The Impact of Human Capital on Economic Growth in Ethiopia: Evidence from Time Series Analysis

The general objective of the study was to analyze the impact of human capital development on economic growth in Ethiopia over the period 1974/5 -2018/9. The econometric models of Johnesan cointegration, VECM and causality tests were applied to analysis short-run and long-run impact of Human capital on Economic growth. The result of the error correction model shows that the model is adjusting at a relatively stable rate of 74.3% towards the long-run equilibrium. The result shows that human capital proxied of (primary and secondary school enrolments) and active labour force have a positive statistical significant long run and short-run effect on economic growth in Ethiopia. Results reveal that education expenditure and life expectancy at birth have a positive and statistically significant long-run effect on economic growth. However, the expenditure on health, secondary school enrolment and official development assistance are statically significant and have an unexpected negative impact on long-run economic growth. Furthermore, the short-run causality tests results reveal that public expenditure on education, primary school enrolment, secondary school enrolment and RGDP have unidirectional causal effects. Hence policymakers and/or the government give prioritize to create institutional capacity that increase school enrolment and strengthening the infrastructure or investment of educational and health institutions that produce quality of manpower to increase productivity.


INTRODUCTION
Human capital consists of the knowledge, skills, and health's that people accumulate over their lives, enabling them to realize their potential as productive members of society. The concept that investment in human capital promotes economic growth actually dates back to the time of the Scottish economist Adam Smith (1776) and the early classical economists who emphasized the importance of investing in human capital. Investments in human capital have become more important as the nature of work has evolved in response to rapid technological change, increase productivity and efficiency as the world development report (World Bank, 2019). It has large payoffs for individuals, societies, and countries' economies as a whole.
Hence Human capital development is one of the necessary conditions for all kinds of growth-social, political, cultural, and economic aspects (Chitescu and Lixandru, 2016).
Most schools of thought believe health and economic growth are intertwined. Health can strongly affect economic growth and economic growth can strongly affect health. Higher incomes promote better health through improved nutrition, better access to safe water and sanitation, and increased ability to purchase more and better quality health care ( Bloom and Canning, 2008). Investments in health and education have direct effects on productivity and economic growth by producing healthy and educated Human Capital. Health and education are two closely related proxy of human capital components that work together to make the individual more effective in production (Acemoglu, 2012). Improvement in the health of workers increases productivity. In turn increase in productivity results in economic growth either through reducing work off days or through increasing production in workplace (Yousefi and Movaghar, 2013). In general, if done in compliance with efficiency, investments in education and health affect income of the individual.
However, sustained improvement in Sub-Saharan Africa human development is found to be the lowest level in the world as the assessment made by UNDP (2013).
In Ethiopia is one of the developing African countries and exhibited low government spending and low private sector participation in healthcare financing and education sector comparing to other developing countries. HDI's value for 2019 was 0.463 of one, which put the country in the low human development category positioning it at 173 out of 189 countries and territories according to the UNDP's Human Development Index Report ( World . This indicates Ethiopia has lower human capital investment and stocks than another country. Investment of health services and education are Weak and limited coverage, especially in a large portion of Ethiopian people in rural areas have inadequate health facility, and standardized education; it leaves insufficient financing available for investments in the other essential inputs for academic success. These challenges manifested in low education and health outcomes hurt the future productivity of workers and future competitiveness of economies. Hence, the gaps in this study the inadequate Expenditure on education and health to develop human capital and increase productivity. Therefore, this study will look at the impact of human capital formation on economic growth in Ethiopia considering both education and health aspects of human capital components into consideration. Government Expenditure in education and health, school enrollment and life expectancy are taken as proxy variables for human capital developments. Applying the method of Johansen Co-integration approach, VECM and causality test.

Objectives of the Study
The general objective of this study is to analyze the impact of human capital development on economic growth in Ethiopia using time series data over the period of 1974/15 to 2018/19. The specific objectives of this study are:-

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To examine the short run as well as long-run effects of human capital stocks such as school enrolment and life expectancy on economic growth in Ethiopia

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To determine the relationship between total Government expenditure on health and education and net official development assistance with economic growth in Ethiopia ✓ To identify the existence of causal relationships between human capital with economic growth in Ethiopia. If any, to investigate the direction of causality.

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To provide empirical evidence and guidance for future spending on the inadequacies in the Ethiopian health and education sectors 2.

Estimation Procedure
This study engages in a series of six-step procedure to determine the long run and short-run relationship between human capital development and economic growth in Ethiopia. These procedures are the stationarity test for variables, Johansen co-integration rank of estimation, the VECM for short-run adjustment to the long run, short-run causality test for the sum of the differences of the explanatory variables, Diagnostic Tests such as autocorrelation, residual normality tests and model stability would be analyzed.
Finally, causality could be tested by employing the Granger causality tests. Source: own estimation using Eviews version 10.

Unit Root Tests
The *** and ** sign indicates the rejection of the null hypothesis of non-stationary at 1%, and 5% significant level respectively.
The null hypothesis in these tests claims that the series under investigation has unit root. On the other hand, the alternative hypothesis claims that the series is stationary. The ADF test statistics as depicted in Table 4.1 illustrates that all variables are non-stationary or unit root problem in their levels for both types of specifications at 1% and 5% level of significance. That is, it is not possible to reject the null hypothesis of a unit root. On the other hand, in their first differences, all of the variables are stationary at the conventional 1% and 5% level of significance.
These results indicate that, with intercept and trend, the variables are integrated of order one I (1). This shows that the mean value and variances are constant. Such results of stationarity test would allow us to apply the Johansen approach of co-integration. This is one of the main justifications for using the VEC Model.

Optimal Lag Length Selection Results
Stationarity of the results confirmed that all variables were integrated I(1), before identifying the number of cointegrating vectors, we first applied the VAR test in order to determine the optimal lag length. As shown in

Johansen Co-integration Test and Analysis
In the presence of co integration, the valuable long-run relationship can be preserved since estimation would not be spurious, so long as the variables are integrated by the same order and are co-integrated. The study tests for the existence of a long-run relationship among the variables. The Johansen cointegration test for the variables indicates the presence of co-integration and also the presence of one co-integration as the variables are integrated of order one. The null hypothesis that there is no co integrating vector in the system is rejected, but the null that there exists at most one co-integrating vector of order one is not rejected at 5% level of significance. These findings establish the existence of an underlying long-run equilibrium relationship between the dependent variable, LnRGDP and the independent variables.

Total government expenditure on Education
Human capital is approximated using total government expenditure on Education has a long-run impact on the Ethiopian economy growth and statistically significant

Gross Capital Formation
The gross capital formation is an unexpected negative sign and significant effect on

Active Labor Force
The population of the active labor force aged and is positive statistical significant effects on economic growth at 1% level of significance in long run. This is in line

Net Official Development Assistant
The study expected the long-run effect of net official development assistance to be positive considering the effects of investing on human capital and other investments.
But the result shows that its effect is an unexpected negative sign. But as attempted

The Vector Error Correction Model Estimation Results
The coefficients of the difference of the variables represent the coefficients of shortrun dynamics whereas the coefficient of lagged error correction term ECM (-1) captures the speed of adjustment towards the long-run equilibrium relationship. i.e., ECM is used to tie short-run behaviour to its long-run dynamics.  Source: own estimation using Eviews version 10; Note: ** and * shows significance level at 5% level of significance respectively.

Short Run Analysis
The model estimates that the short-run dynamics which is mainly driven by lagged

Granger Causality Test Results
A granger causality test is made to identify the direction of causality between the dependent variable (real GDP) and independent variables such as human capital (proxy by education expenditure, health expenditure, primary and secondary school enrolment

Serial Autocorrelation Test
The serial correlation test can be done using the Lagrange multiplier (LM) test for autocorrelation presented in appendix 1(A) shows that our lag selection criteria dictated us to choose lag 3. At each lags, the p-value is greater than 5% level of significant. The decision in this case is to not reject H0 (there is no autocorrelation).
Hence we accept the null hypothesis. Again in all the lags above the p-value is insignificant. As such we no autocorrelation problem and we can judge that the model is free from autocorrelation problem.

Heteroskedasticity Test
The estimated residuals did not provide significant heteroskedasticity effect in the error term (see appendix 1(B) for Breush-pagan heteroskedasticity test).  increasing accessibility to all local area, fulfilling necessary materials and follow upping efficiency. Moreover, the results of the study have important implications, particularly for policymakers that for achieving rapid economic growth, it is indispensable to give much emphasis to human capital development.
Human capital proxy of primary school enrollment and secondary school enrolments are unidirectional causal relationship with real GDP. And real GDP is the causes of public expenditure on education. This shows that human capital is the cause of economic growth by producing educated manpower to increase productivity.
Qualified education has a support to adopt new technology for manufacturing and service sector and benefit for education among people to produce more quality of production. Hence emphasizing to educate society and improving the quality of any type of education system most important direction to economic growth in Ethiopia.

Recommendation
❖ In order to improve economic growth, public expenditure on education needs to be better prioritized and more resources should be devoted to educate the citizens of the country. So, the Government suggested giving more emphasis on its spending on education especially in rural areas because the majority of the population lives there.

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We have shown that economic conditions and health status of most developing countries are unfavourable. Our empirical evidence also reveals that improving the existing bad health facilities can smooth economic growth. To this end, concerned bodies suggested increasing the accumulation of health capital stock. This is possible by investing in health. Therefore, policy makers, government and non-governmental organizations who strive to promote growth and development suggested that investing in health and accumulate this form of capital. In addition, government take better action to audit and follow up how governmental expense used in expected sectors; increase accessibility of health care center facility.

❖
The results suggest that government and any concerned body should be given greater attention to human capital stocks development by introduce policies innovation promote and supporting education with practical and technology to support economic growth. Besides that, government suggested provide more opportunity job to balance with increasing enrollment rate to achieve high income economy and productive in order to adjust the negative impact of secondary school enrolment.