Inclusive Capital and Human Development: Integrating Human and Natural Capitals

Previous empirical studies have shown that human and natural capitals are among the determinants of economic growth. The previous literatures may not allow us to understand how the human and natural capitals affect the human welfare as they mostly do not consider what follows the economic production process. A measure of human welfare explored here is the level of satisfaction of basic human needs following a man's consumption of goods and services produced through the economic production process. Previous literatures also consider human and natural capitals individually, which does not allow us to understand how the abundance of inclusive capital (human plus natural capital) that forms the productive base of the economy contributes to promoting human development. The purpose of this paper is to find how the inclusive capital affects the levels of human development, and to identify the conditions that promote the human development, thereby contribute to achieving sustainability. Cross-country regression analysis is used for analysing the effect of inclusive capital on the level of human developments, and how this relationship depends on other relevant factors, which are institutional quality and trade openness. Main outcomes are the following: high accumulation of inclusive capital improves the levels of human development, and the effect of one standard deviation increase in inclusive capital abundance on the level of human development can be as high as 9.83 (on the scale of 0 (worst) ? 50 (best)) at average trade openness; and this relationship depends on trade openness. The other results are that: the resource curse (the negative effect of natural resource dependence on economic growth) holds in the context of human development; and open trade and high institutional qualities promote the human development. To contribute to achieving sustainability through promoting the human development, some important conditions are to (1) have abundant inclusive capital that forms the production base of the economy and ultimately influence the level of human development, and (2) promote open trade.