13/4/2013: Human Capital & Economic Development - a fascinating study

A fascinating paper, published in The Quarterly Journal of Economics (2013), 105–164, titled "Human Capital and Regional Development" by Nicola Gennaioli, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer (see also NBER Working Paper No. 17158, September 2011 or in final version at http://scholar.harvard.edu/files/shleifer/files/human_capital_qje_final.pdf) looked at "the determinants of regional development" across "1569 sub-national regions from 110 countries covering 74 percent of the world’s surface and 96 percent of its GDP."

The authors "combine the cross-regional analysis of geographic, institutional, cultural, and human capital determinants of regional development with an examination of productivity in several thousand establishments located in these regions." In addition, the study also extends a standard model of regional development to include a "model of the allocation of talent between entrepreneurship and work", and a "model of human capital externalities".

Top line conclusion: "The evidence points to the paramount importance of human capital in accounting for regional differences in development, but also suggests from model estimation and calibration that entrepreneurial inputs and human capital externalities are essential for understanding the data."

More specifically:

• In the paper, human capital as measured by education attainment "emerges as the most consistently important determinant of both regional income and productivity of regional establishments.
• "…Some of the key channels through which human capital operates, includ[e] education of workers, education of entrepreneurs/managers, and externalities." 
• The authors omit other forms of human capital (e.g. creative capacity, innovation capacity, various measures of aptitude, etc), which implies that the results of the study error on cautious side when it comes to determining the full extent of the effects of human capital on economic development.
• The authors also omit from consideration "the role of human capital in shaping the adoption of new technologies. Starting with Nelson and Phelps (1966), economists have argued that human capital accelerates the adoption of new technologies." This once more implies that the numerical estimates provided by the authors error on the side of underestimating the true effects of human capital on economic development.
• The authors "do not find that culture, as measured by ethnic heterogeneity or trust, explains regional differences."
• The paper shows no effect of "institutions as measured by survey assessments of the business environment in the Enterprise Surveys" on helping to "account for cross-regional differences within a country."  
• The two points above are important for us in Ireland - and indeed in all Small Open Economies within the EU27 - because, given the extent of labour mobility and markets integration within the EU27, we are closer, on a comparative basis, to being a regional economy, rather than a separate country-level economy.
• "In contrast, differences in educational attainment account for a large share of the regional income differences within a country. The within country R2 in the univariate regression of the log of per capita income on the log of education is about 25 percent; this R2 is not higher than 8 percent for any other variable."
• Acemoglu, D, & M. Dell (2010) paper “Productivity Differences Between & Within Countries” (published in American Economic Journal, 2(1):169-188) examined "sub-national data from North and South America to disentangle the roles of education and institutions in accounting for development. The authors find that about half of the within-country variation in levels of income is accounted for by education." 
• The study also shows that "focusing [in the analysis of the role human capital plays in economic development] on worker education alone [absent separate consideration of entrepreneurial human capital] substantially underestimates both private and social returns to education. Private returns are very high but to a substantial extent are earned by entrepreneurs, and hence might appear as profits rather than wages…  …the evidence points to a large influence of entrepreneurial human capital, and perhaps of human capital externalities, on productivity."
• Key numerical finding is that "education explains 58% of between country variation of per capita income, and 38% of within country variation of per capita income."
• "Turning to institutions, some of the variables, such as access to finance or the number of days it takes to file a tax return, explain a considerable share of cross-country variation, …but none explains more than 2 percent of within country variation of per capita incomes. Indicators of infrastructure or other public good provision do slightly better: on their own many explain a large share of between country variation, while density of power lines and travel time account for up to 7% of within country variation. These variables are obviously highly endogenous, and still do much worse than education."
• The last two points summarised in the table below:

24/2/2013: Absurdity of Human Capital Politicisation in Europe

Much of economic policymaking in Europe is driven by the political objectives of the EU, not by economic rationality or efficiency considerations. Here is an interesting potential example of the same trend toward over-politicisation of decision making happening in another sphere - border controls and immigration:
http://blogs.lse.ac.uk/europpblog/2012/12/10/eu-asylum-balkans/

Most certainly worth a read and a robust discussion.

A note to flag some absurdity of the EU policies. Take a look at this map:

Note that Balkan countries, not members of the EU, all (with exception of Kosovo) have a visa-free travel arrangement with the Schengen area. This means that a resident (both citizen and non-citizen) of these countries has visa-free access to the entire Schengen despite paying not a single cent in taxes in the EU, having no residency in the EU, having no family member with an EU citizenship, maintaining no home in the EU nor any business within the EU.

In contrast, an EU taxpayer with full residency in the UK or Ireland but who is not the national of the EU state cannot freely travel to Schengen countries. Full stop. Only one restrictive exception to this is the case where such travel is undertaken by non-EU citizen accompanying their EU-citizen spouse.

Get the madness? Those non-EU citizens who live, work, maintain homes, have families (including with EU citizens in them), run businesses in EU member states (Ireland & UK) have less rights than non-EU citizens of the countries that are not a part of the EU.

Worse than that. Absurdity goes much deeper. A non-EU citizen who is a long-term resident of Ireland and the UK, with home ownership (1), employment (2), business (3) in these states, cannot gain a long-term multi-entry visa to Schengen countries simply because the issuing authorities (embassies of Schengen countries in the UK and Ireland) cannot coordinate the frequency of travel etc between themselves. Yet, a non-EU citizen with a vacation home in, say Spain or Montenegro, has full unrestricted access to the Schengen.