On the interaction of human and physical capital in Latin America

This article investigates the causal relationship between the accumulation of human and physical capital. There is a theoretical literature on this topic in which the main emphasis is on how the level of human capital affects the incentives to accumulate physical capital. However, some recent work studies the reverse causal argument that the level of physical capital influences human capital decisions. There is currently little empirical work on this important topic, and in the existing work, no one models and tests for the joint endogeneity of human and physical capital. Using a panel of 18 Latin American countries covering the period 1965-90, I model human and physical capital in a simultaneous system using lagged measures of political instability, regime type, government spending, income inequality, ethnolinguistic diversity, trade openness, and climate as exogenous explanatory variables. This article is organized as follows. In Section II, I discuss the theoretical and empirical literature on the relationship between human and physical capital. In Section III, I construct a simultaneous model of the two forms of capital and discuss the variables used in the system and the overidentifying restrictions of the model. Section IV presents the results of the estimations, while Section V concludes with a brief summary and a discussion of potential future work on this topic.