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Economic Change and Restructuring

, Volume 52, Issue 4, pp 351–382 | Cite as

Human versus physical capital: issues of accumulation, interaction and endogeneity

  • Rafi Amir-ud-DinEmail author
  • Muhammad Usman
  • Faisal Abbas
  • Sajid Amin Javed
Article

Abstract

The human capital and physical capital are inextricably linked. Increase in the physical capital is assumed to affect the stock of human capital and vice versa. This paper examines the impact of increase in human capital on accumulation of physical capital and vice versa for a panel of 237 countries during the period 1971–2015. We also analyzed the interaction between these two types of capitals after disaggregating the countries by their income level. We used 3SLS and fixed effects estimation methods to obtain consistent and unbiased results in the presence of endogeneity. We found that investment in physical capital positively affects accumulation of human capital, but the impact of human capital investment on physical capital accumulation is not uniform. The impact of additional factors such as democracy, trade openness and ethnic fractionalization on human and physical capital is moderated by level of economic development of the countries. Results suggest that in order to accumulate physical capital subject to the resource constraints, low income countries must focus largely on primary education while high income countries should invest in secondary and more importantly in tertiary levels of education.

Keywords

Human capital Physical capital Endogeneity 3SLS Fixed effects model 

Notes

Acknowledgements

We thank Arnab Basu and Leah Bevis for their valuable comments and suggestions for improving the draft.

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© Springer Science+Business Media, LLC, part of Springer Nature 2017

Authors and Affiliations

  1. 1.Department of Management SciencesCOMSATS Institute of Information TechnologyLahorePakistan
  2. 2.Courant Research Centre “Poverty, Equity and Growth in Developing and Transition Countries”Georg August UniversityGottingenGermany
  3. 3.Policy Solutions LabSustainable Development Policy Institute (SDPI)IslamabadPakistan

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