Government spending, migration, and human capital: impact on economic welfare and growth- theory and evidence

The purpose of this dissertation is to analyze the effects of public policies on rural-urban migration and human capital expansion, and to examine the role of human capital (among other domestic and external factors) in the long-term economic growth of developing countries. Human capital expansion and labor migration from villages to cities are two aspects of the structure of labor markets in poor countries that are continuously influenced by public policies— policies that are often either ineffective or have unintended adverse consequences. For example, while much of human resource policy in developing countries is directed toward increasing the supply of educated labor, inter sectoral in-country migration and unemployment have become more pronounced, requiring new thinking on policy responses. This dissertation analyzes the outcomes of such policies and offers insights into how they might be improved. Chapter 2 extends a two-sector, general-equilibrium model of rural-urban migration to include government spending. Provision of public goods acts as a productivity-enhancing input in private production that results in external economies of scale. This approach is generalized by introducing an unbalanced allocation of public expenditure in rural and urban sectors due to political economy considerations, differential sector output elasticities with respect to government input, and distortionary taxation. The chapter studies the effects of an increase in public spending and taxation on sectoral outputs, factor prices, urban unemployment, and welfare. Of particular concern here is to study the effect of an unbalanced allocation of government spending between rural and urban areas. Chapter 3 studies the effects of selected education policies on the size of the educated labor pool and on economic welfare using the “job ladder” model of education, which is relevant to liberal arts education in developing countries. The policies considered are (1) increasing the teacher student ratio, (2) raising the relative wage of teachers, and (3) increasing the direct subsidy per student. In addition, the chapter analyzes the impact of wage rigidities in the skilled or modern sector on the size of the educated labor force. The analysis consists of five major sections. First, it reformulates the Bhagwati-Srinivasan job ladder model to make it amenable to analyzing the comparative static results of the effects of selected policies. Second, since higher education is mostly publicly financed, the analysis extends the job ladder model to incorporate public financing of the education sector. It then examines that model along with the effects of changes in policy parameters. Third, the analysis develops another extension of the job ladder model to include private tuition practices by teachers that are prevalent in many developing countries. Fourth, to analyze the impact of wage rigidities in a less restrictive framework where individuals can choose education based on ability and cost, the chapter develops an overlapping generations model of education with job ladder assumptions of wage rigidities in the skilled or modern sector. The chapter examines the flexible market and fixed market (with wage rigidities) equilibrium scenarios, and compares the impact on the threshold level of abilities and the size of the educated labor force. Finally, using specific functional forms of human capital production, cost, and ability density functions, the chapter analyzes the equilibrium outcomes. The analysis shows that in an economy with wage rigidities in the skilled sectors (modern and education sectors), the result of quality-enhancing policies under the simple job ladder model is an increase in the total size of the educated labor force. However, under an extended version of the job ladder model, the result depends on the relative size of the effects of an increase in the cost of education and the effects of an increase in the expected wage. The overlapping generations/job ladder model formulation used in the chapter finds that an increase in the present value of the expected wage and/or an increase in the marginal product of education will increase the demand for education. The minimum threshold level of ability falls, and more people are encouraged to acquire educational skills. Chapter 4 estimates the effects of openness, trade orientation, human capital, and other factors on total factor productivity (TFP) and output for a pooled cross section, time-series sample of countries from Africa and Asia, as well as for the two regions separately. The models are estimated for the level and growth of both TFP and output by using panel fixed effects. The generalized method of moments is also applied to address endogeneity issues. Several variables related to political, financial, and economic risks are used as instruments, together with the lagged values of the dependent and endogenous explanatory variables. The data for this study span 40 years (1972–2011) and are grouped into five-year averages. Several sources were used to obtain the most updated data, including the newly released Penn World Table (Version 8.0). The chapter finds that inducing a greater outward orientation generally boosts TFP, per capita output, and growth. Greater accumulation of human capital has a consistently positive effect on output and TFP growth in both Africa and Asia. Its positive influence comes rather independently of trade variables than interactive terms with openness. Furthermore, inflation does not negatively affect growth, although inflation variability is found to adversely affect TFP and output in Africa. Chapter 5 concludes the dissertation by providing conclusions, a summary of major results, and possible directions for future research.