Human Capital and Economic Growth in Developing Countries: Evidences from Low and Middle Income African Countries

Abstract

This study examines the effect of flow and stock human capital (education and health) on economic growth on the whole African continent with specific focus on low and middle income African countries using dynamic GMM panel data estimation techniques. It uses panel data from 52 African countries from the World Bank’s World Development Indicators (WDI) over the period 1985–2015. The major findings reveal that investments in education and health positively and significantly affect economic growth in all the African countries with health investments in human capital having stronger effects compared to investments in education. Health, which is measured by life expectancy, has positive and statistically significant effects in low income countries while it has no statistically significant impact on economic growth in middle income African countries. In all the African countries the stock of education as human capital has no effects on economic growth. Other control variables like net FDI inflows, openness, inflation and domestic credit to the private sector affect income growth in low income African countries while in middle income countries only inflation and domestic credit significantly affect income growth. The other findings of the study include income growth and domestic credit to the private sector positively and significantly effects investments in health and education. However, inflation rate negatively affects investments in human capital. The policy implications of these findings are that there should be more investments in health and education aspects of human capital as this will help in enhancing economic growth in African countries while controlling inflationary pressures. Further, better financial services for the private sector will also improve economic growth and investments in health and education in Africa. Finally, liberalizing trade could boost economic growth and healthcare investments in low income African countries.