Essays on human capital, institutions and economic growth

This thesis provides both theoretical and empirical evidence to identify why the effect of human capital on economic growth differs across countries.Chapter 1 provides a theoretical explanation of the weak effects of human capital on economic growth in a dynamic general equilibrium model of corruption and growth where the bureaucrats acts as the agents of government to administer public policy. Corruption in this model arises from the incentive of the bureaucrat to appropriate (steal) public resources, thereby reducing the provision of public services. The decision of the corruptible bureaucrat affects public finances and hence the capital accumulation in the economy. Education has two opposing effects, a positive productivity enhancing effect and a negative bureaucratic stealing efficiency of corrupt bureaucrats. If the latter dominates the former the net effect may result in an insignificant (or even negative) effect of human capital on growth.The second chapter explains empirically why previous studies do not find link between human capital and economic growth, again looking at the role of corruption. In this chapter, we provide cross sectional evidence on this issue by explicitly introducing the role of corruption together its interaction with human capital. The empirical analysis first revisits the Rogers (2008) study, where he uses an arbitrary level of corruption to divide the full sample of countries into subsamples of high and low corruption countries and concludes that human capital matters only in low corruption countries. However, using a range of corruption data and sample periods, our results do not confirm his findings. Our preferred specification allows the effects of human capital to be conditional on the level of corruption, which is implemented through the inclusion of both a corruption measure and its interaction with human capital. Although we generally find the expected positive sign on human capital and a negative sign on the interaction term, these often lack in significance. We repeat the analysis using instrumental variable estimation and find a similar pattern of results, and hence conclude that cross sectional evidence is uninformative for empirical analysis of the role of human capital in economic growth.In the third chapter, we employ panel data analysis to investigate the relationship between human capital and economic growth by considering an exhaustive range of institutional measures, along with corruption. These various institutional measures are used to capture different aspects of institutions on the impact of human capital on economic growth. Our growth regressions include the interaction of institution and human capital, in addition to the direct effect of institution and human capital. The coefficient on interaction term can be interpreted as showing whether human capital and institutions appear to be compliments or substitutes for their impact on growth. Our results generally show positive and significant coefficients on human capital and institutions, with a negative coefficient on the interaction term. The results suggest that, for policy purposes, the government needs to carefully identify the level of human capital to be pursued in relation to the quality of institutions.