Human capital and economic growth: causality and co – integration analysis

Abstract

In this study, the relationship between education and health that are accepted as an indicator of human capital and economic growth is tested empirically. The study aimed at decomposing the relationship between human capital (using health index and education index as a proxy) and economic growth using time series data from 1971- 2011 in Ethiopia using modern econometrics technique. Long-run relationship among variables is confirmed through Johnson co-integration analysis whereas the long-run and short-run dynamics are observed by VECM specification. For causality purpose VECM based causality tests are employed. The finding indicates that in the long run investment on education and health would affect further economic growth. Hence policy makers and / or the government should strive to create institutional capacity that increase school enrolment and improved basic health service 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 encourage better investment in human capital (education and health) by the private sector. So any countries policy designed to promote economic growth should have to consider priority in health and education.