The Effect of Human Capital proxed by Education Expenditure on Economic Growth in Ethiopia

Abstract

The general objective of the study was to assess the effect of human capital proxed by education expenditure in Ethiopia. Although there are many previous related studies on the topic, the studies were focused ononly byaggregating total public expenditure as proxy to human capital; as far as the researcher’sknowledge there is no previous studies used different levels of education expenditures separately. It is a major research gap. The secondary data was collected from various organization data base and employed both descriptive analysis and time series econometricsmodel. The descriptive was showed that the trend of explained and explanatory variables showed gradual increase year to year and the share of total public education expenditure from real GDP was very small. In empirical findings, relevant pre and post estimation tests which are unit root test, co-integration test, Granger causality test, autocorrelation test, normality test and stability test were done. The result of the study disclosed that entire explanatory variables jointly has significant and positive relationship with economic growth in long run and secondary education expenditure, tertiary education expenditure and total import are significant and positive effect on economic growth in short run. But, general inflation rate is significant and has negative effect on economic growth in the short run. Total education expenditure, primary education expenditure, and total export are insignificant and no effect on economic growth in short runs.According to Granger causality test, education human capital and economic growth as bi-lateral causality.Findings of the researcher concluded that, education human capital has vital role on economic growth in long run and short run and education human capital and economic growth are supplementary to each other. Finally, the researcher mentions recommendation that Government should increase public education expenditure, especially to the secondary and tertiary education from its GDP as well asby supporting higher education institutions in order to generate their revenue and also support private sector to invest on education.