IMPACT OF HUMAN AND PHYSICAL CAPITAL FORMATION ON THE ECONOMIC GROWTH

CHAPTER ONE

INTRODUCTION

Background of the Study

Nigerian overall macro-economic objective remains how to accelerate economic growth and reduce widespread poverty. In order to achieve this laudable objective, certain variables which have the capacity to accelerate growth have to be identified and of all the contributing factors to economic growth and development, capital formation stands out as a major catalyst.

Capital formation refers to net additions of capital stock such as equipment, buildings and other intermediate goods (physical capital formation). A nation uses capital stock in combination with labour to provide goods and services; an increase in this capital stock is also known as capital formation. Generally, the higher the capital formation of an economy, the faster an economy can grow its aggregate income.

According to Wikipedia (the free encyclopedia), capital formation can be defined in three different ways:

  • It is a specific statistical concept used in national accounts statistics, econometrics and macroeconomics. In which it is refers to as, measure of the net additions to the (physical) capital stock of a country (or an economic sector) in an accounting interval, or a measure of the account by which the total physical capital stock increased during an accounting period. To arrive at this measure, standard valuation principles are used.
  • It is also seen as term in economic theory as a modern general term for capital that has been formal or to the growth of this total capital stock.

In a much broader or vaguer sense, the term capital formation has in more recent times been wed in financial economics to refer to saving drives, setting up financial institutions, fiscal measures, educational improvement, public borrowings, development of capital market, to mention a few which in result will help to increase the amount of capital owned or under one’s control or any method in utilizing or mobilizing capital and human resources for investment purposes. So far, it can be deduced that the impact of capital formation (which could be in form of physical investment or human investment) could not be over-emphasized for the growth in economy and improvement in the standard of living of a nation.

Before the recent past, accumulation of physical capital was considered near-singular factor of economic growth. Improvement in technology that accounts for increase in output and services was considered as an exogenous variable (Solow, 1956). It is important to recall that the human capital revolution, which gained reasonable attention started with the seminal paper of economic scholars in the 50’s and 60’s (Blang, 1976). Nigeria is referred to as the giant of Africa; despite this title, it has not translated into a sustainable growth which can lead to economic development, though, the government tends to pay lip service to the funding of educational sector or as each state has its primary, secondary and tertiary institution with lot of federal government institution in virtually all the state of Nigeria. Educational (Human capital) is generally believed to contributes immensely to the growth of an economy through acquisition of training and skills which are been transferred to utilizing the physical capital good, thereby working to enhances growth and expansion of output. Undoubtedly, one can say that education has reached all state in one form or the other with privately owned institution cropping up. Each year graduates are being turned out in our tertiary institution (Colleges, Polytechnics and Universities) as member of corpers after completion of National Youth Service Corps (NYSC) and sent to the labour market where the jobs available are relatively few in comparison with job seekers (problem of unemployment).

Most of the indices of human welfare which incorporate income on education of education show that Nigeria’s level of human development is low compared with several other countries in the Africa regions, of great concern is the deterioration in the quality of education services at all levels, especially the higher education levels where persons are trained to take up leadership roles in science, technology, management and business. For a meaningful growth to take place, human capital must be developed and efficiently utilized. Strategies and priorities towards sustained human development, efficient investment in human capital and effective manpower planning and utilization policies needs to be put in place by the government. This would in its way ultimately excite growth that will allow the nation and the people to progress and achieve the required economic turnaround. This less than the optimal level of human capital formation in Nigeria has its effect on both economic growth and development; this creates a problem to be examined. In the past two decade of the last century in Nigeria, it has been refined to highlight its endogenous contribution to the growth process (Romer, 1986, 1990; Lucas, 1988; Umo, 2007).

Therefore all developing countries were advised to invest in human capital formulation of which Nigeria also participated. Nigeria government did not only start training people in schools, but formulated education policies in relation to primary, secondary and tertiary institution toward making education workable in Nigeria, with Nigeria having the fastest growing educational industry in the African continent (Umo, 2007:7). For instance, in 1960, Nigeria had two Universities (Universities of Ibadan and Nigeria, Nsukka) with students’ enrolment of about 1,400. Forty-four years after, Nigeria had 77 Universities, an increase of 75 Universities and percentage increase of 3,750. Today, the number of universities in Nigeria is 93. Primary schools as at 1960 were 15,703 and increased to 50,741 in 2004 an increase of 35,038 or percentage increase of 233. The number of secondary schools was 833 in 1960 and increased to 10,913 in 2004, an increase of 10,080 or percentage increase of 1136. In terms of student intake, the two universities in 1960 had an intake of about 1,400 but by 2004 total intake in all the 77 universities close in to about 1.6million students, an increase of 1,598,600 or 11,419% increase. Primary school intake in 1960 was about 2,912,618 and rose to 20,037,450 in 2004, an increase of 17,124,862 or 558% increase. For secondary schools, the intake in 1960 was 135,364 and rose to 5,388,734 in 2004, an increase of 5,253,370 or percentage increase of 3881. But these expansions are observed with some statistical inferences on how effective the education commodity had been delivered.

HDR (2001) notes “the quality and orientation of education at each level, and the link with the demand for skill, are critical for growth”. However, opinions converge that education requires adequate funding for improved quality. This results from appropriately equipping the schools, living quality teachers and commensurately remunerating them. In 1990, Ghana’s expenditure on education was 4% of her GDP and 24% of her budget and in Malaysia 5% of her GDP and 20% of her budget. Nigeria’s expenditure on education was 4.2% of her GDP (at 1984 factor cost) and 6.3% of her budget. Despite these efforts Nigeria had made towards building of human capital through education, it is not exactly clear to what extent human capital has impacted on the economic growth or progress of Nigeria. It is against this background that this study is set up.

 

Statement of the Problem

Nigeria had invested in formal education for a period not less than 167 years. The number of primary schools had grown to above 50,000; 8,275 post primary institutions and over 77 universities. Nigeria’s higher institutions have been turning out not less than 120,000 graduates yearly. The federal government and some corporate bodies via Educational Trustfund (ETF) had been funding education. Comparing education funding of some countries in the sub-African region, it is observed that Nigeria had never in any year met the minimum standard prescribed by the UNESCO, which is 26% of total expenditure or annual budget of the economy.

Education expansion in Nigeria does not seem to equally match with expansion in economic growth. For instance, between 1970 and 1980, growth in primary schools was 141%. For the post primary institutions, the percentage increase between 1980 and 2000 was 101%. Even more astronomical is the students intake at various levels of schools, for primary schools, between 1970 and 1980 is 247% and between 1980 and 2000 was 104%. In term of post primary institutions, the growth rate of intake between 1970 and 1980 was 426% and between 1980 and 2000 was 239%.

For tertiary institutions, the intake growth rate between 1970 and 1980 is 299%, between 1980 and 2000 was 1,689%. Equally, the growth rate of GDP (at 1984 factor cost) between 1970 and 1980 was 77.6% and 1980 and 2000 was 25%. The growth in GDP is a distant comparison with the growth in the schools intake. Unfortunately, observing the growth of GDP per capital was -15.0, -7.7, -5.1 and -4.4 measured in percentage point for the years 1981, 1984, 1990 and 1999 respectively (Ajayi, 2002). There is also a question; to what extent had education expenditure and human development efforts contributed to economic growth in Nigeria? For knowledge (Economy index (KEI), Umo (2006:5)) states the following: South Africa 5.08, Mauritis 4.32, Egypt 3.77 and Nigeria 1.55. The simple observation here is that Nigeria stands at the bottom of knowledge economy. Education is generally considered to be an instrument of poverty reduction, but Nigeria’s case appears to be different. There is high level of poverty prevalent in Nigeria. For the population living below $1 per day in SSA for the period of 1970 to 2001, Nigeria had the highest percentage of 70.2, closely followed by Zambia 63.7% while the least is South Africa 1.3%. Also there is high level of unemployment. Generally, Ndiyo (2003:372) is of the opinion that education in Nigeria has contributed very little to social capital.

This research is carried out with the aim of discovering the impact of human capital formation and physical capital formation toward improving the growth and standard of living in an economy and providing sustained answers to certain question as:

  • To what extent does capital formation enhances economic growth?
  • Does the effort of government towards adequate development of capital formation (Human capital formation) has effect on economic growth.

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Updated: 25th June 2017 — 7:34 pm

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