Role of Human Capital in Economic Growth: A Comparative Study of India and China

Abstract

Human capital constitutes a significant ingredient of economic growth. As more and more countries are moving on the path of growth and development one needs to explore the contribution of human capital in economic growth. Considering health and education as two components of human capital, the paper attempts to achieve three-fold objectives. First to examine the status of health and education in both the countries for the period 1970-2016, secondly to comprehend the role of public expenditure on health in economic growth and finally to examine the role played by human capital comprising of both health and education component in economic growth of both the nations. To achieve the first objective, the paper attempts to construct the Index of health and education both for India and China, also comparing it with South Asian region. Public health expenditure by government (PHE), out of pocket expenditure (OPE), Life Expectancy (LE) and Access to health care (HC access) are selected as indicators of health while educational attainment at least completed upper secondary, population 25+ (EDU) indicating the access to education, Literacy rate (LR) and number of patent applications by residents (PA) are considered as indicators of education. Both health and education indices are constructed using the Principal Component Analysis (PCA) method. The study examines the causality between the public health expenditure and economic growth for both the countries by deploying the Engle Granger Causality test using the Vector autoregression (VAR) model. Finally, an endogenous growth model is run selecting the appropriate variables, considering health and education indices as inputs. The study observes uni-directional causality between public health expenditure and economic growth, GDP granger causes PHE in both India and China. Both health and education index have positive impact on growth in India however the results of regression depict that the both health and education negatively affect the growth rate in China. The paper holds a great relevance in terms of policy implications highlighting the need for the developing nations to invest in human capital both health and education. It is crucial to comprehend the significance of accessibility of health and education by removing the political economy, making these facilities more inclusive.