The Impact of Human Capital on Economic Growth in Ethiopia: Evidence from Time Series Analysis

Mekoro Arega

doi:10.48185/she.v1i1.95

Abstract

The general objective of the study was to analyze the impact of human capital development on economic growth in Ethiopia over the period 1974/5 -2018/9. The econometric models of Johnesan cointegration, VECM and causality tests were applied to analysis short-run and long-run impact of Human capital on Economic growth. The result of the error correction model shows that the model is adjusting at a relatively stable rate of 74.3% towards the long-run equilibrium. Furthermore, the result shows that human capital proxied of (primary and secondary school enrolments) and active labour force have a positive statistical significant long run and short-run effect on economic growth in Ethiopia. Such findings are consistent with the endogenous growth theories which argue that an improvement in human capital (skilled workers) improves productivity. In addition, results reveal that education expenditure and life expectancy at birth have a positive and statistically significant long-run effect on economic growth. However, the expenditure on health, secondary school enrolment and official development assistance are statically significant and have an unexpected negative impact on long-run economic growth. Furthermore, the short-run causality tests results reveal that public expenditure on education, primary school enrolment, secondary school enrolment and RGDP have unidirectional causal effects. Hence policymakers and/or the government give prioritize to create institutional capacity that increase school enrolment and strengthening the infrastructure or investment of educational and health institutions that produce quality of manpower to increase productivity.

Highlights

Human capital consists of the knowledge, skills, and health’s that people accumulate over their lives, enabling them to realize their potential as productive members ofMost schools of thought believe health and economic growth are intertwined
Short Run Analysis The model estimates that the short-run dynamics which is mainly driven by lagged real GDP, total government expenditure on education and health, primary and secondary school enrollment, life expectancy, Gross capital formation, net official development assistant, and active labor force age population
Our result shows that human capital which is proxy by Ln of Primary School Enrolment and Ln of Secondary School Enrolment are causal relation with LnRGDP that is at 1% and 5%

Summary

INTRODUCTION

Human capital consists of the knowledge, skills, and health’s that people accumulate over their lives, enabling them to realize their potential as productive members of. Θ=1- α-β and α0 =LnA ,e = Base of natural logarithm The augmented Solow human capital growth model is modified to take an additional (external) variable in addition to gross variable and labor force These external variables are proxy of human capital such as govn’t expenditure on education, govn’t expenditure on health, official development assistance, life expectancy at birth, primary school enrollment, secondary school enrollment and dummy of policy change. These procedures are the stationarity test for variables, Johansen co-integration rank of estimation, the VECM for short-run adjustment to the long run, short-run causality test for the sum of the differences of the explanatory variables, Diagnostic Tests such as autocorrelation, residual normality tests and model stability would be analyzed. Causality could be tested by employing the Granger causality tests

RESULTS AND DISCUSSION

Optimal Lag Length Selection Results

CONCLUSION AND POLICY IMPLICATION