Human capital in small open economies: Theory and evidence

Moo-Ho Han, Fordham University


This dissertation develops a growth model capable of explaining the observed persistent differences in per capita income across countries. A defining characteristic of the model is that population growth is endogenously determined based on the utility maximizing behavior of parents. It is a small open economy model because the return to physical capital is exogenously determined in world markets. Physical capital is internationally mobile, but human capital and labor are immobile. Human capital is also assumed to be rival and finite, and completely depreciated each generation.^ Agents can choose to accumulate physical or human capital. The productivity of investment in human capital differs from country to country due to externalities. The productivity of human capital depends both on the country's stock of human capital and on the world stock of knowledge. Because the productivity of human capital investment is nonlinear with respect to levels of existing human capital, multiple steady-state equilibria or "poverty trap" characterize some steady equilibria of the model. Agents' decisions regarding investment in human capital are affected by this externality so that unlike most augmented Solow models there is no necessary tendency toward international convergence in per capita incomes.^ Several empirical tests lend support to some key implications of the model. First, returns to physical capital investment are robust and close to 10 percent. Second, the evidence suggests there are differences in the productivity of human capital investment between rich and poor countries. Third, Granger-Sims causality tests do not support the hypothesis of one way causality from population growth to per capita income. Together this evidence suggests that human capital accumulation is an important engine of economic growth especially in developing countries. The role of human capital in economic growth however decreases as per capita income increases because the externality of world knowledge decreases. ^

Subject Area

Economics|Economic theory

Recommended Citation

Han, Moo-Ho, "Human capital in small open economies: Theory and evidence" (1995). ETD Collection for Fordham University. AAI9520608.