth primarily in terms of expanded human and social capital rather

than physical capital. Growth can also be linked to many other elements of human

development such as political freedom, cultural heritage, societal progress and

environmental sustainability.

Presently, accelerating growth is a major challenge, an equal, if not the greater,

challenge for many developing countries including India is to ensure that the growth

translates into human development in terms of better living condition, more choice and

greater opportunities. In this endeavour public action is needed -

� To accelerate growth in order to expand resources available for human development.

� To ensure that the available resources are actually allocated towards human

development priorities, and

� To ensure their efficient use to address people’s priorities.

3.2.2 Chain relationship between HD and EG

The causal link between human development and economic growth has been

quantitatively examined on its two Chains relations from Economic growth to human

development and from human development to economic growth. Obviously there exists

a strong two-way relationship between economic growth (EG) and human development

(HD). On the one hand, economic growth provides the resource to permit sustained

improvements in human development; on the other, sustained improvements in the

quality of human capital are an important contributor to economic growth.

Figure 3.2.1: Economic Growth and Human Development

Source: Human Development Report 1996, page No. 68. The above flowchart 3.2.1 shows the two-way causal chains linkages between

EG and HD and vice versa. Human development is featured “at the top”, in recognition

of its status as the fundamental objective, with respect to chain A, running from

economic growth to human development, we may note that, from a given level of

income generated by past growth, the expenditure of households, governments and civil

society, including NGO’s, on inputs which serve to enhance human development as

defined above. The impact of given aggregate levels of household income on human

development, of course, depends not only on the average level but also on the

distribution of that income and on the extent to which societal poverty has been

eliminated. Thus, the nature of the growth process, that is how growth is generated,

how employment sensitive, and how income distribution friendly it is, as well as how

well it has succeeded in reducing poverty, will have an effect on how households spend

their income.

3.2.3 Chain A: From EG to HD

From the material side of HD, the use of economic resources is essential. Hence a

society’s total command over economic resources (GNP) provides the source of HD

achievements in this dimension. But the way economic resources are distributed and

allocated can lead to very different HD performance for any given macro economic

achievement (i.e., level or growth in GNP per capita). To understand the success of HD,

therefore, we need to explore how economic resources translate into HD achievements,

as well as the determinants of the changing resource base to which HD performance

itself makes an important contribution.

The economic resources or GNP translate into human development mainly through

household and government activity, civil society and other NGOs. The same level of

GNP can lead to very different performance in HD according to the allocation of GNP

among and within these institutions and variations in their contribution to HD.

The households propensity to spend their after tax income on items which contribute

directly to human development varies, depending on such factors as the level and

distribution of income across households as well as on who controls the allocation of

expenditure within households. In general, poor households spend a higher proportion

of their incomes on human development items than those with higher incomes, and

similar results flow from greater female control over household income.

Private Income Poverty (PIP) arises among households which have inadequate

disposable income and Social Income Poverty (SIP) arises among households, which

have inadequate access to publicly provided goods and services. The empirical

evidence indicates that, in general, PIP is reduced with economic growth, the extent of

the reduction varies greatly with the distribution of income and its change over time

(Fields et al, 1989 and Bruno et. al, 1995). The way in which growth translates into

income distribution and poverty reduction depends on the nature of the growth process

– in particular, the extent to which it is based on the generation of employment and on

increasing rural incomes. If the output mix is labour intensive and rural incomes rise

rapidly, income distribution is more likely to improve and poverty reduction to occur than

if growth is urban biased and capital intensive (Rains, 1979 and Stewart, 1977).

For a given GNP, a more equal distribution of incomes received by households will

lead to lower PIP, which is likely to result in better performance on HD, since poor

households are more deficient in HD elements and are likely to spend more of their

disposable income on items which contribute directly to improvement in HD namely

food, education and health.

The empirical evidence shows that expenditure on HD related items is strongly

affected by the rate of poverty reduction. It also indicates the positive effects of family

income change on child schooling. While the evidence on the relations between income

and health is less extensive than for education, studies suggest that household income

also has a significant effect on the use of health services, some showing a much higher

relative response for low than for high income households.

Another important element determining how economic resources translate into HD

is the extent of female control over income. For example, among Gambian households,

the larger the proportion of food under women’s control the larger household calorie

consumption (Von Braun, 1988). Similarly, in the Philippines it has been shown that

consumption of calories and proteins increases with the share of income accruing to

wives Garcia et al, 1990). In the Cote d’Ivorie, an increase in women’s share of cash

income was associated with significantly higher spending on food and reduced

spending on alcohol and cigarettes (Hoddinot and Haddad, 1991).

The allocation of government resources to improving HD depends on the total level

of public sector expenditure, on how much of this flow to the HD sectors, and on the

way in which it is allocated within these sectors. This can be expressed in the form of

three ratios (HDR, 1991). The public expenditure ratio, defined as the proportion of GNP

spent by the various levels of government, the HD allocation ratio, defined as the

proportion of total government expenditure going to the HD sectors and finally, the HDF

priority ratio, defined as the proportion of total HD sector expenditure going to priority

areas. The precise definition of what constitutes a priority area will inevitably vary

according to a country’ stage of development, rendering this third ratio more arbitrary

and difficult to measure than the other two. But within the HD sectors, some

expenditures are clearly much more productive in terms of achieving advances in HD

than others. For example, basic education, especially at an early stage of development,

is generally recognised to have a larger impact on HD than tertiary education. There

exist very large variations across countries in each of these ratios, which mean that the

same level of GNP may be associated with very different levels of government spending

on HD priorities.

Finally, NGO or other civil society activity is also another important factor which

influences on chain relationship between economic growth and human development.

But this information is more scattered. There are considerable variations in the extent,

vitality and effectiveness of NGO activities across countries, depending on their history,

culture, tax laws and actual or perceived government deficiencies in providing services.

In most contexts, NGO’s play a supplemental or even marginal role, but in a few

countries like Bangladesh, Kenya, Peru and India it appears to represent a major

source of Human development enhancement (Riddell et al, 1995).

3.2.4 Chain B from HD to EG

In this linkage many ways in which human development contributes to economic

growth have often been emphasised. In recent years an increasing number of studies

have documented the strength and diversity of the links between the two. The strength

of the links between human development and economic growth depends, firstly, on the

accumulation of human capital through investments in health and nutrition, education

and skills training and R & D. Secondly, it depends on accessible opportunities for

people to contribute to economic development through social, political and economic

participation. A higher level of human development, in addition to being an end in itself,

affects the economy by enhancing people’s capabilities and consequently their creativity

and productivity. Clearly, the health and education of a population are among the main

determinants of the composition and growth of output.

Education is also an important contributor to technological capability and technical

change in industry. The higher the level of education attained by the workforce, the

higher overall productivity is, because the more educated are more likely to innovate,

and thus affect everyone’s productivity. Furthermore, education may effect per capita

income growth through reducing population growth. Income distribution also appears to

be important to this link. Recent empirical evidence suggests that the distribution of

assets and income has an effect on economic growth, with a more equitable distribution

favoring higher rates of growth. One explanation is that a more equitable distribution of

assets and income implies better nutrition and a stronger demand for education and

hence higher labour productivity.

The strength of these various links varies considerably and there is no automatic

connection between an improved level of HD and increases in per capita GDP. Creating

a larger pool of educated people is not sufficient to stimulate growth, there must also be

opportunities for them to be productively employed. Besides, human development alone

cannot transform an economy. Even skilled and vigorous people need machinery,

buildings and infrastructure to complement their efforts to enhance growth. Therefore,

the connection between HD and EG, is likely to be stronger with the more equitable the

distribution of income, the more educated women and the lower unemployment rate.

Section III

b. Economic Growth and Human Development of Indian States: An Empirical Analysis

There are two distinct causal chains relationship between human development and

economic growth, one runs from economic growth to human development through

national income allocated to social sectors such as education and health, the other runs

from human development to economic growth. It examines economic growth enhancing

human development through social sector expenditures to achieve high human

development across Indian states.

The empirical evidence of the third world countries at the global level reveals that

economic growth influences on human development through active state interventions

in terms of - equal distributions of income and wealth among the people, public

expenditure on social sectors which includes education and health, people’s

participation and improved status of women in the working of the economy. Therefore,

an attempt is made to fit regression equations, which explain impact of economic growth

on human development.

On the other hand, the reverse links from human development to economic growth

depends on two critical factors, one is accumulation of human capital through

investments in education and skills formation, health and nutrition and research and

development. And the other one is accessible opportunities to people to contribute to

economic development though social, political and economic participation.

As mentioned earlier, this study used the following Regression model where

in the flow from economic growth to human development is looked into. In other

words it explains the influence of economic growth on human development. The

model specified is as follows -

HDI= �0+ � 1D1+ � 2T + � 3 Gr + � 4 Ee+ � 5 He +ut Where

HDI = Human Development Index for the periods of 1981, 1991 and 2001

D1= Dummy variable for the initial achievement

T= Time variable

Gr = Growth rate for the periods 1970-71 to 1979-80, 1980-81 to 1989-90 and 1990-91 and 1999-2000 Ee= Expenditure on education for the periods of 1981, 1991 and 1998 He= Expenditure on health for the periods of 1981, 1991 and 1998 Ut = Dependent term

We are considering HDI, education and health for the periods of 1981, 1991 and

2001 for the 15 major states in India. Hence the data exhibits the characteristics of time

series as well as cross sectional data. But the time periods are limited i.e., only for 3

decades. In that sense, the data considered are restrictive time series. Again we have

introduced a dummy variable for initial achievement in human development.

The model also includes the expenditure of the government on education and

health because the expenditure on education and health by the government has

directly influenced on human development. So the study incorporated the above

said variables.

The growth rates also significantly influenced on human development. It

implies that state with a higher rate of economic growth has an advantage to

have higher rate of human development.

Table 3.3.1 influence of Economic Growth on Human Development Index

Variables

Co-efficient

Standard Error

Probability

Time variable 0.144780* 0.049634 0.0055 Dummy variable 0.370515* 0.032006 0.0000 Growth Rate 0.002439* 0.000883 0.0083 Education Expenditure

0.057042* 0.015683 0.0007

Health Expenditure 0.008259 0.011633 0.4815 R – Squared 0.98, Adjusted R Square 0.97 F – Statistic 531.9673, Prob (F – Statistic) 0.00000

Note: * P < 0.01 Significant at 1.1 level ** P < 0.05 Significant 5 total

The results of the estimation show that all the explanatory variables have positively

influenced human development and their influence is significant at 1 percent level

except health expenditure, which is positive but has not significantly, influenced human

development.

The dummy variable which is a proxy for initial level of development is found

to be significant because the initial level of development of a state has certainly

influence on human development so the results indicate this.

3.4 Summary An attempt is made to trace the theoretical framework of human development since

Adam Smith to the most recent endogenous growth theories in the first part. Human

capital theory gradually led to human centered development where in human

development became absolutely essential. Several approaches to human development

have emerged particularly the “Capability Approach” which became very popular. The

section II made an attempt to examine the two way causal link between HD and EG.

The EG translate into HD with the help of allocation of the rewards of growth through

the distribution of private and public resources (GNP), the distribution of opportunities,

particularly employment, female control over income and NGO or other civil society

activity. While, on the other hand HD leads to EG through accumulation of human

capital through investment in health, education, skills training and R & D, accessible

opportunities for people to contribute to EG through social, political and economic

participation.

Similarly in the final part the empirical causality between economic growth and

human development in Indian states reveals that public expenditure in health and

education has positively influenced human development. However, the results show

that health expenditure has not significantly influenced human development.