THE IMPACT OF HUMAN CAPITAL ON ECONOMIC GROWTH IN ETHIOPIA: EVIDENCE FROM JOHANSEN CO-INTEGRATION APPROACH

Abstract

Using a time series data from 1974-2015, this study employs the augmented Solow human-capital-growth model to investigate the impact of human capital on economic growth in Ethiopia. Expenditure on public health and education were taken as proxy variables for human capital development in order to see their impact on economic growth. The Augmented Dickey Fuller test is employed to test for stationarity and Johansen Cointegration technique is used to validate cointegration among variables as a sign of long run relationship. The error correction model is used to adjust for the short run error correction. Further tests of autocorrelation and residual normality distribution were done. The result of the ADF test has shown that all variables are non-stationary at level I (0) and stationary at I (1). There are two cointegrating equations implying convergence. The result of the error correction model show that the model is adjusting at a relatively stable rate of 35 % towards the long run equilibrium. The result of the short run causality tests show public expenditure on education, gross fixed capital formation and GDP have significant effect while labor force growth rate, public expenditure on health and inflation have shown to have statistically insignificant effect