Abstract
ABSTRACTAsia’s rapid population aging fortifies the case for strengthening human capital investments. Further, the experience of the newly industrialized economies suggests that human capital investments will be a vital ingredient of the transition from middle income to high income. Those investments can also affect equity and public finances. In this article, we use data from the National Transfer Accounts to empirically analyze the effect of human capital investment in Asian countries on economic growth, inequality, and fiscal balance. Our empirical evidence suggests that human capital investments have a positive effect on labor productivity and, hence, output. The positive effect is stronger for poorer households and, hence, beneficial for equity. We also find that such investments can generate sufficient tax revenues to improve the fiscal balance. Overall, our evidence points to a positive effect of human capital on growth, equity, and fiscal balance in Asia.
Highlights
One major consequence of Asia’s sustained rapid growth is the region’s transformation from a lowincome region to a middle-income region in a short span of time
The results suggest that human capital investment increases labor productivity and output, and reduces income inequality and improves the government’s fiscal balance
We focus on the impact of expanding human capital investments on both productivity and inequality in developing Asia countries
Summary
One major consequence of Asia’s sustained rapid growth is the region’s transformation from a lowincome region to a middle-income region in a short span of time. The Republic of Korea and Singapore are at an advanced stage of demographic transition Despite such heterogeneity, there is a clear regionwide trend toward older populations and, even in younger Asian countries, the demographic dividends associated with large working-age populations are set to dwindle in the foreseeable future (ADB 2011). In the absence of significant human capital investments, many aging middle-income Asian economies may see their growth fall sharply. In addition to its effect on economic growth, human capital investment can influence income inequality and fiscal balance. The central objective of this paper is to empirically examine the effect of human capital investment on labor productivity, inequality, and fiscal balance in middle-income Asia. The results suggest that human capital investment increases labor productivity and output, and reduces income inequality and improves the government’s fiscal balance.
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