Roles Of Human Capital And Total Factor Productivity Growth As Sources Of Growth: Empirical Investigation In Thailand

Abstract

Total Factor Productivity (TFP) growth has long been identified as an exogenous source of economic growth (the residual growth). Recently, there have been a number of economists who introduced and developed the view of endogenous growth model. An argument is that all important factors of source of growth are incorporated into the growth model, there should not present a significant exogenous residual growth. This paper presents an analysis on estimated TFP growth of which it could be considered as a factor of technological progress that is viable in the economy as it is believed. This study included human capital input into the estimated sectoral production function as an essential factor input that can explain capacity of knowledge advancement and an effective innovation in the economy. Human capital is therefore considered to play an essential role in modern growth theory. However, empirically, the effect of human capital on growth and productivity has been inconclusive probably due to the estimation problem. Frequently macroeconomic time series are often non stationary, this study cautiously dealt with the estimation in line with stationary time series econometrics. In this paper, human capital index was constructed based on the Mincerain wage equation and was augmented into the production function for the analysis of growth. The results of the estimation indicated the existence of long run positive contribution of the TFP growth in agriculture but insignificant long run contribution to growth in services. Human capital also positively contributed to growth in agriculture but it was insignificantly contributed to growth in industry and services. Remarkably, physical capital input was found the significant contribution to growth in all sectors. The study also estimated for the economy wide allowing all three sectors to interact among them and found that in the long run growth of industry can be traded off with those of agriculture and services. The TFP growth was also found significantly contributable to the long run growth of the economy. The finding is consistent with the new concept of endogenous growth hypothesis. The conventional concept of the TFP growth estimated from the two input production function was found inadequate to explain the contribution to growth. Human capital was found to be the third factor input that must be included in the estimation of production function. The residual growth or the shift of production function or the TFP growth in this study can mainly be explained by technological progress that is not represented by any other factor of advancement. Nevertheless, this technological progress or the TFP growth must be incorporated and be estimated at the same time in the model but not as being the residual of the regression equation. Therefore, the residual growth in line with the conventional concept must be insignificant. Additionally, because the findings excluded the essential factors, which is human capital input from the estimated standard two factor input models, it caused the residual growth to be significant, as found in the past.