The Accumulation of Physical and Human Capital

  February 28, 2022   Read time 2 min
The Accumulation of Physical and Human Capital
Physical capital accumulation occurs when some portion of present income is saved and invested in order to augment future output and income. It includes all new investments in land, machinery, and physical equipment.

While investment in these is directly related to output, investment in infrastructure (such as roads, sanitation, and communications) indirectly facilitates economic activity. Since the early 1900s, economists have focused on the important role of such capital accumulation for economic growth. Solow’s neoclassical growth model of 1956 claimed that growth depends on the accumulation of physical capital. The Harrod-Domar model of the 1950s formally linked economic growth to the accumulation of capital, and subsequent scholarly research has expanded and strengthened this link.

According to the original model, the savings rate is crucial since it is positively related to capital accumulation, which in turn is positively related to output (indeed, evidence from countries with high savings rates, such as Japan, show unequivocal benefi t from this source of capital). Public savings and debt compensate for a defi ciency of private savings. If private and public domestic savings are still inadequate for the desired levels of capital accumulation, then international sources of capital fill the gap (such as multilateral and bilateral flows of capital).

Within the development literature, whether savings and investment is an engine of growth in developing countries has been discussed for decades, starting with the discussion between Arthur Lewis and Albert Hirshman in the 1950s. Lewis contended that savings and investment was crucial for development while Hirshman said that development was crucial for savings and investment. Afterwards, questions of diminishing returns to investment in physical capital were followed by endogenous growth theories claiming that the accumulation of knowledge could offset diminishing returns. Whichever comes first, Meier and Rauch state, “Few doubt that investment in physical and human capital, financed primarily by domestic savings, is crucial to the process of economic development.” One group of scholars defi ned capital as including not just physical capital, but also human capital. Both Lucas (1988) and Romer (1986) argued that knowledge and human capital added to growth because they increased productivity, so societies that invest more in human capital will have more growth.48 Grossman and Helpman argued that growth then follows from investment in education of future workers and training of existing ones.

In the discussion of human capital, two concerns are raised for developing countries. The fi rst has to do with the production of human capital, and the second has to do with its retention. Indeed, it is not just a question of training workers, but also keeping them so that they do not leave and contribute to another country’s labor force. While the particulars of how destination countries train and retain their health tourism workers is discussed in chapter 5, suffi ce it to say here that in order for a country to retain its trained workers, it needs to be able to provide them with employment. Medical tourism is an industry that provides work for both skilled and unskilled workers. While that is true for nonmedical tourism also, the proportions are very different, as much of nonmedical tourism occurs in the informal sector in which jobs are labor intensive and low paying.