Human capital formation and economic growth in South Asia: heterogeneous dynamic panel cointegration

Abstract

This study attempts to examine the impact of human capital formation in terms of health and education expenditure on GDP growth of five South Asian economies. It uses annual panel data of Bangladesh, India, Nepal, Pakistan and Sri Lanka for the period 2000-2017, published by the World Bank. Panel unit root test, Pedroni cointegration test, panel auto regressive distributed lagged (ARDL) model estimation, and Granger causality test are applied. The result of panel ARDL model estimation reveals that growth of GDP, health expenditure and government education expenditure have long run association, but no short run correlation among the variables. The Granger causality test reveals the existence of a bidirectional causality between GDP growth rate and health expenditure, and a unidirectional causality from education expenditure to GDP growth. It means health expenditure causes GDP growth rate and the vice versa, and government education expenditure also causes GDP growth. Therefore, the policy makers should promote human capital formation through greater budget allocations towards health and education sector, and ensure effective use of allocated expenditures on education and health for achieving sustainable economic growth through human capital formation in South Asia.