Introducing Modern Human Capital Model

In neo-classical economic growth theory, literature is evident of the reformist role of human capital accumulation. Conversely, this relationship is empirically weak in many countries. To fulfill this gap, we estimate a dynamic model of modern human capital theory and use it to analyze the prospects for economic growth in selected Asian countries. The basic research question is to see if the modern human capital growth model provides more adequate consideration to rhetoric theory by studying the linkages among human capital, institutions, and trade openness? We propose that institutional quality, which is an important element in determining the effects of economic growth, increases along with human capital. We also find considerable elasticities in their interactions with economic growth. Results provide empirical evidence in favor of a substitutionary effect, rather than the existence of a complementary effect. This suggests that the size of the increase in institutions and human capital may differ to catalyze the growth process. The study in hand contributes to the literature in three aspects: (i) it provides a modern theoretical explanation of the rhetoric human capital model (well cited in the literature on economics); (ii) it empirically provides evidence for human capital accumulation that cannot be achieved without improvements in institutional quality, and this has been ignored in the previous literature on Asian countries; (ii) it suggests policy-makers that their focus must go through mentioned channels, as the growth effect may be operating through co-existence of human capital accumulation and institutional quality.