The Economics of Education: Human Capital Investment and Economic Growth in Malaysia
While human capital theory as proposed by Becker (1964), stresses the role of education as a necessary ingredient to increase productivity, Barro and Sala-i-Martin (1995) argued that investment in human capital is indeed a key factor in generating higher productivity and economic growth. Mankiw, Romer, and Weil (1992) extended the Solow growth model by including investment in human capital and showed that the econometric fit of their model is much better when human capital is considered than otherwise not. Likewise, Romer’s (1990) endogeneous technical change model also placed human capital as its centre. Investment in human capital helps diffuse knowledge and technology to offsets the diminishing returns to physical capital (McMahon, 1998). Nelson and Phelps (1966) has also showed that developing countries would dcrease the distance with the advanced countries at a rate dependent on the level of human capital. This paper attempts to investigate the relationship between investment in human capital and the level of economic growth in Malaysia between the period 1976–2006. Throughout the period, expenditure on education ranged from thirteen to twenty eight percent of the gross domestic product of the country.
Keywords: Human Capital, Economic Growth, Economic of Education
KU AZAM Tuan Lonik
Lecturer, Economics Section