The Effect of Human Capital Accumulation on Economic Growth: An Empirical Analysis in Ethiopia

Abstract

The study aimed at examining the long run and short run effect of human capital accumulation on economic growth in Ethiopia (using real growth domestic product per capita growth, as a proxy for economic growth) over the period 1975/76-2016/2017 and uses these period to get three different economic policy changes between these periods. The ARDL approach to co-integration and Error Correction Model is applied in order to investigate the long-run and short run effect of human capital accumulation on economic growth. The stationary test was undertaken and its result shows real growth domestic product per capita growth, growth rate of import of goods and services, labor force growth rate and average inflation were stationary at level while the ratio of public education expenditure to real growth domestic product, the ratio of official development assistance to real growth domestic product, the ratio of public health expenditure to real growth domestic product and ratio of real gross capital formation to real growth domestic product were stationary at their first difference. The finding of the bounds test shows that there is a stable long run relationship between real gross domestic product per capital, the ratio of public education expenditure to real growth domestic product, the ratio of public health expenditure to real growth domestic product, labor force growth rate, ratio of real gross capital formation to real growth domestic product, imports of goods and services, average inflation and the ratio of official development assistance to real growth domestic product. The estimated long run model revels that human capital in the form of education (proxies by the ratio of public expenditure on education to real growth domestic product) is the main contributor to real growth domestic product per capita growth followed by health human capital (proxies by the ratio of public expenditure on health to real growth domestic product). In the short run, the coefficient of error correction term is - 0.293979 suggesting about 29.40 percent annual adjustment towards long run equilibrium. This is another proof for the existence of a stable long run relationship among the variables. But, unlike their long run significant effect, health and education have no significant short run effect on the economy. The findings of this paper imply that economic performance can be improved significantly when the ratio of public expenditure both on health and education to growth of domestic product increases. Hence, the government have a duty to channel its expenditure to create institutional capacity to improve education and health services delivery in the country.