THE EFFECT OF HUMAN CAPITAL DEVELOPMENT ON ECONOMIC GROWTH: AN EMPIRICAL ANALYSIS IN ETHIOPIA.

Abstract

The general objective of the study was to assess the effect of human capital development on economic growth in Ethiopia. The ARDL Approach to Co-integration and Error Correction Model has applied in order to investigate the long run and short run effect of Human capital accumulation on Economic growth. The stationary test under taken. The result of the stationary test shows that real GDPPC growth, import of pharmaceuticals and medical equipment, labor force and Educational enrolment are stationary at level while education human capital, official development assistance, health human capital and gross capital formation are stationary at their first difference. The finding of the Bounds test shows that there is a stable long run relationship between real GDP per capita growth, education expenditure, health expenditure, labor force, gross capital formation, pharmaceuticals and medical equipment, Educational enrolment and official development assistance. The estimated long run model revels that human capital in the form of education (proxed by the ratio of public expenditure on education to real GDP) is the main contributor to real GDP per capita growth followed by health human capital (proxed by the ratio of public expenditure on health to real GDP). 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. However, 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 improved significantly when the ratio of public expenditure both on health and on education to GDP increases. Hence, the government should channel its expenditure to create institutional capacity to improve education and health services delivery in the country.