Human Capital and Economic Growth: The Moderating Role of Economic Structural Change

Abstract

This paper investigates reasons behind the existence of different economic growth implications due to human capital formation in ASEAN nations. This paper also evaluates whether structural change towards a services-based economy increases the impact of human capital on economic growth. A balanced panel dataset of ten ASEAN countries from 1994 to 2023 (287 observations) was utilized for the empirical analysis. Economic growth is estimated using the Human Capital Index (HCI), the share of services in GDP (SERV), the interaction of HCI-SERV, and macroeconomic control variables. The estimations of fixed effects (FE), fixed effect-Driscoll-Kraay (FE-DK) and two-step System GMM were undertaken. Further marginal effect analysis and threshold estimation were conducted. The results suggest that both human capital and structural transformation are significantly contributing to growth. Based on the most preferred specification (System GMM), the HCI (β=9.318, р<0.01) and SERV (β =0.094, р <0.05) demonstrate positive influences. Most importantly, the interaction coefficient between HCI and SERV is highly positive and significant (β =0.386, р <0.01). Thus, this result provides evidence that structural transformation intensifies the contribution of human capital towards economic growth. Through marginal effect analysis, it can be shown that there is an estimated activation point for an average share of services of about 33% of GDP, from where human capital will have its growth contribution become significant. The robustness tests through employing alternative indicators, using sub-group analysis, and excluding crisis periods do not undermine main results. From analysis, human capital is not sufficient for driving economic growth without the necessary structural transformation. Therefore, human capital development and service modernization should go hand in hand for ASEAN countries.