Human Capital and Economic Growth: A Three Stage Least Squares Approach

Abstract

It can never be overemphasized that human capital is the engine of growth of an economy. No nation can develop beyond its investment in education in particular. Growth economists in affirmation have explained that the differences in the per capita income of countries cannot be explained in isolation from the differences in human capital development. For early classical economists, economic growth had always been closely linked with physical capital, to the neo classicals - human capital, while the endogenous growth scholars linked economic growth with technology, which is a function of human capital. We conclude then that growth differences among nations can be better understood by studying the differences in human capital investment. In Nigeria, available data makes it clear that there has been severe under investment in education and health sectors. The government is far from complying with the UNESCO’s 26% and African Leaders’ 15% minimum budgetary benchmark to both sectors respectively. This paper therefore examines the role of government investment in human capital on economic growth of the Nigerian economy. Using time series data from 1980-2010, the paper adopted the Ordinary Least Squares (OLS) and 3 Stage Least Squares analytical technique, in an Augmented Human Capital Solow theoretical framework. The study found that human capital alongside with technological development and population growth has a positive relationship with growth of the Nigerian economy. The model confirmed that adequately trained and employed population enhances the growth of the economy. However, high mortality and unemployment rate remain the greatest challenge to education in Nigeria. It further revealed that the Nigerian experience does not support Solow’s hypothesis of high population growth/low productivity relationship. When Solow’s full employment assumption is relaxed, high population growth rather enhances productivity. The study also found that education has the greatest marginal impact on life expectancy. The study interestingly makes it clear that although the private sector benefits maximally from an educated population, she may not invest adequately in human capital development. However, both the rent- seeking and non-rent seeking behaviour of economic agents are estimated to impact positively on economic growth of Nigeria directly or indirectly. The study therefore recommends an urgent need for government to strategically shift her investments towards the continuous development of effective and efficient human capital. This will serve as the foundation for an effective development of an organized private sector.