CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

It is now a generally accepted view that human capital plays a key role in the development of any nation. In fact, the differences in the level of socio – economic development across nations is attributed not so much to natural resource endowment and the stock of physical capital but to the quality and quantity of human capital. Human resource development tends to improve the quality and productivity of labour, which in turn, leads to economic growth. Besides, acting as an important vehicle of achieving equitable income distribution, human capital is also a potent means of addressing the problem of poverty. In the words of Nwaobi, (1996) “human resources constitute the ultimate basis for the wealth of the nations. Capital and natural resources are passive factors of production”.

Human beings are the active agents who accumulate capital, exploit natural resources, build social, economic and political organizations and carry forward national development. Clearly, a country, which is unable to develop the skills and knowledge of its people and to utilize them effectively in the national economy, will be unable to develop anything else. Economists had long realized the importance of human resource development in the development process. For instance, besides

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emphasizing the importance of education at various points in The Wealth of Nations, Adams Smith specifically includes the acquired and useful abilities of all the inhabitants or members of the society in his concept to fixed capital. Alfred Marshal also emphasizes the importance of education as a national investment and, in his view, “the most valuable of all capital is that invested in human beings. In spite of this awareness, most early economists still regard physical capital as the main component of a country’s productive wealth; they still relegate natural and human capital to the background. It took the effort of Schultz (1961a) and others to rediscover the importance of human capital, which has in a more recent effort to incorporate investment in education into the mainstream of economic analysis.

In its very general form, human capital refers to the aggregate stock of a nation’s population that can be drawn upon for present and future production and distribution of goods and services. It comprises the essential variables (i.e knowledge, skills and attitude) available within each unit of a nation’s human resource stock. The United Nations Economic Commission for Africa (UNECA: 1990) describes human capital as the knowledge, skills, attitudes, physical and managerial effort required to manipulate capital, technology, and land among other things to produce goods and services for human consumption. In other words, human capital is the totality of human potentials (knowledge, skills, attitude, energy and

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technology), inherent within a nations human capital stock. This, if properly developed and harnessed, would yield a high level of labour productivity. Human capital can therefore be conceived as a developed skill, knowledge and the capabilities of all the people of the society and which are needed in the labour market for the production of goods and services. In economic terms, it could be described as the accumulation of knowledge and its effective investment in the development of an economy (Harbison and Mayer 1964)

Generally, human capital is developed in several ways. The first is through formal education, involving pre-primary, primary, secondary and higher education. The second is “in–service or on the job” training, which is a systematic or informal training programme in employing institutions in adult education programme and through membership of various political, social, religious and cultural groups. The third way is individual, self-development. This occurs when individuals seek to acquire greater knowledge, skills or capacities through preparation on their own initiatives. Human capital can also be developed through improvement in the health of the working population by means of better medical and public health programmes and improvement in nutrition, which jointly increase the working capacity of people on a man-hour basis as well as over a working life. The improvement in formal education, health and nutrition can be both a cause of productivity growth and a result of it. Finally, human capital can

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be developed through importation of educated manpower, mostly technical expertise and consultants. Of the various ways of human capital development, formal education seems to be the most veritable.

Corvers (1994) discussed the four effect of human capital on labour productivity: the worker effect, the allocative effect, the diffusion effect, and the research effect. The effects are based on the studies of Nelson and Phelps (1966), Welch (1970), Ram (1980) and Pencavel (1991), inter alia. The work argue that the first and second of these effects underpin the relevance of human capital for the productivity level, whereas the latter two effects underpin the relevance of human capital for productivity growth.

Welch (1970) has explained the first of these, the worker effect (or productivity effect). He assumes that firms produce only one good with the production factor education, and that other resources are given. The worker effect refers to the positive marginal productivity of education with respect to that particular good. Workers with a high level of education are assumed to be more efficient in working with the resources at hand, (i.e. these workers produce more physical output). In other words, education increases the effective labour input. Therefore, a better educated labour force shifts the production possibility curves outward. According to Welch (1970; 43) the worker effect is presumably “related to the complexity of the physical production process”. The more complex the production technique is, the more is the ‘room’ left for the worker effect to improve the (technical)

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efficiency of production. An increase in the proportion of intermediate or highly skilled workers relative to low skilled workers increases the productivity level of physical units. Productivity shows output per unit of input employed. Increase in productivity comes about from increased efficiency on the part of labour.

The allocative effect points to the greater (allocative) efficiency of better educated workers in allocating all input factors to the production process (including education itself) between the alternative uses. Welch (1970) gives two examples of the allocative effect. If there is one fixed input factor to produce two goods (or varieties), education may improve the total revenues of firms by means of a better allocation of the input factor between the alternative outputs. Although, the production process is technically efficient because the firm produces on the production possibility curve (expressed in physical units), workers have more knowledge of how to maximize the marginal value product (expressed in money units) of the input factor. Total revenues are maximized if the marginal value product of the input factor is equalized for all goods. Another allocative effect is present if in addition to education as an input factor two (or more) other inputs are included in the production function. If just one good is produced with two inputs, education may also help to select the efficient quantities of inputs. In equilibrium the marginal value product of the inputs should equal the price of the inputs. In fact, education seems to provide the skills to

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make better decision based upon the available information (Ram, 1980:366). Education generally has the effect of lowering the marginal cost of acquiring production related information and raising the marginal benefits of such information. As a result of allocative effect, an increase in the relative proportions of intermediate and highly skilled worker is expected to lead to a higher productivity level in money units.

Third, the diffusion effect stresses that better educated workers are more able to adapt to technological change and will introduce new product techniques more quickly. Nelson and Phelps (1966) state that “educated people make good innovators, so that education speeds the process of technological diffusion” (Bartel and Lichtenberg, 1987). Moreover, Nelson and Phelps (1966) stress the role of receiving, decoding and understanding information in performing a job. In fact the diffusion effect can be regarded as a special case of the allocation effect. A higher level of education increases the ability to discriminate between more and less profitable innovations and reduces the uncertainty about investment decisions with regard to new processes and products. Therefore, education increases the profitability of successful and early adoption of innovations. Higher proportions of intermediate and highly skilled workers, relative to low skilled workers, would be expected to lead to more rapid and successful adoption of innovations and higher productivity growth.

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Fourth, the research effect refers to the role of higher education as an important input factor in research and development (R&D) activities. Research and Development R&D in turn is a key factor for technological progress and productivity growth e.g. the endogenous growth models in Romer (1990) and Grossman and Helpman (1992). Since research and development activities are very complex, a relatively large proportion of intermediate and highly skilled workers is a prerequisite to increase technological knowledge and achieve productivity growth.

This empirical analysis is applied to all the registered manufacturing firms in Enugu and Anambra State. Since the labour productivity of a firm is a measure of competitiveness, an increase in the employment shares of intermediate and highly skilled workers may improve the competitive position of industrial sector. If the employment shares of intermediate and highly skilled labour are either too small or too large relative to the effect on firms’ labour productivity, this may point to under investment or over investment in human capital. The rest of the work is structured as follows: chapter two provides some stylized fact on human capital situation in Nigeria, and further traced the link between education and human capitals. Chapter three reviews theoretical and empirical issues; while chapter four outlines the analytical framework and the model as well as the method of estimation and evaluation, Data sources and measurement. Chapter five shows the evaluation and interpretation of research findings. Further

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explanations were made with the help of principal component analysis Kmo and Bartlett’s test. Chapter six constitutes in detail the summary, policy implication, and conclusion.

1.2. STATEMENT OF PROBLEM

Although, Human capital theory is not exactly watertight nor is causality easy to establish, yet the impact of human resource development on the industrial productivity is decidedly positive. It is really a matter of regret that after over decades of experimenting in the art of industrialization, most of our industries still remain lukewarm to the fundamental concepts of industrial engineering technology. The level of technology has been very low. It is a common observation that many of the capital equipment and machinery used in the factories are obsolete and are of low yielding and low efficiency capacity. In case of their breakdown, repairs are more difficult because their models have since been discarded. The result is that production is often disrupted in our factories. The corpus of empirical research unequivocally leans toward an affirmation of direct causation for which the East Asian countries are recent examples. This consensus was not forged from the beginning; it was inspired partly by disenchantment with absolute growth oriented development strategies pursued in the fifties and sixties which neglected or marginalized the social sector- education, health and others, yet failed to deliver robust growth in industries or achieve poverty reduction as well. The argument of those that may be termed the

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