The impact of human capital on economic growth in Ethiopia: evidence from time series analysis

Abstract

The general objective of this study was to analyze the impact of human capital development on economic growth in Ethiopia using real GDP as a proxy for economic growth and govn’t expenditure on education and on health as proxied human capital investment. In addition human capital stock variables such as: life expectancy, primary school enrolment and secondary school enrolment were used over the period 1974 -2018. Time series data was collected from NBE, MoFED, MoE and World Bank Data sets. The econometric models of Johnesan co integration, VECM and causality tests were applied to analysis short run and long run impact of Human capital on Economic growth by using statistical package Eview 10. The result shows that all variables are non-stationary at level (I (0)) and stationary at I (1). The result of the error correction model show 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 labor force have positive statistical significant long run and short run effect on economic growth in Ethiopia. The economic performance can be improved significantly when the human capital stock of primary and secondary school enrolment and active labor force of population improves and increase. 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 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 unexpected negative impact on long run economic growth. Furthermore, the short run causality tests results reveals that public expenditure on education, primary school enrolment, secondary school enrolment and RGDP have unidirectional causal effects. Generally, human capital development or improvements have a large impact on human productivity which leads to improved national output per capita. Hence policy makers 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.