Human Capital, Economic Institutions, and World Poverty

Seth Norton (Wheaton College)

Abstract: The effects of human capital are central to the modern theory of economic development Indeed, some scholars, such as Robert E. Lucas, go so far as to attribute the core of economic development to investment in human capital. Other scholars stress the presence of well-being enhancing institutions as the essential ingredient in the elimination of poverty. The effect of economic institutions—well-specified property rights, the rule of law, economic freedom and the quality of government—on economic performance is an important research stream in recent years. The absence of effective economic institutions must also contribute to measures of world poverty. The analysis below builds on these findings by examining human well-being using standard measures developed by the United Nations. The empirical results indicate that both economic institutions and human capital play an important role in reducing poverty. Both powerfully reduce the measures of human poverty. Because property rights and economic freedom reduce the proportion of unschooled in a country, it seems reasonable to infer that economic institutions indirectly reduce that type of poverty. The data therefore show that the human capital theorists and neo-institutional economists are correct. There are robust statistical results to support both views. Institutional and human capital explanations for enhanced human well-being are well founded.

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