THE IMPACT OF HUMAN CAPITAL ON ECONOMIC GROWTH IN ETHIOPIA

Abstract

The general objective of the study was to examine the impact of human capital on economic growth in Ethiopia using real GDP as a proxy for economic growth and education expenditure, health expenditure, official development assistance and school enrolment (primary, secondary and tertiary) as a proxy of human capital over the period 1974 -2015. Wide differences of various empirical studies are found in the model specifications, human capital approximation and the results obtained. The study answers the research question: Is human capital having long run and short run significances impact on economic growth in Ethiopia? The sources of data being used in this study are secondary data which obtained from various sources. The ARDL Approach to Co-integration and Error Correction Model are applied in order to investigate the long-run and short run impact of Human capital on Economic growth respectively. The finding of the Bounds test shows that there is a stable long run relationship between real GDP, education expenditure, health expenditure, labor force, gross capital formation, official development assistance and school enrolment. The result of this research showed that expenditure on health, expenditure on education, and growth capital formation are positive and statistically significant long run and short run effect on economic growth of Ethiopia. The economic performance can be improved significantly when the expenditure on health, expenditure on education and growth capital formation improves. However, school enrolment and official development assistance are statically significant and negative long run and short run impact on economic growth. This shows that, the increase in enrolment rate is not sufficient to sustain the growth. What is more important is how the amount is utilized and quality of education. However, there may be a mismatch between the skills taught by the educational system and the skills needed by the labor market, so educated workers may end up doing low productivity jobs. Thus, despite a country‟s achievements in accumulating human capital through the school enrolment, this achievement may not lead to economic growth and poverty reduction if the labor market and quality is not considered. Hence the government should strive to create institutional capacity and continue its leadership role in creating and enabling environment that encourage better investment in human capital (education and health) by strengthening the infrastructure of institutions that produce quality manpower. Moreover, future researches in this area are suggested.