Academic journal article Journal of Economic Development

Dynamics of Growth, Poverty and Human Capital: Evidence from Indonesian Sub-National Data

Academic journal article Journal of Economic Development

Dynamics of Growth, Poverty and Human Capital: Evidence from Indonesian Sub-National Data

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. INTRODUCTION

For many long years, severe disparities among regions in Indonesia have prevailed, especially between the western and eastern regions in the country. In the 1990s, poorer regions persistently expressed their frustration with the central government's development policies, and demand much larger income transfers and more autonomy in regional governance. Following the financial crisis 1997 and the fall of the New Order regime, Indonesia in the early 2000s adopted the new political system with decentralization at the forefront. Even in the aftermath of Indonesia drastically transforming from a highly centralized government structure to a highly decentralized system in 2001, the issues revolving around regional economic imbalances still exist, and policy planners debate zealously on the latent causes and determinants responsible for these spatial disparities. Thus the growing interest on spatial income disparities have accentuated the need for research and knowledge on the determinants of regional economic growth and human development in Indonesia.

Numerous economic theories and models exist in relating education and health to economic growth. Human capital in the form of education and health increases an individual's earning potential, but also generate a "ripple effect" throughout the economy by way of a series of positive externalities. Mankiw, Romer and Weil (1992) demonstrated that the Solow model, when augmented to include education capital as a factor of production, did a satisfactory job of explaining the variations in per capita real income that are witnessed across a large and heterogeneous sample of countries. Maksymenko and Rabbani (2011), employing a multivariate time series techniques found significant and positive effect of human capital accumulation on long run economic growth rates. Sahoo, Dash and Nataraj (2012), examined the role of physical and social infrastructure on economic growth and concluded that it is necessary to design an economic policy that improves the physical infrastructure as well as human capital formation for sustainable economic growth in developing countries.

An equally important form of human capital for economic growth is health, which can directly augment labour force productivity by enhancing its physical capacities, such as strength and endurance, as well as mental aptitude, such as cognitive performance and reasoning ability. Unfortunately, little attention has also been paid in the past to the impact of poor health on growth, productivity, and poverty. Effects of education, trade openness, savings, inflation and the initial level of income have been most commonly used to explain regional differences in economic growth and productivity rates (Barro, 1991; Mankiw et al., 1992; Barro and Sala-i-Martin, 1995; Miller and Upadhyay, 2000). However there are many compelling reasons to believe that health is also an important determinant of productivity and standard of living in any region of a country or the world.

Nevertheless, empirical evidence on the relationship between human capital and economic growth is have also been somewhat mixed. For an example, Bils and Klenow (2000) argue that schooling may have only a limited impact on growth. Caselli, Esquivel and Lefort (1996) and Islam (1995) in their panel data studies have also failed to find significance of schooling in standard growth regressions. Sachs and Warner (1995) find a positive, but still insignificant impact of both primary and secondary education on growth, while Romer (1989) find no significant effect for literacy rates. Pritchett (2001) claims that the weak institutional framework, low quality and excess supply of schooling in developing countries are all accountable for the lack of empirical link between changes in educational attainment and economic growth. Acemoglu and Johnson (2001) find no evidence that an increase in life expectancy leads to faster growth in income per capita. …

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