Impact of Human capital on the economic growth of Ethiopia: ARDL Approach to Co-integration

Abstract

The study's primary goal was to look into the impact of human capital on the economic growth of Ethiopia from 1980 to 2020. To explore the long-run and short-run impact of human capital on economic growth, ARDL Approach to co-integration and error correction model was used. The Bounds test results reveal that real GDP, education expenditure, health expenditure, labor force, gross capital formation, total government expenditure, official development assistance, secondary school enrollment, consumer price index, drought, and policy change have a stable long-run connection. The finding shows significant positive impact of human capital on economic growth by confirming direct positive relationship between economic growth and measures of human capital (education and health). The estimated long-run model reveals that gross capital formation is the most significant contributor to real GDP growth, followed by human capital in health expenditure, secondary school enrollment, and education expenditure. In the short-run, the coefficient of error correction term is -0.9528, implying a 95.28 percent annual adjustment towards long-run equilibrium. This is another evidence of a steady long-run relationship between the variables. The estimated short-run model reveals that gross capital formation is the main contributor to real GDP change followed by policy change and secondary school enrollment. Health has no significant short-run impact on the economy. But its one-period lag has a significant and positive impact on the economy. The findings mentioned above have significant policy implications. This study suggests that increasing the ratio of health expenditure to GDP and increasing secondary school enrollment can significantly boost economic performance. Such improvements have a significant impact on human productivity, resulting in increased national output. By developing the infrastructure of educational and health institutions that produce quality human resources, the government should endeavor to establish institutional capacity that increases school enrollment and improves primary human health. In addition, the government should maintain its leadership role in establishing an enabling climate that encourages private sector investment in human capital (education and health).