the 1960s, neoclassical model was used for the growth model as developed by
(Sollow, 1956). One feature of this model is the convergence property, which
means that lower the real per capita GDP, higher the predicted growth rate. If
all economies were the same and which is not the case, then convergence would
apply absolutely, because all economies differ in various ways, then
convergence would have a conditional effect. Meaning that growth rate tends to
be high if an economy begins below its own target position. Convergence
property is conditional because steady state levels and output per worker
depend on population growth, saving rates, government policies, protection of
property rights, so on and so forth. This property is derived from the
diminishing returns to capital in the neoclassical model. Low capital per
worker would lead to higher rate of returns and thus higher growth rate.
concept of capital in the neoclassical model can be broadened to include human
capital, as education, experience and health play a role in it (Lucas, 1988),
(Mulligan and Sala-i-Martin, 1993), (Barro and Sala-i-Martin, 1995). A country
that tends to have a high labor to capital ratio tends to grow more rapidly,
because physical capital is much easier to manage and can be allocated
efficiently in a short time. (Ben Habib and Spiegel, 1994) suggest that if the
GDP depends more on a countries initial level of per capita output then the
starting amount of human capital is high.
this rate must diminish as it reaches its steady state. But the long run data
of countries show that a steady positive growth sustains over a century or more.
Neo classical theory then fails to predict long run per capita growth. One exogenous
variable in the model which successfully predicts the long run growth is rate
of technological progress.
growth theory thus tries to fill the gap by including technological progress.
These models include private incentives to discover new products or production
methods. These incentives can be encouraged by patent protection or government
subsidies or direct government involvement. This incorporated theory was
initialized by (Romer, 1987, 1990) and includes contributions by (Grossman and
Helpman, 1991) and (Agion and Howitt, 1992).
1962) also popularized investment in human capital. He studied the change in
income due to change in investment cost and rate of returns. He emphasized to
invest in education, healthcare and training. (Schultz, 1971) also worked along
these lines and found causal relationship in education and healthcare and found
a positive effect of these variables on economic growth.
cross-country studies find a significant impact of human capital on economic
growth. (Rosenzweig, 1990) reported out that major determinant of high growth rate
of developed countries and poor growth rate of developing countries is
difference in the human capital growth. (Sachs and Werner, 1997) also reported
a positive relation between healthcare and growth but found that increase in
health expenditure increases economic growth but a decreasing rate. (Steward et
al, 1998) studied cross country data from 1970-1992 between human development
and economic growth and found a strong two-way causation. However, strength of
the relationship from economic growth to human development depends on female
education and social services expenditure whereas income distribution and
investment rate determine the strength of relationship from human development
to economic growth.
2001) studied education’s effect and found a strong impact. He reported that
high ratio of human capital tends to generate higher growth through two
channels, firstly through more absorption of physical capital due to lower
labor to capital ratio and secondly due to efficient adjustment of physical