Correlate the strategies of government policies with the determinant of growth (human capital)
Economic growth is a main factor that influence the prosperity and well being of billions people. Industrialization and advances in technology has left a gap between developed countries and poorer ones. For example, in the 21st century the GDP per capita of many poorer countries is lower than the GDP per capita of Europe in the 19th century. Economic growth was a pinnacle of the 20th century that insured the development of the Western World and improved for many people the leaving standards. Denison (1962) affirmed that economic growth is the increase of real GDP or GDP per capita, an increase of national product that is measured in constant prices.
Economic growth is influences by direct factors such as human resources (increasing the active population, investing in human capital), natural resources (land, underground resources), the increase in capital employed or technological advancements. Economic growth is also influenced by indirect factors such as institutions (financial institutions, private administrations etc.), the size of the aggregate demand, saving rates and investment rates, the efficiency of the financial system, budgetary and fiscal policies, migration of labour and capital and the efficiency of the government.
One of the main determinant of growth is human capital as mentioned above. Human capital can be measured in terms of education level and health. Human capital and economic growth have a strong relationship. Human capital affects economic growth and can help to develop an economy through the knowledge and skills of people. Human capital refers to the knowledge, skill sets and motivation people have, which provide economic value. Human capital realizes not everyone has the same skill sets or knowledge and that quality of work can be improved by investing in people's education.
As such, Barro (1991), for 98 countries in the period 1960-1985, concludes that the growth rate of real per capita GDP is positively related to initial human capital. In 1995, he further concludes that for a country to grow adequately, human capital in the form of education and health is an important element. He emphasises that the faster a country grows, the greater its current level of human capital development, since physical capital expands rapidly to match a high endowment of human capital. Also, the country is better equipped to acquire and adapt the efficient technologies that have been developed in the leading countries. Sach and Warner (1997) also noted that a rapid increase in human capital development would result in rapid transitional growth.
There are two main policies the government can employ to promote growth including monetary and fiscal policy. Monetary policy is the change of interest rate and affecting the supply of money. To increase spending in the economy and encourage economic growth, the government may lower interest rates and increase the supply of money however this can cause an increase in inflation. If the economy is growing too much and there is too much inflation, the government can increase interest rates and lower the supply of money to discourage spending. Fiscal policy is the change of government spending and taxation to influence aggregate demand. To increase aggregate demand in the economy and economic growth, the government may increase government spending and lower tax. If the government wants to decrease aggregate demand, they may decrease government spending and increase taxation.
From a policy perspective, the results have some important implications. Governments in developing countries need to channel more money into education and capital works programmes, such as investment in infrastructure and health. It also needs to undertake tariff reforms, in a consequential manner to promote openness and deregulate markets to encourage efficiency. Furthermore, developing countries need to broaden their resource and industry base, in order to minimise the adverse effects on economic growth of supply shocks in the agricultural sector. Government policies also play a very crucial role in determining where an economy will go in the long run. For example, favourable public policies including better maintenance of law, fewer distortions of private markets, less non-productive government consumption and greater public investment in high-return areas will lead in the long run to higher levels of real per capita GDP (Barro, 1995).
Recent studies have shown that a macroeconomic policy framework conducive to growth is a necessity. There seems to be a broad consensus that long-term growth is negatively associated with inflation and positively correlated with good fiscal performance and undistorted foreign exchange markets. If human capital is not accounted for in the model, then the quantitative implications of different saving and population growth rates are biased upward. Human capital development is positively correlated with savings and population growth.
On 25 December 2017, a new set of policies was proposed to address the rising trend of non-communicable diseases (NCDs) for a healthier Malaysia. Mainly on food, eating and exercise habits, health screenings, smoking, and employment and promotion criteria in civil service, the policies also aim to help the Ministry of Health (MOH) to stay within their budget for the year. Due to the cost of treating NCDs and the lack of availability of such interventions, Malaysian former Health Minister, Datuk Seri Dr S. Subramaniam and the MOH developed key policies to address the country’s health issues. These policies were set to make sure the development of heath care is on the track as health care is the factor influencing the growth of human capital. When the human capital has a very good access to health care, it later will influence the labour market growth because healthier labour can increase the GDP per capita of country.
The other policy that can be implemented by government to boost up growth through human capital is improving education level. Human capital is affected directly and indirectly by education which plays an important role in both accumulating human capital and increasing economic growth. Human Capital Theory is the most influential economic theory of education, and it becomes a key determinant for economic performance.
In the Wealth of Nation, Adam Smith (1776) included human capital in his definition of capital. A. Marshall has emphasized the significance of skills and knowledge as an important tool for economic development
Studies proposed by Mankiw, Romer, and Weil (1992) and Lucas (1988) stress the essential role of education as the most important production factor in increasing human capital as a determinant of economic growth, by helping individuals acquire knowledge which encourages participation in groups, opens doors to job opportunities, develops social interactions, makes individuals aware of their rights, improves health, and reduces poverty