Human Capital and Economic Growth in India, Indonesia, and Japan: A quantitative analysis, 1890-2000

After World War II at the height of decolonization, the analysis of the underlying process of economic growth became a topic of high priority. The neo-classical, Solowian, growth theory, with all its limitations, was embraced by economists and historians alike, resulting in countless growth accounting studies and further research into country-specific institutional developments. Later, however, especially with the introduction of new growth theories, economics and other social sciences have drifted somewhat apart. Economics preserved its focus on both the theory and empirics of economic growth, while the focus on country-specific institutional development remained largely absent. This practice, however, set a limit to the possibilities to apply new growth theories to the real-world economic development. Also, given its strong relationship with the Solowian growth theory, it is not surprising that even within economics one may encounter the view that the new growth theories have nothing new to offer after all. Before drawing such a premature conclusion, however, it is advisable to establish a link among new growth theories and History in order to find out whether the latter offers new insights into the root of differences in economic performance. This thesis focuses on three Asian countries, a successful (Japan) and two less successful economic developers (India and Indonesia). Our main question is whether the new growth theories can explain why Japan was successful in economic development relative to India and Indonesia. Besides the theoretics and empirics of economic growth, matters which are extensively treated in the economic literature, it is important to focus on what human capital, the main engine in the new growth theories, actually is, and what effect country-specific institutions have. Our main conclusions are that the some of the more commonly used human capital proxies only capture human capital to a certain extent. As they either underestimate the growth of human capital or proxy the growth, instead of the level, of human capital, they (falsely) bias the choice of the new growth theories towards the Romer (1990) model. But even when using the applicable stock if human capital and the applicable growth theory, still there are considerable differences in economic growth among countries. Circa 50% of these differences in income levels among India, Indonesia, and Japan resulted from differences in country-specific human capital forming institutions. These differences can be traced back to the construction of their education systems. In Japan, as in most Western countries, the education system arose in the late eighteenth and early nineteenth century from the need for economic development and was responsive to the special characteristics of the respective societies. In India and Indonesia, on the other hand, similarly to most developing economies, it were largely ideas of 'creating an indigenous class of literati', a 'moral duty of the colonizer country', nationalism, and, after World War II, the 'idea of progress by education', 'lack of finances', and 'policies of international organisations' that drove educational development. In other words, the education systems of India and Indonesia were influenced by global, or at least external, factors.