ED <Lecture Note 4> 13.3.29
ED: Capitals and Investment
*Some parts of this note are borrowed from references for
teaching purpose only.
Semester: Spring 2013
Time: Friday 9:00~12:00 am
Class Room: No. 322
Professor: Yoo Soo Hong
Office Hour: By appointment
Mobile: 010-4001-8060
E-mail: yshong123@gmail.com
Home P.: //yoosoohong.weebly.com
Income Level by Region and Country
World Bank Scheme- ranks countries on GNI/capita
2
Factors of Economic Development
 Understanding Economic Development
–
–
Overall understanding (‘seeing the forest’):
Understanding of main macro indicators such as economic growth
Partial Understanding (‘seeing the trees’):
Understanding of main components as a point of the whole
 Main Factors for Enhancing Development/Barriers
－
－
－
－
－
Resources (physical/human capital, labor, land, natural resources, etc.)
Technologies (productive technology, know-how, knowledge, etc.)
Institutions (law, regulation, etc.)
Cultures (custom, morality, life style, etc.)
Others (politics, international relations, etc.)
3
Key Factors of Economic Development
4
Stages of Economic Development
Factor-driven
Economy
Investment
- driven Economy
Innovation
- driven Economy
5
Source: Porter, Michael E. Competitive Advantage of Nations, 1990.
Changes in Production Capacity
Physical Capital
Accumulation
EAP&
HR
Investment
Production (Capital, Labor, Technology)
Population Support
Savings
R&D
Consumption
EAP=Economically Active Population
6
Basic Relationship of Capital Accumulation and Growth
Consumption
Economic growth
Impoverished
household
Household savings
Tax payments
Population
growth and
depreciation
Capital per
person
Public investment
Public budget
7
Poverty Trap
Basic needs
Impoverished
household
Zero
household
savings
Decline in
capital per
person
Negative
economic
growth
Zero tax
payments
Zero public
investment
budget
Population
growth and
depreciation
Role of ODA in Breaking the Poverty Trap
Basic needs
Impoverished
household
Household
savings
Humanitarian
relief
Official
development
assistance
Economic
growth
Economic
growth
Public
investment
Budget
support
Public budget
Population
growth and
depreciation
Private and Public Investments in Capital
Business capital
Human capital
Knowledge capital
Infrastructure
Natural capital
Institutional and
Social capital
Household income
Tax payments
Public budget
10
Networks
Membership
Political
Rights
Knowledge
Skills
Health
Shelter
Machinery
Infrastructur
e
Land
Water
Livestock
Savings
Pensions
Insurance
Financial Capital
11
Source: DFID Sustainable livelihoods Guidance Sheets
How Inter-relationship of Society’s Assets
12
Factors Accounting for Economic Growth in Selected
Regions
Source: International Monetary Fund.
13
Capitals
 Three types of capital, or resources, are used to produce goods and
services.
– Natural capital includes resources and services produced by the
earth’s natural processes, which support all economies and all life.
– Human capital, or human resources, includes people’s physical and
mental talents that provide labor, innovation, culture, and organization.
– Physical capital, or manufactured resources, are items such as
machinery, equipment, and factories made from natural resources with
the help of human resources.
– Most economic systems use three types of resources to produce goods
and services.
14
Concept of Capital and Human Capital
 Concepts of Capital
o Broad meaning: All sources generating future income flows
o Narrow meaning: Physical capital and human capital only
 Capital and Technology Accumulation
– Accumulation of physical capital, human capital and technology
(knowledge) increase in production and income  increase in
accumulation ……(virtuous circle)
 Human Capital
– The ability embodied in individuals as a result of investment in the
form of education, training, health, regional movement (migrant),etc.
that increases quality of labor.
15
Physical Capital
–
Economic growth requires and depends, in part, on inputs of capital. The
rate of growth implied by a given capital formation proportion depends on
the capital/output ratio and the rate of growth of the labor force.
–
The process of growth involves saving to create a surplus for capital
formation. Saving is not tightly related to incomes per capita.
–
Saving can be undertaken by government, and it can be forced upon
households and businesses by inflation. All economies have a limited
capacity to absorb new investments, but most do not ever test the limits.
–
When investment increases continuously, additional (marginal) rates of
return to capital tends to fall because better opportunities have been
exploited already.
16
–
Physical capital is a scarce resource, in rich and poor countries alike.
It is also an input into the production process. In general, the higher the
level of inputs, the higher will be the level of output. The poverty of
physical resources obviously characterizes poor countries. Thus
conventional views would urge higher rates of capital formation to
overcome poverty.
–
Physical capital takes the form of long-lived goods such as machinery used
to produce other goods. Capital goods are themselves the result of the
process of capital formation, a process that takes time and that uses
resources.
–
In an efficient economy, higher rates of capital formation (and thus, the
higher potential rates of growth of overall output in the future) mean lower
production of consumer goods in the present. Thus, there are trade-offs
between current consumption and future consumption.
17
Capital and Investment
 Importance of Capital
 Harrod-Domar’s Model
– Interested in investment conditions for achieving sustainable growth
without inflation and unemployment
 The View called ‘capital fundamentalism’
– Claim that capital formation is the key factor for economic growth.
– The issue of economic development is essentially to gain investment
resources necessary to achieve the target (minimum) rate of economic growth
needed for desirable employment and income distribution.
– They assume that high economic growth is expected to automatically reduce
unemployment and excessive income inequality.
 Adding the concept of human capital
– In principle, human capital is the same as physical capital so that it
reinforces the importance of capital for economic development.
18
 Problems of ‘capital fundamentalism’
– High investment and capital formation do not necessarily guarantee
desirable economic growth and income distribution.
– There are many cases of inefficient investments or investments for mainly
demonstration purpose that are not appropriate for the reality of developing
countries.
 Required Investment
– In developed countries (during 1960-1975), 50% of economic growth was
resulted from capital investment. In developing countries (newly industrial
countries), 25-35%of economic growth was resulted from capital
accumulation.
– Investment rate of 15-20% should be maintained for sustainable
development for a long period.
 Capital-Intensive Investment vs. Labor-Intensive Investment
– In developing countries lacking capital, if more emphasis is given to capitalintensive production, economic growth rate may be lowered and/or consumption
may be constrained.
19
Saving: A Fundamental Determinant of Economic
Growth
•
To have more consumption in the future, people must consume less today
and save the difference between consumption and income.
20
Relationship Between Rate of Saving and Per Capita
Real GDP
Source: World Bank.
21
Relationship between Savings and Investment
at the Macro-Economic Level
Savings
Domestic
private
savings
Bank
deposit
Financial Intermediaries
Domestic
bank
Stock
purchase
Cash
holding
Domestic government
savings
FDI
Foreign
savings
From
foreign
bank
Investment ( by firm,
government, person, etc. )
Domestic borrowing
from
banks or individuals
( these are debt ) and
invested in capital or
operation
Stock market
Person
to
person
Foreign
financial
institutions
Through domestic
stock market, new stocks
are issued and invested
as equity
Foreign borrowing
or
equity investment
22
Savings and Economic Growth
Savings and Growth in 90 Developing Countries
0,35
0,3
0,29
0,27
0,25
0,2
0,2
0,18
Real GDP grow th (% increase)
Total savings (% GDP)
0,15
0,1
0,08
0,07
0,04
0,05
0,02
0
Highgrow th
countries
Middlegrow th
countries
Low grow th
countries
* East
Asia
* Hong Kong, Singapore,
Taiw an,S.Korea,Indonesia,
Malaysia, Thailand
Source: IMF World Economic Outlook, May 1993 (Annual data, 1971-92).
23
Diversity of Economic Outturn across SSA groupings



Real GDP growth has
outstripped population
growth since 2004. Because
of better oil prices, real GDP
growth has been high in Oil
exporting countries
Improved macro policies, low
income countries have been
growing at higher rates
Gross national savings are
low, perhaps constraining
total investment
Real GDP Growth (Percent)
SSA
Of which
Oil Exporting Countries
Middle Income Countries
Low Income Countries
Fragile Countries
Total Investment (Percent of GDP)
SSA
Of which
Oil Exporting Countries
Middle Income Countries
Low Income Countries
Fragile Countries
Gross National Savings(Percent of GDP)
SSA
Of which
Oil Exporting Countries
Middle Income Countries
Low Income Countries
Fragile Countries
2004-08
(%)
6.5
2007
2008
2009
7
5.6
2.5
8.5
4.9
6.3
3.3
9.2
5.5
6.4
3.2
7
3.7
6.3
3.5
4.8
-1.7
4.7
3.3
21.1
21.9
22.8
22.8
21.4
20.5
21.5
13.4
21.5
21.7
22.6
12.9
22
22.9
23.5
14.3
25.3
20.1
22.9
13.9
21.5
22.6
21.6
21.4
32.8
16.3
15.5
10.1
35.8
16.1
15.9
9.2
33.5
31.4
16.4
16.1
14.5
16.3
24
7.9
10.9
Accumulation Speed of Physical Capital
(Unit: Real Domestic Investment/Real GDP, %)
1960
1965
1970
1975
1980
1985
1990
Growth
Rate,%
Korea
7.0
10.6
21.9
23.3
28.0
28.5
36.9
5.6
Taiwan
14.0
16.8
21.9
25.9
29.1
19.9
23.1
1.7
Singapore
11.0
21.9
38.8
33.9
37.8
37.3
35.0
3.9
Hong Kong
21.7
23.8
16.8
18.5
23.4
17.4
17.7
-0.7
The Philippines
10.9
13.0
13.0
18.1
19.3
11.3
17.7
1.6
Thailand
11.3
15.5
18.3
17.4
17.2
16.8
27.0
2.9
Indonesia
6.2
6.8
11.1
17.2
18.0
26.9
28.2
5.2
Brazil
18.9
19.0
19.8
26.0
22.0
15.6
15.2
-0.7
Chile
20.4
21.5
21.6
20.6
22.0
15.6
15.2
-0.7
Mexico
14.5
16.9
17.7
19.1
21.4
15.3
15.0
0.1
Ghana
11.0
10.7
7.0
6.3
4.0
4.2
5.5
-2.3
Kenya
23.2
13.4
27.6
11.8
17.2
13.8
11.0
-2.5
Note: 1. Measured in 1985 constant dollars. 2. Average Annual Growth Rate for the period, 1960-1990.
Source: Summers and Heston Data Set 5.6.
Roles of Remittances







Count as the 2nd largest source of capital inflow to many developing
countries.
Only foreign direct investment account for more sources of external
finance.
Remittances exceeds inflows that come from international aid.
Receiving countries become more dependent on global economies
rather than sustaining their own local economies.
Promotes economic growth in developing countries.
World Bank estimates $240 billion in total remittances in 2007, a
staggering jump from only $31.2 billion in 1990.
Remittances exceed all other imports of private and public
capital in 36 developing countries.
26
Advantages of Remittances







Finance much needed investment in recipient countries to contribute to
increased productivity.
Believed to reduce poverty. Mainly due to the poor that migrate and send
back remittances.
Increase of income in households also increase consumption.
Remittances do not have to pay interest.
More stable than foreign direct investment or foreign portfolio investments.
These are highly volatile in developing countries.
Unskilled workers may return to their home countries with useful skills
acquired abroad.
Recipients have a higher propensity to own bank accounts.
27
Disadvantages

Promotes idleness among the recipients.

May cause appreciation of receiving country’s currency. Thus leading to
lower net exports and negative economic growth.

Some emigrants may be educated or highly skilled causing what commonly
known as “brain drain”.
– Loss of human capital lowers productivity and economic growth.
– Home country invested time, effort and money on their education.
– Migration of skilled workers worsens the distribution of income between
rich and poor countries.
28
Top Remittances Countries

Developing countries receive the highest amount of remittances.

One-third of remittances to the developing world go to India, China, and
Mexico.
Share of remittances in GDP
Tajikistan
50%
Moldova
31%
Lebanon
25%
Top recipient countries 2008
India
$51.5 billion
China
$48.5 billion
Mexico
$26.3 billion
Philippines
$19.1 billion
29
Trends of Remittance Flows

Most of the developing world has been increasing flows of remittances by
double digits annually between 1990-2005.
Remittances by region (US$ billions)
1990
1995
2000
Eastern Europe and Central Asia
3.2
8.1
13.4
East Asia and Pacific Region
3.3
9.7
16.7
South Asia
5.6
10
17.2
Latin America and Caribbean
5.8
13.4
20.1
Middle East and North Africa
11.4
13.6
13.2
Sub-Saharan Africa
1.9
3.2
4.6
2005 Annual growth
30.8
15.1%
43.9
17.3%
34.9
12.2%
47.6
14.0%
23.5
4.8%
7.4
9.1%
Source: World Bank
30
Remittances by Area
31
Labor and Human Capital
–
While physical capital may be the scarcest input to development, labor is
usually plentiful. Usually low-income countries are characterized by
capital-poor and labor-rich.
–
Productivity of workers is dependent on their native ability, the amount of
raw labor they bring to the marketplace, and the returns to their stock of
human capital.
–
Investments in human capital include formal schooling, on-the-job
training, health care, and nutrition, among others. (=> human
development)
–
Intensity of effort also affects output and is influenced by labor supply.
Backward-bending supply curves for labor seem less accurately descriptive
of current low-income countries.
32
–
Managing the process of human capital formation is a challenge to
policymakers. Educational requirements depend in an indirect but
quantifiable way on future output and its prospective composition.
–
Poor countries have lost some trained workers through emigration. The
results of the so-called brain drain are amenable to economic analysis.
–
Unions affect the development process through both the economic and
noneconomic roles they play. Their organizational capabilities seem more
limited in poor countries than rich countries.
–
The use of political instruments to gain their ends is more pronounced.
Early hopes that unions might act on behalf of the society as a whole have
proved unrealistic.
33
Population Changes
 The Importance of Population Issue
o The relationship between population growth rate and economic
growth rate
– The inter-relationship between the two variables is important, but the
casual relationship is complicated.
– The size and growth rate of population affect economic growth rate
and economic development, and vice versa.
o The relationship between population and income
– Population and income distribution (Y/P): moving in the opposite
direction
– However, population size is positively related to production scale,
market size and defense power.
– Higher population density may lower productivity. In contrast, it may
encourage technological innovation.
34
Population and Per Capita Income
C
Y
A
Output
B

Slope indicates
per capita income (Y/P)
P
Population
35
o Population and resource depletion
Resource depletion = Population size X Per capita income X Intensity
• Pessimistic view:
– The report by the Club of Rom, The Limits to Growth warned a gloomy
future of mankind.
• Optimistic view of neo-classical economists:
– Supply of resource is determined by resource market price mechanism.
(E.g. Recent oil price fluctuations)
•
Dissemination of technology positively affects resource utilization.
 Population Growth Rate
o Population growth rate = Birth rate - Death rate  Migration rate
36
Distribution and Growth Rate of Population
by Region in the World
Distribution (%)
Growth (%)
1950
1990
1980-91
China
22.1
21.5
1.5
India
14.2
16.1
2.1
Asia-other
18.9
26.8
-
Africa
8.8
12.1
3.1
Europe
22.8
14.8
0.9
Latin America
6.6
8.5
2.0
North America
6.6
5.2
1.0
World Population
2.5 billion
5.3 billion
1.7%
37
Demographic Transition
o
Shortening Demographic Transition Period
–
Compared to demographic transition in developed countries in the past, the
transition process in developing countries is more radical and fast due to fast
decrease in both birth rate and death rate so that the transition process tends to
be shortened.
o
Increase in Young Population vs. Old Population
–
The increase in young population results in increasing dependency rate which in
turn requires job creating and human capital investment. Relative increase in old
age group also increases dependency rate and results in negative effects on
economic growth.
o
Determinants of Birth rate
–
Malthusian hypothesis: Population growth rate is constrained by food production.
Population growth is geometric whereas food production growth is arithmetic so
that income increase (and economic growth) above the subsistence level is
impossible in the long run, since population will increase faster if food (income)
per capita increases due to some reason.
38
• Modern Theory of Birth Rate : Birth rate is affected by many factors.
• Economics of human behavior: Are children investment goods of parents?!
• Decision and preference of women are most important: culture, income level,
education level, opportunity costs, etc.
39
Demographic Transition Process
%
Demographic transition
Birth rate
Death rate
Population
growth rate
Time
40
Demographic Transition and Population
41
Estimated Human Population Growth
42
Five Features of World Migration

Major world migration is from less to more developed regions of
the world.

New demands for immigrants in highly developed countries are
increasing due to demographic transitions.

Globalization creates contradictory labour demands and displacements,
creating mobility opportunities for some and uprooting others.

Economic globalization creates contradictory tendencies in international
migration.

World migration has added racial and cultural diversity to historically
homogeneous populations.
43
Average Annual Net Migration By Region,
2005-2010
1500000
1000000
500000
0
-500000
-1000000
-1500000
Africa
Asia
Europe
L. America &
Caribbean
N. America
Oceania
Average annual net migration
Source: United Nations, International Migration, 2009
44
Human Capital Definitions

Human capital is the accumulation of skill and knowledge imbedded in
labor performance in order to produce economic value.

“the acquired and useful abilities of all the inhabitants or members of the
society. The acquisition of such talents, by the maintenance of the acquirer
during his education, study, or apprenticeship, always costs a real expense,
which is a capital fixed and realized, as it were, in his person.” - Adam
Smith, The wealth of the nations (Short title of the book)

Human capital refers to the collection of innate and acquired individual
abilities that are substantially durable, persisting over some
significant portion of the life of the possessor
45
Role of HC and Measurement

Economic growth closely depends on the relation between new
knowledge and human capital, which is why large increases in
education and training have accompanied major advances in
technological knowledge in all countries that have achieved significant
economic growth.

Quantitatively, the early studies compared school enrollment ratios or
literacy rates. The problem with that, is there is no adequate measure
of aggregate stock of human capital available as an input of
production.

Technological progress is invaluable when there are only few skilled
workers that know how to benefit from it.
46
Component of HC
Human
Capital
Tangible
Intangible
Health
Longevity
Physiological
condition:
e.g. Strength,
eyesight etc.
Psycho-motor
based skills
("know-how",
"can-do").
Cognitive
capabilities
("know-why"'
know-what")
Procedural
capabilities
Creativeness,
innovativeness
Problem-solving,
leadership,
managing complex tasks.
Social capabilities
(“know-how”, “know-who”):
Flexibility:
e.g., diligence, loyalty, Multi-task performance,
cooperativeness, trust, etc.
re-trainability.
47
The Human Capital Model
C
(3)
Incremental earnings
Annual earnings
H
(2)
H Opportunity
cost
18
C
(1)
Direct
cost
22
65
Age
48
Age-Earnings Profiles with and without college education
Age-earnings Profiles by Level of Education
(Venezuela, 1989)
49
Comparison Of Human Capital And Physical Capital
 Differences
– There are major differences in terms of the returns obtained from
the investment in human capital and physical capital. The investment in
physical capital has only monetary and market returns whereas
investment in human capital has non-monetary as well as non-market
returns.
– The returns to human and physical capital tend to behave differently.
When individual invest in physical capital, they are return-takers i.e. the
owners accepts the return dictated by the market and cannot influence
them. Since there are no market for the stock of human capital,
investors in human capital become return-maker, as the amount, the
quality and the maintenance of their human capital will dictate what the
market will be willing to offer for their services.
50
 Similarities
- Investment are made in both human capital and physical capital. When
a person (or person’ s parents or society at large) makes a current
expenditure on education and training, it is anticipated that the
individual's knowledge and skills and therefore future earnings will be
enhanced. The important point is that expenditures on education and
training can be fruitfully treated as investment in human capital just as
expenditure on capital equipments can be understood as investment in
physical capital.
51
Education Level
School Attendance Rate (2000) (%)
Illiteracy Rate of Age
15-25 (2001)
Elementary
Education
Secondary
Education
Higher
Education
Male
Female
China
Japan
Korea
Chinese Taipei
Singapore
Hong Kong
Indonesia
Philippine
Thailand
Malaysia
Vietnam
106
101
101
100
110
113
94
99
106
63
102
94
99
57
77
82
70
67
7
48
78
77
15
31
35
28
10
1
0
0
1
2
1
1
2
5
3
0
0
0
3
1
2
2
4
United States
101
95
73
-
-
World
102
67
22
-
-
Source: World Bank, World Development Indicators, 2001, 2002, 2003
52
Tertiary Enrollment Rate by Country (1998)
%
90
80
70
60
50
40
30
20
10
0
China Hong Kong(a) Indonesia
Japan
Korea(b) Malaysia Philippines Singapore(a)Thailand
USA
Notes: a. 1997 b. 2001
Sources: World Bank, World Development Indicators. Various years; Hong Kong, China. Education and
Manpower Bureau.
53
Primary School Enrollment and Pupil-Teacher Ratios,
2010
54
Human Development Index for 24 Selected Countries
(2007 Data)
55
Under-5 Mortality Rates, 1990 and 2005
56
Wealth of Nations
•
Produced assets: human-made things
•
Human resources
– Human capital: physical, psychological, and cultural attributes of a
population
– Social capital: the social and political environment people create for
themselves in society
– Knowledge assets: the codified or written fund of knowledge that can be
transferred to others
•
Natural capital: goods and services supplied by natural ecosystems
– Renewable
– Nonrenewable
– Subject to depletion
57
Land and Other Natural Resources
–
A long tradition in economics treats land differently from other physical
assets and from labor. Land and subsoil natural resources have usually
been considered nonreproducible.
–
Natural resources similarly have limited reproducibility. The possibilities of
substitution between raw materials exist.
–
Land and subsoil minerals are usually immobile. They cannot be
transported from place to place as cheaply as other assets and labor. This
characteristic is central to the consideration of their economic
properties in poor countries.
–
Land is relatively unimportant for a developed country that has abundant
capital to alter the character and capacity of its existing resources, and
human drive and creativeness to substitute for the natural constraints.
58
Problem of Resources
 Exporting large quantities of primary products
- Making the country vulnerable to changes in prices
- Low YED / low incomes
- Deteriorating terms of trade
- Forcing up the exchange rate and negatively impact on the
competitiveness
of other (manufacturing) sectors to emerge (the Dutch disease)
- Political corruption and instability is often associated with the natural
resource curse
59
Natural Capital and Economic Growth
 Natural capital share and growth are inversely
related. The most striking aspect is not the
average performance of resource rich countries
but the huge variation.
-0.67
Growth of per capita GDP, adjusted for
initial income (% per year)
8
-0.2
6
4
2
0
-2
0.0
0.2
0.4
0.6
0.8
1.0
-4
-6
-8
-10
Natural capital as share of total wealth
60
Relationship between Resource Exports and Growth
61
Localization of the Reserves of Main Mineral
Commodities
(per gross national income per capita)
Low-income country (2006 GNI < 2.5 $/day per capita)
Upper middle income country (2006 GNI < 30.5 $/day per capita)
Lower middle income country (2006 GNI < 10 $/day per capita)
High-income country (2006 GNI > 30.5 $/day per capita)
100%
90%
80%
70%
60%
… while many strategic resources are located in p
oor countries with severe limitations to their gover
nance capacities
50%
40%
30%
20%
10%
0%
Source:
Christmann,
Data Sources:
USGS2009
and World Bank
Location of Production for Nine Important Minerals
63
Source: Google
World Supply and Demand
Source: Google
64
Mineral Resources
65
Source: Google
Regional Primary Energy Consumption
Patterns
Source: BP Statistical Review of World Energy, 2010
66
Primary Energy Consumption Per Capita
Source: BP Statistical Review of World Energy, 2010
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Primary Commodity Dependence
 Developing countries’ exports dependency on commodities is an issue that
has for decades and constrains economic development of such countries.
 More than half (78) of all developing countries rely on four
commodities for 50 per cent of their earnings; 31 per cent rely on four
commodities for more than 75 per cent of their export earnings.
 The boom of commodity prices seems to have increased dependency,
since commodity export represent a higher value of total export of
developing countries due to higher prices.
 The current commodity boom should provide new possibility to countries to
come out of dependency.
 Dependency is not only factor contributing to the vulnerability of countries
– the capacity to sustain shocks ( called resilience ) also plays an important
role. Although resilience and dependency go together, the more dependent
a country is, the less resilient it is and thus the more vulnerable it is.
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Primary Commodity Dependence
69
Source: UNCTAD, Development and Globalization
Sustaining Natural Capital
If we truly care about the future of our planet, we must stop leaving
it to “them” out there to solve all the problems. It is up to us to save
the world for tomorrow; it’s up to you and me.
-Jane Goodall, Reason for Hope
 Natural capital contributes enormously to human development and welfare. The term
natural capital encompasses the sink functions, that is, air and water as receiving media
for human-generated pollution and source functions, that is, production based on forests,
fisheries, and mineral ores.
 Protecting sink functions is essential for human health. Protecting the productive or
source functions is critical to the economic security of many who depend on these
resources for their livelihoods.
 High-quality natural capital contributes to welfare indirectly as an essential part of the
sustained production of economic goods and services. It also contributes to welfare
directly as people derive enjoyment from pristine surroundings, old growth forests, and
clean lakes and rivers in which to swim and fish.
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Human, Physical and Natural Capital and the Economic
System
Economic Process
Human
Welfare
Built
Environment
Aesthetics,
Life Support
Production
KP
Source: Barbier (2002)
KN
Human
Knowledge
KH
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Sustainable Economic Development
Development that meets the
needs of the present without
compromising the ability of future
generations to meet their needs
Sustainable
Development
Welfare does not
decline over time
Requires managing
and enhancing a
portfolio of
economic assets
Total Capital
Stock
Natural
Capital
KN
“Weak”
Sustainability
“Strong”
Sustainability
All KN is nonessential
Some KN is
Essential
Physical
Capital
KP
Keep essential KN
“intact” because of:
Substitutes for
KN
•Imperfect substitution
•Irreversible losses
•Uncertainty over value
Human
Capital
KH
Source: Barbier (2002)
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Definition of Social Capital

Social capital consists of the networks, norms, relationships, values and
informal sanctions that shape the quantity and co-operative quality of a
society’s social interactions.

Social capital represents the degree of social cohesion which exists in
communities. It refers to the processes between people which establish
networks, norms and social trust, and facilitate co-ordination and cooperation for mutual benefit.
– World Health Organization. Health Promotion Glossary.1998.

Social capital is created from the myriad of everyday interactions between
people, and is embodied in such structures as civic and religious groups,
family membership, informal community networks, and in norms of
voluntarism, humanity and trust. The stronger these networks and bonds,
the more likely it is that members of a community will co-operate for
mutual benefit.
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Social Capital Defined
 Definition of Social Capital
- “Connections among people add value to a society in much the same
way that financial capital does. Social capital refers to the collective value
of all social networks - or who people know.” (Robert Putnam, Bowling
Alone)
 Social Capital and Economic Growth
- Social capital generates positive externalities for members of a group, but
not necessarily a country.
- The externalities arise from shared norms and values and their
implications for expectations and behavior.
- These values and norms arise from informal forms of organizations
based on networks and organizations.
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Measurements in Social Capital
A narrow measurement:
Social capital concentrates on
the degree of horizontal conta
ct between individual in a com
munity.
(Putnam, 1993)
Broader Measurement:
Social capital includes vertical
(power distribution) as well as
horizontal associations among
members in community.
(Coleman, 1988,1990)
Torsvik apply a narrow definition of social capital.
He developed micro-foundations for the link
between social capital and economic performance.
The microfoundations consist of clearly specified
mechanisms that can explain why social capital
facilitates production.
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Difference between HC and SC
Human Capital
Social Capital
Focus
Individual Agent
Relationships
Measures
Duration of Schooling,
Qualifications
Attitudes
Membership, Participation,
Trust Level
Outcomes
Direct: Income, Productivity
Indirect: Health, Civic Activity
Social Cohesion
Economic Achievement
More Social Capital
Model
Linear
Network
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Rise and Fall of Social Capital
• Robert Putnam has shown most
indicators of social capital followed
an inverted U path in the United
States during the twentieth century.
• During the first two thirds of the
century “Americans took a more
and more active role in the social
and political life of their
communities”, and they behaved in
an increasingly trustworthy way
toward one another.
• Then, beginning in the 1960s and
1970s and accelerating in the
1980s and 1990s, an erosion of the
stock of American social capital
started.
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Nature and Role of Economic Institutions
•
Institutions provide “rules of the game” of economic life
•
Provide underpinning of a market economy
•
Include property rights; contract enforcement
•
Can work for improving coordination
•
Restricting coercive, fraudulent and anti-competitive behavior
•
Providing access to opportunities for the broad population
•
Constraining the power of elites, and managing conflict
•
Provision of social insurance
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References
 Christmann, Patrice, “Why EUROPE Needs a Mineral Resources”,
Natural Resources Reporting Workshop Institute of Geologists of Ireland,
Dublin, May 14th, 2009.
 Gylfason, Thorvaldur, “Natural Resource Abundance and Economic
Growth: Some Lessons from Norway and Iceland”, (Google, PPT)
 Thomas, Vinod., et al. The Quality of Growth. the World Bank and Oxford
University Press. 2000.
 UN, Trend of Sustainable Development, 2006.
 UNCTAD, Development and Globalization, Facts and Figures, 2008.
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