The Impact of Human Capital Development on Economic Growth in Ethiopia: Evidence from ARDL Approach to Co-Integration

The study's main objective was to investigate the long-run and short-run impact of human capital on economic growth in Ethiopia (using real GDP per capita, as a proxy for economic growth) over the period 1974/75/2010/2011. The ARDL Approach to Co-integration and Error Correction Model is applied to investigate the long-run and short-run impact of Human capital on Economic growth. The Bounds test finding shows a stable long-run relationship between real GDP per capita, education human capital, health human capital, labor force, gross capital formation, government expenditure, and official development assistance. The estimated long-run model reveals that human capital in the form of health (proxied by the ratio of public spending on health to real GDP) is the main contributor to real GDP per capita rise followed by education human capital (proxied by secondary school enrolment). Such findings are consistent with the endogenous growth theories, which argue that improving human capital (skilled and healthy workers) improves productivity. In the short run, the coefficient of error correction term is -0.7366, suggesting about 73.66 percent annual adjustment towards long-run equilibrium. This is proof of the existence of a stable long-run relationship among the variables. The estimated coefficients of the short-run model indicate that education is the main contributor to real GDP per capita change, followed by gross capital formation (one period lagged value) and government expenditure (one period weakened value). But, unlike its significant long-run impact, health has no significant short-run effects on the economy. Even its one-period lag has a significant negative impact on the economy. The above results have an important policy implication. The findings of this paper imply that economic performance can be improved significantly when the ratio of public expenditure on health services to GDP increases and when secondary school enrolment improves. Such improvements significantly impact human productivity, leading to improved national output per capita. Hence policymakers and/or the government should strive to create institutional capacity that increases school enrolment and improves basic health services by strengthening the infrastructure of educational and health institutions that produce quality manpower. In addition to its effort, the government should continue its leadership role in creating enabling environment that encourages better investment in human capital (education and health) by the private sector.