Human Capital and the Level of Economic Development

Abstract

This study aims at testing the causal relationship between human capital via the government spending share on education and economic growth using cross-country evidence and investigating the relationship pattern between such human capital – growth and the level of economic development based on 30 country data. The study employs a standard approach through uniting root test and Granger causality test. The data is annually collected during the periods 1983 – 2012, totaling to 30 observations. The finding indicates that for both developing and developed countries, education human capital cannot explain much the economic growth and vice versa. In addition, from the relationship pattern between human capital – growth and the economic development level neutrality is the most commonly found pattern for both developing and developed countries. However, we see somewhat difference between them in terms of causation running from growth to human capital. That is, the number of developed countries is almost double as compared to the developing ones. This gives rise to a policy implication for developed countries in that it should put more emphasis on the government education spending share to GDP since it can help boost human capital in the long run.